UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q







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


For
the quarterly period ended September 30, 2010





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





For
the transition period from             
               to     
                     
  .




Commission
File Number: 001-32248








GRAMERCY
CAPITAL CORP.


(Exact
name of registrant as specified in its charter)








Maryland
              
              06-1722127(State
      or other jurisdiction of
              
              (I.R.S.
      Employer Identification No.)incorporation
      or organization)





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  x     NO 
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§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 
 ̈    
NO   ̈




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





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





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


The
number of shares outstanding of the registrant's common stock, $0.001 par value,
was 49,940,671 as of November 5, 2010.







GRAMERCY CAPITAL CORP.


INDEX





PAGEPART
      I.
                    
                    FINANCIAL
      INFORMATION
                    
                    3ITEM
      1.
                    
                    FINANCIAL
      STATEMENTS
                    
                    3Condensed
      Consolidated Balance Sheets as of  September 30, 2010 and
      December 31, 2009 (unaudited)
                    
                    3Condensed
      Consolidated Statements of Operations for the three and nine months
      ended  September 30, 2010 and 2009 (unaudited)
                    
                    5Condensed
      Consolidated Statement of Equity for the nine months ended September 30,
      2010 (unaudited)
                    
                    6Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2010 and 2009 (unaudited)
                    
                    7Notes
      to Condensed Consolidated Financial Statements (unaudited)
                    
                    8ITEM
      2.
                    
                    MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                    
                    49ITEM
      3.
                    
                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                    
                    74ITEM
      4.
                    
                    CONTROLS
      AND PROCEDURES
                    
                    75PART
      II.
                    
                    OTHER
      INFORMATION
                    
                    76ITEM
      1.
                    
                    LEGAL
      PROCEEDINGS
                    
                    76ITEM
      1A.
                    
                    RISK
      FACTORS
                    
                    76ITEM
      2.
                    
                    UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                    
                    76ITEM
      3.
                    
                    DEFAULTS
      UPON SENIOR SECURITIES
                    
                    76ITEM
      4.
                    
                    (REMOVED
      AND RESERVED)
                    
                    76ITEM
      5.
                    
                    OTHER
      INFORMATION
                    
                    76ITEM
      6.
                    
                    EXHIBITS
                    
                    77SIGNATURES
                    
                    78




2





PART
I. FINANCIAL INFORMATION


ITEM
I. FINANCIAL STATEMENTS




Gramercy
Capital Corp.


Condensed
Consolidated Balance Sheets


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





September
      30,
                
                
                December
      31,2010
                
                
                2009Assets:Real
      estate investments, at cost:Land
                
                $
                887,056
                
                
                $
                891,078Building
      and improvements
                
                
                2,385,907
                
                
                
                2,391,817Other
      real estate investments
                
                
                20,518
                
                
                
                -Less:
      accumulated depreciation
                
                
                (151,047
                )
                
                
                (106,018
                )Total
      real estate investments, net
                
                
                3,142,434
                
                
                
                3,176,877Cash
      and cash equivalents
                
                
                141,625
                
                
                
                138,345Restricted
      cash
                
                
                79,149
                
                
                
                76,859Pledged
      government securities, net
                
                
                93,986
                
                
                
                97,286Investment
      in joint ventures
                
                
                92,466
                
                
                
                84,645Assets
      held for sale, net
                
                
                486
                
                
                
                841Tenant
      and other receivables, net
                
                
                74,086
                
                
                
                61,065Derivative
      instruments, at fair value
                
                
                2
                
                
                
                -Acquired
      lease assets, net of accumulated amortization of $134,199 and
      $92,958
                
                
                408,982
                
                
                
                450,436Deferred
      costs, net of accumulated amortization of $28,121 and
    $21,243
                
                
                11,386
                
                
                
                10,332Other
      assets
                
                
                18,181
                
                
                
                13,342Subtotal
                
                
                4,062,783
                
                
                
                4,110,028Assets
      of Consolidated Variable Interest Entities ("VIEs"):Real
      estate investments, at cost:Land
                
                
                15,786
                
                
                
                19,059Building
      and improvements
                
                
                48,726
                
                
                
                36,586Less:  accumulated
      depreciation
                
                
                (2,320
                )
                
                
                (1,442
                )Total
      real estate investments directly owned
                
                
                62,192
                
                
                
                54,203Restricted
      cash
                
                
                148,618
                
                
                
                130,331Loans
      and other lending investments, net
                
                
                1,176,195
                
                
                
                1,383,832Commercial
      mortgage-backed securities
                
                
                1,009,158
                
                
                
                984,709Investment
      in joint ventures
                
                
                -
                
                
                
                23,820Assets
      held for sale, net
                
                
                47,651
                
                
                
                -Derivative
      instruments, at fair value
                
                
                857
                
                
                
                -Accrued
      interest
                
                
                31,452
                
                
                
                32,122Deferred
      costs, net of accumulated amortization of $24,281 and
    $19,478
                
                
                16,403
                
                
                
                21,709Other
      assets
                
                
                41,897
                
                
                
                24,683Subtotal
                
                
                2,534,423
                
                
                
                2,655,409Total
      assets
                
                $
                6,597,206
                
                
                $
                6,765,437





The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.


3


Gramercy
Capital Corp.


Condensed
Consolidated Balance Sheets


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





September
      30
                
                
                December
      31,2010
                
                
                2009Liabilities
      and Equity:Liabilities:Mortgage
      notes payable
                
                $
                1,667,465
                
                
                $
                1,702,155Mezzanine
      notes payable
                
                
                550,731
                
                
                
                553,522Junior
      subordinated notes
                
                
                -
                
                
                
                52,500Total
      secured and other debt
                
                
                2,218,196
                
                
                
                2,308,177Accounts
      payable and accrued expenses
                
                
                51,823
                
                
                
                58,157Dividends
      payable
                
                
                18,688
                
                
                
                11,707Accrued
      interest payable
                
                
                6,479
                
                
                
                2,793Deferred
      revenue
                
                
                163,704
                
                
                
                159,179Below
      market lease liabilities, net of accumulated amortization of $201,194 and
      $144,253
                
                
                713,753
                
                
                
                770,781Leasehold
      interests, net of accumulated amortization of $7,090 and
      $5,030
                
                
                16,205
                
                
                
                18,254Liabilities
      related to assets held for sale
                
                
                257
                
                
                
                238Other
      liabilities
                
                
                5,869
                
                
                
                16,193Subtotal
                
                
                3,194,974
                
                
                
                3,345,479Non-Recourse
      Liabilities of Consolidated VIEs:Mortgage
      notes payable
                
                
                40,639
                
                
                
                41,513Collateralized
      debt obligations
                
                
                2,697,928
                
                
                
                2,710,946Total
      secured and other debt
                
                
                2,738,567
                
                
                
                2,752,459Accounts
      payable and accrued expenses
                
                
                12,566
                
                
                
                4,137Accrued
      interest payable
                
                
                5,937
                
                
                
                6,991Deferred
      revenue
                
                
                3
                
                
                
                67Liabilities
      related to assets held for sale
                
                
                5
                
                
                
                -Derivative
      instruments, at fair value
                
                
                199,246
                
                
                
                88,786Other
      Liabilities
                
                
                845
                
                
                
                -Subtotal
                
                
                2,957,169
                
                
                
                2,852,440Total
      liabilities
                
                
                6,152,143
                
                
                
                6,197,919Commitments
      and contingencies
                
                
                -
                
                
                
                -Equity:Common
      stock, par value $0.001, 100,000,000 shares authorized, 49,922,393
      and49,884,500
      shares issued and outstanding at September 30, 2010 andDecember
      31, 2009, respectively.
                
                
                50
                
                
                
                50Series
      A cumulative redeemable preferred stock, par value $0.001,
      liquidationpreference
      $115,000, 4,600,000 shares authorized, 4,600,000 shares
      issuedand
      outstanding at September 30, 2010 and December 31, 2009,
      respectively.
                
                
                111,205
                
                
                
                111,205Additional
      paid-in-capital
                
                
                1,079,613
                
                
                
                1,078,784Accumulated
      other comprehensive loss
                
                
                (206,168
                )
                
                
                (96,038
                )Accumulated
      deficit
                
                
                (541,059
                )
                
                
                (527,821
                )Total
      Gramercy Capital Corp. stockholders' equity
                
                
                443,641
                
                
                
                566,180Non-controlling
      interest
                
                
                1,422
                
                
                
                1,338Total
      equity
                
                
                445,063
                
                
                
                567,518Total
      liabilities and equity
                
                $
                6,597,206
                
                
                $
                6,765,437





The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.


4


Gramercy
Capital Corp.


Condensed
Consolidated Statements of Operations


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





Three
      months ended September 30,
                  
                  
                  Nine
      months ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009RevenuesRental
      revenue
                  
                  $
                  78,182
                  
                  
                  $
                  79,840
                  
                  
                  $
                  236,570
                  
                  
                  $
                  242,078Investment
      income
                  
                  
                  40,773
                  
                  
                  
                  42,222
                  
                  
                  
                  128,831
                  
                  
                  
                  140,014Operating
      expense reimbursements
                  
                  
                  31,656
                  
                  
                  
                  30,634
                  
                  
                  
                  89,780
                  
                  
                  
                  90,644Other
      income
                  
                  
                  8,981
                  
                  
                  
                  1,263
                  
                  
                  
                  16,345
                  
                  
                  
                  3,775Total
      revenues
                  
                  
                  159,592
                  
                  
                  
                  153,959
                  
                  
                  
                  471,526
                  
                  
                  
                  476,511ExpensesProperty
      operating expensesReal
      estate taxes
                  
                  
                  9,917
                  
                  
                  
                  10,211
                  
                  
                  
                  30,860
                  
                  
                  
                  29,699Utilities
                  
                  
                  11,221
                  
                  
                  
                  11,367
                  
                  
                  
                  30,430
                  
                  
                  
                  30,771Ground
      rent and leasehold obligations
                  
                  
                  4,350
                  
                  
                  
                  4,885
                  
                  
                  
                  14,191
                  
                  
                  
                  13,776Property
      and leasehold impairments
                  
                  
                  -
                  
                  
                  
                  587
                  
                  
                  
                  -
                  
                  
                  
                  4,181Direct
      billable expenses
                  
                  
                  2,254
                  
                  
                  
                  2,466
                  
                  
                  
                  4,939
                  
                  
                  
                  6,725Other
      property operating expenses
                  
                  
                  24,999
                  
                  
                  
                  18,575
                  
                  
                  
                  66,735
                  
                  
                  
                  59,551Total
      property operating expenses
                  
                  
                  52,741
                  
                  
                  
                  48,091
                  
                  
                  
                  147,155
                  
                  
                  
                  144,703Interest
      expense
                  
                  
                  50,911
                  
                  
                  
                  55,935
                  
                  
                  
                  151,572
                  
                  
                  
                  179,745Depreciation
      and amortization
                  
                  
                  26,652
                  
                  
                  
                  27,228
                  
                  
                  
                  80,867
                  
                  
                  
                  84,185Management,
      general and administrative
                  
                  
                  6,769
                  
                  
                  
                  7,960
                  
                  
                  
                  24,144
                  
                  
                  
                  25,809Management
      fees
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,787Impairment
      on securities and loans held for sale
                  
                  
                  6,730
                  
                  
                  
                  13,551
                  
                  
                  
                  21,333
                  
                  
                  
                  139,930Impairment
      on business acquisition, net
                  
                  
                  2,722
                  
                  
                  
                  -
                  
                  
                  
                  2,722
                  
                  
                  
                  -Provision
      for loan loss
                  
                  
                  10,000
                  
                  
                  
                  205,508
                  
                  
                  
                  64,390
                  
                  
                  
                  425,692Total
      expenses
                  
                  
                  156,525
                  
                  
                  
                  358,273
                  
                  
                  
                  492,183
                  
                  
                  
                  1,007,851Income
      (loss) from continuing operations before equity in income
      fromunconsolidated
      joint ventures, provisions for taxes, gain on
      extinguishmentof
      debt and non-controlling interest
                  
                  
                  3,067
                  
                  
                  
                  (204,314
                  )
                  
                  
                  (20,657
                  )
                  
                  
                  (531,340
                  )Equity
      in net income of unconsolidated joint ventures
                  
                  
                  2,006
                  
                  
                  
                  2,397
                  
                  
                  
                  4,870
                  
                  
                  
                  6,584Income
      (loss) from continuing operations before provision for
      taxes,gain
      on extinguishment of debt and discontinued operations
                  
                  
                  5,073
                  
                  
                  
                  (201,917
                  )
                  
                  
                  (15,787
                  )
                  
                  
                  (524,756
                  )Gain
      on extinguishment of debt
                  
                  
                  11,703
                  
                  
                  
                  -
                  
                  
                  
                  19,443
                  
                  
                  
                  107,229Provision
      for taxes
                  
                  
                  (19
                  )
                  
                  
                  (88
                  )
                  
                  
                  (123
                  )
                  
                  
                  (2,489
                  )Net
      income (loss) from continuing operations
                  
                  
                  16,757
                  
                  
                  
                  (202,005
                  )
                  
                  
                  3,533
                  
                  
                  
                  (420,016
                  )Net
      loss from discontinued operations
                  
                  
                  (10,674
                  )
                  
                  
                  (1,736
                  )
                  
                  
                  (12,118
                  )
                  
                  
                  (14,000
                  )Net
      gains from disposals
                  
                  
                  1,127
                  
                  
                  
                  3,021
                  
                  
                  
                  2,439
                  
                  
                  
                  11,531Net
      income (loss) from discontinued operations
                  
                  
                  (9,547
                  )
                  
                  
                  1,285
                  
                  
                  
                  (9,679
                  )
                  
                  
                  (2,469
                  )Net
      income (loss)
                  
                  
                  7,210
                  
                  
                  
                  (200,720
                  )
                  
                  
                  (6,146
                  )
                  
                  
                  (422,485
                  )Net
      (income) loss attributable to non-controlling interest
                  
                  
                  (60
                  )
                  
                  
                  (60
                  )
                  
                  
                  (84
                  )
                  
                  
                  944Net
      income (loss) attributable to Gramercy Capital Corp.
                  
                  
                  7,150
                  
                  
                  
                  (200,780
                  )
                  
                  
                  (6,230
                  )
                  
                  
                  (421,541
                  )Accrued
      preferred stock dividends
                  
                  
                  (2,336
                  )
                  
                  
                  (2,336
                  )
                  
                  
                  (7,008
                  )
                  
                  
                  (7,008
                  )Net
      income (loss) available to common stockholders
                  
                  $
                  4,814
                  
                  
                  $
                  (203,116
                  )
                  
                  $
                  (13,238
                  )
                  
                  $
                  (428,549
                  )Basic
      earnings per share:Net
      income (loss) from continuing operations, net of non-controlling
      interestand
      after preferred dividends
                  
                  $
                  0.29
                  
                  
                  $
                  (4.10
                  )
                  
                  $
                  (0.08
                  )
                  
                  $
                  (8.57
                  )Net
      income (loss) from discontinued operations
                  
                  
                  (0.19
                  )
                  
                  
                  0.03
                  
                  
                  
                  (0.19
                  )
                  
                  
                  (0.03
                  )Net
      income (loss) available to common stockholders
                  
                  $
                  0.10
                  
                  
                  $
                  (4.07
                  )
                  
                  $
                  (0.27
                  )
                  
                  $
                  (8.60
                  )Diluted
      earnings per share:Net
      income (loss) from continuing operations, net of non-controlling
      interestand
      after preferred dividends
                  
                  $
                  0.29
                  
                  
                  $
                  (4.10
                  )
                  
                  $
                  (0.08
                  )
                  
                  $
                  (8.57
                  )Net
      income (loss) from discontinued operations
                  
                  
                  (0.19
                  )
                  
                  
                  0.03
                  
                  
                  
                  (0.19
                  )
                  
                  
                  (0.03
                  )Net
      income (loss) available to common stockholders
                  
                  $
                  0.10
                  
                  
                  $
                  (4.07
                  )
                  
                  $
                  (0.27
                  )
                  
                  $
                  (8.60
                  )Basic
      weighted average common shares outstanding
                  
                  
                  49,920
                  
                  
                  
                  49,857
                  
                  
                  
                  49,906
                  
                  
                  
                  49,844Diluted
      weighted average common shares and common share equivalents
      outstanding
                  
                  
                  50,423
                  
                  
                  
                  49,857
                  
                  
                  
                  49,906
                  
                  
                  
                  49,844





The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.


5





Gramercy
Capital Corp.


Condensed
Consolidated Statement of Equity


(Unaudited,
dollar amounts and shares in thousands)





Accumulated
      OtherCommon
      Stock
                                          
                                          
                                          Series
      A
                                          
                                          
                                          Additional
      Paid-
                                          
                                          
                                          Comprehensive
      Income
                                          
                                          
                                          
                                          
                                          
                                          Total
      Gramercy
                                          
                                          
                                          Non-controlling
                                          
                                          
                                          
                                          
                                          
                                          ComprehensiveShares
                                          
                                          
                                          Par
      Value
                                          
                                          
                                          Preferred
      Stock
                                          
                                          
                                          In-Capital
                                          
                                          
                                          (Loss)
                                          
                                          
                                          Accumulated
      Deficit
                                          
                                          
                                          Capital
      Corp.
                                          
                                          
                                          Interest
                                          
                                          
                                          Total
                                          
                                          
                                          (Loss)Balance
      at December 31, 2009
                                          
                                          
                                          49,885
                                          
                                          
                                          $
                                          50
                                          
                                          
                                          $
                                          111,205
                                          
                                          
                                          $
                                          1,078,784
                                          
                                          
                                          $
                                          (96,038
                                          )
                                          
                                          $
                                          (527,821
                                          )
                                          
                                          $
                                          566,180
                                          
                                          
                                          $
                                          1,338
                                          
                                          
                                          $
                                          567,518Net
      income (loss)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (6,230
                                          )
                                          
                                          
                                          (6,230
                                          )
                                          
                                          
                                          84
                                          
                                          
                                          
                                          (6,146
                                          )
                                          
                                          $
                                          (6,230
                                          )Change
      in net unrealized loss on  derivative
instruments
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (112,417
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (112,417
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (112,417
                                          )
                                          
                                          
                                          (112,417
                                          )Reclassification
      of adjustments of net unrealized loss on securities previously available
      for sale
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,287
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,287
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,287
                                          
                                          
                                          
                                          2,287Issuance
      of stock - stock purchase plan
                                          
                                          
                                          12
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          26
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          26
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          26Stock
      based compensation - fair value
                                          
                                          
                                          25
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          803
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          803
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          803Dividends
      accrued on preferred stock
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (7,008
                                          )
                                          
                                          
                                          (7,008
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (7,008
                                          )Balance
      at September 30, 2010
                                          
                                          
                                          49,922
                                          
                                          
                                          $
                                          50
                                          
                                          
                                          $
                                          111,205
                                          
                                          
                                          $
                                          1,079,613
                                          
                                          
                                          $
                                          (206,168
                                          )
                                          
                                          $
                                          (541,059
                                          )
                                          
                                          $
                                          443,641
                                          
                                          
                                          $
                                          1,422
                                          
                                          
                                          $
                                          445,063
                                          
                                          
                                          $
                                          (116,360
                                          )





The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.


6





Gramercy
Capital Corp.


Condensed
Consolidated Statements of Cash Flows


(Unaudited,
dollar amounts in thousands)





Nine
      months ended September 30,2010
                            
                            
                            2009Operating
      Activities:Net
      loss
                            
                            $
                            (6,146
                            )
                            
                            $
                            (422,485
                            )Adjustments
      to net cash provided by operating activities:Depreciation
      and amortization
                            
                            
                            85,533
                            
                            
                            
                            92,857Amortization
      of leasehold interests
                            
                            
                            (2,047
                            )
                            
                            
                            (2,174
                            )Amortization
      of acquired leases to rental revenue
                            
                            
                            (48,647
                            )
                            
                            
                            (58,477
                            )Amortization
      of deferred costs
                            
                            
                            5,774
                            
                            
                            
                            8,741Amortization
      of discount and other fees
                            
                            
                            (19,781
                            )
                            
                            
                            (18,744
                            )Straight-line
      rent adjustment
                            
                            
                            20,851
                            
                            
                            
                            19,735Non-cash
      impairment charges
                            
                            
                            31,612
                            
                            
                            
                            161,996Net
      gain on sale of properties and lease terminations
                            
                            
                            (2,518
                            )
                            
                            
                            (11,492
                            )Net loss
      on acquisition of joint venture investment
                            
                            
                            2,722
                            
                            
                            
                            -Equity
      in net income of joint ventures
                            
                            
                            (4,870
                            )
                            
                            
                            (6,276
                            )Gain
      on extinguishment of debt
                            
                            
                            (19,443
                            )
                            
                            
                            (107,229
                            )Amortization
      of stock compensation
                            
                            
                            829
                            
                            
                            
                            845Provision
      for loan losses
                            
                            
                            64,390
                            
                            
                            
                            425,692Changes
      in operating assets and liabilities:Restricted
      cash
                            
                            
                            (1,895
                            )
                            
                            
                            (290
                            )Tenant
      and other receivables
                            
                            
                            (8,232
                            )
                            
                            
                            (14,789
                            )Payment
      of capitalized tenant leasing costs
                            
                            
                            (1,828
                            )
                            
                            
                            (1,254
                            )Accrued
      interest
                            
                            
                            (1,666
                            )
                            
                            
                            -Other
      assets
                            
                            
                            (4,466
                            )
                            
                            
                            (3,353
                            )Accounts
      payable, accrued expenses and other liabilities
                            
                            
                            6,511
                            
                            
                            
                            (4,558
                            )Deferred
      revenue
                            
                            
                            (21,311
                            )
                            
                            
                            (23,427
                            )Net
      cash provided by operating activities
                            
                            
                            75,372
                            
                            
                            
                            35,318Investing
      Activities:Capital
      expenditures and leasehold costs
                            
                            
                            (11,524
                            )
                            
                            
                            (6,533
                            )Deferred
      investment costs
                            
                            
                            -
                            
                            
                            
                            (657
                            )Proceeds
      from sale of real estate
                            
                            
                            35,141
                            
                            
                            
                            111,865New
      investment originations and funded commitments
                            
                            
                            (98,480
                            )
                            
                            
                            (51,702
                            )Principal
      collections on investments
                            
                            
                            152,108
                            
                            
                            
                            79,645Proceeds
      from loan syndications and sale of commercial mortgage-backed
      securities
                            
                            
                            19,608
                            
                            
                            
                            52,926Investment
      in commercial mortgage-backed securities
                            
                            
                            (50,597
                            )
                            
                            
                            (109,866
                            )Investment
      in joint ventures
                            
                            
                            (2,484
                            )
                            
                            
                            (3,429
                            )Change
      in accrued interest income
                            
                            
                            (48
                            )
                            
                            
                            (61
                            )Payment
      for acquistions of joint venture interest
                            
                            
                            (4,550
                            )
                            
                            
                            -Purchase
      of marketable investments
                            
                            
                            2
                            
                            
                            
                            (7
                            )Sale
      of marketable investments
                            
                            
                            4,621
                            
                            
                            
                            5,042Change
      in restricted cash from investing activities
                            
                            
                            (1,574
                            )
                            
                            
                            (3,474
                            )Net
      cash provided by investing activities
                            
                            
                            42,223
                            
                            
                            
                            73,749Financing
      Activities:Proceeds
      from repurchase facilities
                            
                            
                            -
                            
                            
                            
                            9,500Repayments
      of repurchase facilities
                            
                            
                            (85
                            )
                            
                            
                            (49,296
                            )Repayment
      of unsecured credit facility
                            
                            
                            -
                            
                            
                            
                            (45,000
                            )Repayment
      of mortgage notes
                            
                            
                            (35,133
                            )
                            
                            
                            (36,721
                            )Purchase
      of interest rate caps
                            
                            
                            (2,999
                            )
                            
                            
                            -Repurchase
      of collateralized debt obligations
                            
                            
                            (19,557
                            )
                            
                            
                            -Payment
      for exchange of junior subordinate notes
                            
                            
                            (5,000
                            )
                            
                            
                            -Dividend
      paid
                            
                            
                            -
                            
                            
                            
                            (16
                            )Distributions
      to non-controlling interest holders
                            
                            
                            -
                            
                            
                            
                            (6,171
                            )Deferred
      financing costs and other liabilities
                            
                            
                            (6,331
                            )
                            
                            
                            (3,196
                            )Change
      in restricted cash from financing activities
                            
                            
                            (45,210
                            )
                            
                            
                            (18,250
                            )Net
      cash used in financing activities
                            
                            
                            (114,315
                            )
                            
                            
                            (149,150
                            )Net
      increase (decrease) in cash and cash equivalents
                            
                            
                            3,280
                            
                            
                            
                            (40,083
                            )Cash
      and cash equivalents at beginning of period
                            
                            
                            138,345
                            
                            
                            
                            136,828Cash
      and cash equivalents at end of period
                            
                            $
                            141,625
                            
                            
                            $
                            96,745Non-cash
      activity:Deferred
      gain and other non-cash activity related to derivatives
                            
                            $
                            (112,417
                            )
                            
                            $
                            17,852Debt
      assumed by purchaser in sale of real estate
                            
                            $
                            -
                            
                            
                            $
                            103,621Supplemental
      cash flow disclosures:Interest
      paid
                            
                            $
                            149,879
                            
                            
                            $
                            153,164Income
      taxes paid
                            
                            $
                            230
                            
                            
                            $
                            504





The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.


7


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010




1.
Business and Organization





Gramercy
Capital Corp., also referred to as the Company or Gramercy, is a self-managed,
integrated, commercial real estate finance and property investment company. 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. At September 30, 2010 and December 31, 2009, SL Green Operating
Partnership, L.P., or SL Green OP, a wholly-owned subsidiary of SL Green, owned
approximately 12.5% of the outstanding shares of the Company’s common
stock.




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, 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.




The
Company’s property investment business, which operates under the name Gramercy
Realty, targets commercial properties leased primarily to 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, Wells Fargo Bank,
N.A. (formerly Wachovia Bank, National Association), or Wells Fargo, Regions
Financial Corporation, or Regions Financial, and Citizens Financial Group, Inc.,
or Citizens Financial, and to mid-sized and community banks. The Company’s
commercial real estate finance business, which operates under the name Gramercy
Finance, focuses on the direct origination, acquisition and portfolio management
of whole loans, subordinate interests in whole loans, mezzanine loans, preferred
equity, commercial mortgage-backed securities, or CMBS, and other real estate
related securities. Neither Gramercy Realty nor Gramercy Finance is a separate
legal entity, but are divisions of the Company through which the Company’s
property investment and commercial real estate finance businesses are
conducted.




As of
September 30, 2010, Gramercy Finance held loans and other lending investments
and CMBS of $2,223,053, net of unamortized fees, discounts, unfunded
commitments, reserves for loan losses and other adjustments, with an average
spread of 30-day LIBOR plus 361 basis points for its floating rate investments,
and an average yield of approximately 6.84% for its fixed rate investments. As
of September 30, 2010, Gramercy Finance also held interests in one credit tenant
net lease investment, or CTL investment, three interests in joint ventures
holding fee positions on properties subject to long-term leases, seven interests
in real estate acquired through foreclosures and a 100% fee interest in a
property subject to a long-term ground lease.




As of
September 30, 2010, Gramercy Realty’s portfolio consisted of 627 bank branches,
323 office buildings and two land parcels, of which 54 bank branches were owned
through an unconsolidated joint venture. Gramercy Realty’s consolidated
properties aggregated approximately 25.4 million rentable square feet
and its unconsolidated properties aggregated approximately 251
thousand rentable square feet. As of September 30, 2010, the occupancy of
Gramercy Realty’s consolidated properties was 83.7% and the occupancy for its
unconsolidated properties was 100.0%. Gramercy Realty’s two largest tenants are
Bank of America and Wells Fargo, and as of September 30, 2010, they represented
approximately 40.4% and 15.6%, respectively, of the rental income of the
Company’s portfolio and occupied approximately 43.6% and 16.5%, 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, 2010, the weighted average remaining term of
Gramercy Realty’s leases was 8.8 years and approximately 71.9% of its base
revenue was derived from net leases. 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, executing new leases and renewing expiring
leases.


8





Gramercy Capital
Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010




In
March 2010, the Company amended its $240,523 mortgage loan with Goldman Sachs
Commercial Mortgage Capital, L.P., or GSCMC, Citicorp North
America, Inc., or Citicorp, and SL Green, or the Goldman Mortgage Loan, and
its $550,731 senior and junior mezzanine loans with KBS Real Estate Investment
Trust, Inc., or KBS, GSCMC, Citicorp and SL Green, or the Goldman Mezzanine
Loans, to extend the maturity date to March 11, 2011. The Goldman Mortgage Loan
is collateralized by approximately 195 properties held by Gramercy Realty and
the Goldman Mezzanine Loans are collateralized by the equity
interest in substantially all of the entities comprising the Company’s
Gramercy Realty division, including its cash and cash equivalents totaling
$32,428 of the Company’s unrestricted cash as of September 30, 2010. The Company
does not expect that it will be able to refinance the entire amount of
indebtedness under the Goldman Mortgage Loan and the Goldman Mezzanine Loans
prior to their final maturity and it is unlikely to have sufficient capital to
satisfy any shortfall. Failure to refinance
or restructure the Goldman Mortgage Loan and the Goldman Mezzanine Loans
prior to their March 2011 maturity dates will result in a default and
could result in the foreclosure of the underlying Gramercy Realty properties
and/or the Company’s equity interests in the entities that comprise
substantially all of its Gramercy Realty division. Such default would materially
and adversely affect the Company’s business, financial condition and results of
operations. A loss of the Gramercy Realty portfolio or the lack of resolution of
the Goldman Mortgage Loan and the Goldman Mezzanine Loans at or prior to
maturity would trigger a substantial book loss and would likely result in the
Company having negative book value. The Company continues to negotiate with its
lenders to further extend or modify the Goldman Mortgage Loan and the Goldman
Mezzanine Loans and has retained EdgeRock Realty Advisors LLC, an FTI Company,
to assist in evaluating strategic alternatives for Gramercy Realty and the
potential restructure of such debt. However, the Company and its lenders have
made no significant progress in these negotiations to date. There can be no
assurance of when or if the Company will be able to accomplish such
restructuring or on what terms such restructuring would be.





The
Company relies on the credit and equity markets to finance and grow its
business. Despite signs of improvement, market conditions remain significantly
challenging and offer the Company few, if any, attractive opportunities to raise
new debt or equity capital, particularly while the Company’s efforts to extend
or restructure the Goldman Mortgage Loan and Goldman Mezzanine Loans remain
ongoing. In this environment, the Company is focused on extending or
restructuring the Goldman Mortgage Loan and Goldman Mezzanine
Loans, actively managing portfolio credit, generating liquidity from existing
assets, accretively investing repayments in loan and CMBS
investments, executing new leases and renewing expiring leases.
Nevertheless, the Company remains committed to identifying and pursuing
strategies and transactions that could preserve or improve cash flows to the
Company from its CDOs, increase the Company’s net asset value per share of
common stock, improve the Company’s future access to capital or otherwise
potentially create value for the Company’s stockholders.





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 2010
operating results for the period presented are not necessarily indicative of the
results that may be expected for the year ending December 31, 2010. 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, 2009.





The
Condensed Consolidated Balance Sheet at December 31, 2009 has been derived from
the audited financial statements at that date, but does not include all the
information and footnotes required by GAAP for complete financial
statements.




9


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





2.
Significant Accounting Policies





Reclassification





Certain
prior year balances have been reclassified to conform with the current year
presentation.





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, or VIEs, in which the
Company is the primary beneficiary. The Company adopted the new consolidation
accounting guidance, which was effective as of January 1, 2010. This guidance
has changed the criteria for consolidation of VIEs and removed a preexisting
consolidation exception for qualified special purpose entities, such as certain
securitization vehicles. The amended guidance requires a qualitative, rather
than quantitative assessment of when a VIE should be consolidated. The primary
beneficiary is defined as the entity that (i) directly controls the activities
that have the most significant impact the entity’s economic performance, and
(ii) has the right to receive benefits from the VIE or the obligation to absorb
losses of the VIE that could be significant to the VIE. The Company has
historically consolidated four VIEs as further discussed below, and the adoption
of the new accounting guidance did not impact the accounting for these entities.
All significant intercompany balances and transactions have been eliminated.
Entities which the Company does not control and entities which are VIEs, but
where the Company is not the primary beneficiary, are accounted for as
investments in joint ventures or as investments in CMBS.





Variable
Interest Entities




The
following is a summary of the Company’s involvement with VIEs as of September
30, 2010:





Company
                      carrying
                      value-assets
                    
                    
                    Company
                      carrying
                      value-
                      liabilities
                    
                    
                    Face
      value of
                      assets
      held by
                      the
      VIE
                    
                    
                    Face
      value of
                      liabilities
                      issued
      by the
                      VIEConsolidated
      VIEsReal
      estate investments, net
                    
                    $
                    43,230
                    
                    
                    $
                    40,889
                    
                    
                    $
                    43,230
                    
                    
                    $
                    40,889Collateralized
      debt obligations
                    
                    
                    2,491,193
                    
                    
                    
                    2,916,280
                    
                    
                    
                    3,112,924
                    
                    
                    
                    3,078,018$
                    2,534,423
                    
                    
                    $
                    2,957,169
                    
                    
                    $
                    3,156,154
                    
                    
                    $
                    3,118,907Unconsolidated
      VIEsInvestment
      in joint ventures
                    
                    $
                    87,969
                    
                    
                    $
                    -
                    
                    
                    $
                    401,993
                    
                    
                    $
                    206,506CMBS-controlling
      class
                    
                    
                    11,064
                    (1)
                    
                    
                    -
                    
                    
                    
                    903,654
                    
                    
                    
                    903,654$
                    99,033
                    
                    
                    $
                    -
                    
                    
                    $
                    1,305,647
                    
                    
                    $
                    1,110,160





(1)
            CMBS
      are assets held by the collateralized debt obligations classified on the
      Condensed Consolidated Balance Sheet as an Asset of Consolidated
      VIEs.




10





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





Consolidated
VIEs




As of
September 30, 2010, the Condensed Consolidated Balance Sheet includes $2,534,423
of assets and $2,957,169 of liabilities related to four consolidated VIEs. Due
to the non-recourse nature of these VIEs, and other factors discussed below, the
Company’s net exposure to loss from investments in these entities is limited to
$2,341.




Real
Estate Investments, Net




The
Company, through its acquisition of American Financial Realty Trust (NYSE: AFR),
or American Financial, on April 1, 2008, obtained a wholly-owned interest of
First States Investors 801 GP II, LLC and First States Investors 801, L.P. which
own the 0.51% and 88.4% general partnership interests, respectively, in 801
Market Street Holdings, L.P., or Holdings, for the purpose of owning and leasing
a condominium interest located at 801 Market Street, Philadelphia, Pennsylvania.
The original acquisition of the condominium interest was financed with a $42,904
non-recourse mortgage loan held by Holdings. The loan bears interest at a fixed
rate of 6.17% and matures in 2013. Excluding the lien placed on the property by
the mortgage lender, there are no other restrictions on the assets of Holdings.
The Company does not have any arrangements to provide additional financial
support to Holdings. The Company’s share of the net income of Holdings totals
$350 and $1,060 for the three and nine months ended September 30, 2010,
respectively, and the cash flows from the real estate investments are
insignificant compared to the cash flows of the Company. The Company manages the
real estate investment and has control of major operational decisions and
therefore has concluded that it is the primary beneficiary of the real estate
investment.




Collateralized
Debt Obligations




The
Company currently consolidates three collateralized debt obligations, or CDOs,
which are VIEs. These CDOs invest in commercial real estate debt instruments,
the majority of which the Company originated within the CDOs, and are financed
by the debt and equity issued. The Company is named as collateral manager of all
three CDOs. As a result of consolidation, the Company’s subordinate debt and
equity ownership interests in these CDOs have been eliminated, and the Condensed
Consolidated Balance Sheet reflects both the assets held and debt issued by
these CDOs to third parties. Similarly, the operating results and cash flows
include the gross amounts related to the assets and liabilities of the CDOs, as
opposed to the Company’s net economic interests in these CDOs. Refer to Note 7
for further discussion of fees earned related to the management of the
CDOs.




The
Company’s interest in the assets held by these CDOs is restricted by the
structural provisions of these entities, and the recovery of these assets will
be limited by the CDOs’ distribution provisions, which are subject to change due
to non-compliance with covenants, which are described further in Note 7. The
liabilities of the CDO trusts are non-recourse, and can generally only be
satisfied from the respective asset pool of each CDO.




The
Company is not obligated to provide any financial support to these CDOs. As of
September 30, 2010, the Company has no exposure to loss as a result of the
investment in these CDOs. Since the Company is the collateral manager of the
three CDOs and can make decisions related to the collateral that would most
significantly impact the economic outcome of the CDOs, the Company has concluded
that it is the primary beneficiary of the CDOs.




Unconsolidated
VIEs




Investment
in CMBS





The
Company has investments in CMBS, which are considered to be VIEs. These
securities were acquired through investment, and are comprised of primarily
securities that were originally investment grade securities, and do not
represent a securitization or other transfer of the Company’s assets. The
Company is not named as the special servicer or collateral manager of these
investments, except as discussed further below.


11


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





The
Company is not obligated to provide, nor has it provided, any financial support
to these entities. The majority of the Company’s securities portfolio, with an
aggregate face amount of $1,231,055, is financed by the Company’s CDOs, and the
Company’s exposure to loss is therefore limited to its interests in these
consolidated entities described above. The Company has not consolidated the
aforementioned CMBS investments due to the determination that based on the
structural provisions and nature of each investment, the Company does not
directly control the activities that most significantly impact the VIEs’
economic performance.




The
Company further analyzed its investment in controlling class CMBS to determine
if it was the primary beneficiary. At September 30, 2010, the Company owned
securities of two controlling class CMBS trusts, including a non-investment
grade CMBS investment, GS Mortgage Securities Trust 2007-GKK1, or the Trust. The
carrying value of both investments were $11,064 at September 30, 2010. The
total par amounts of CMBS issued by the two CMBS trusts were
$903,654.




The Trust
is a resecuritization of approximately $634,000 of CMBS originally rated AA
through BB. 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. The Company has determined that it is the
non-transferor sponsor of the Trust. As collateral administrator, the Manager
has the right to purchase defaulted securities from the Trust at fair value if
very specific triggers have been reached. The Company has no other rights or
obligations that could impact the economics of the Trust and therefore has
concluded that it is not the primary beneficiary. The Manager can be
removed as collateral administrator, for cause only, with the vote of
66 2/3% 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 loss as a result of its investment in these CMBS
trusts totaled $11,064, which equals the book value of these investments as of
September 30, 2010.





Investment
in Unconsolidated Joint Ventures




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 an $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. As of September 30, 2010 and December 31, 2009, the investment had
a carrying value of $35,775 and $31,567, respectively. The Company is required
to make additional capital contributions to the entity to supplement the
entity’s operational cash flow needs. The Company is not the managing member and
has no control over the decisions that most impact the economics of the entity
and therefore has concluded that it is not the primary beneficiary of the VIE.




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. As of September 30, 2010 and December 31, 2009, the
investment had a carrying value of $52,194 and $45,659, respectively. The
Company is required to make additional capital contributions to the entity to
supplement the entity’s operational cash flow needs. The Company is not the
managing member and has no control over the decisions that most impact the
economics of the entity and therefore has concluded that it is not the primary
beneficiary of the VIE.




Unless
otherwise noted, the Company is not obligated to provide any financial support
to these entities. The Company’s maximum exposure to loss as a result of its
investment in these entities is limited to the book value of these investments
as of September 30, 2010 and any further contributions required to enable the
VIEs to meet operating cash flow needs. The Company’s accounting for
unconsolidated joint ventures is further disclosed in Note 6.




12


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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 both
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 evaluated for impairment at each reporting period. None
of the joint venture debt is recourse to the Company. As of September 30, 2010
and December 31, 2009, the Company had investments of $92,466 and $108,465 in
unconsolidated joint ventures, respectively.





Real
Estate Investments





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.  In July 2010, the Company acquired the remaining 60% interest
in Whiteface Lodge. In connection with this acquisition, the Company acquired
521 fractional residential condominium units. These fractional residential
condominium units are classified as Other Real Estate Assets on the
Company’s Condensed Consolidated Balance Sheets.




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, 2010 consists of $82,383 on deposit with the trustee of
the Company’s CDOs. The remaining balance consists of $66,856 held as collateral
for letters of credit, $2,539 of interest reserves held on behalf of borrowers
and $75,989 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




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, 2010 and December 31, 2009, the Company had real estate
investments held-for-sale of $10,437 and $841, respectively. The Company
recorded impairment charges of $10,098 and $10,361 for the three and nine months
ended September 30, 2010, respectively, and $1,860 and $16,463 for the three and
nine months ended September 30, 2009, respectively, related to real estate
investments classified as held-for-sale.





Loans
and Other Lending Investments Held-For-Sale




Loans
held-for-investment are intended to be held to maturity and, accordingly, are
carried at cost, net of unamortized loan origination fees, discounts,
repayments, sales of partial interests in loans, and unfunded commitments unless
such loan or investment is deemed to be impaired. 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, 2010, the Company had loans and other lending
investments designated as held-for-sale of $37,700. As of December 31, 2009, the
Company had no loans and other lending investments designated as held-for-sale.
The Company recorded impairment charges of $0 and $2,000 related to the
mark-to-market of the loans designated as held-for-sale for the three and nine
months ended September 30, 2010, 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.





13





Gramercy Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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 Condensed 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 Condensed Consolidated Statements 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
Condensed 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, 2010 and December
31, 2009, the amortization of unrealized loss on the redesignated CMBS
investments included in other comprehensive income (loss) was $2,882 and $3,906,
respectively.




When it
is probable that the Company will be unable to collect all contractual payments
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. During the three and nine months
ended September 30, 2010, the Company recognized an other-than-temporary
impairment of $6,730 and $19,333, respectively, due to an adverse change in
expected cash flows related to credit losses for two and ten CMBS investments,
respectively, which are recorded in impairment on loans held-for-sale and CMBS
in the Company’s Condensed Consolidated Statement of Operations. The Company
recorded impairments of $1,360 during the three and nine months ended September
30, 2009.




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 $93,986 and $97,286, a fair value of $98,853
and $98,832 and unrealized gains of $4,867 and $1,546 at September 30, 2010 and
December 31, 2009, respectively, and have maturities that extend through
November 2013.


14





Gramercy Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010


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, 2010 and December 31, 2009, were $7,097 and $8,172,
respectively. The Company continually reviews 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, the
Company increases the allowance for doubtful accounts or records a direct
write-off of the receivable in the Condensed Consolidated Statements of
Operations.




15





Gramercy Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





Intangible
Assets





As of
September 30, 2010 and December 31, 2009, the Company’s intangible assets and
acquired lease obligations were comprised of the following:





September
      30,
                    2010
                  
                  
                  December
      31,
                    2009Intangible
      assets:In-place
      leases, net of accumulated amortization of $103,326 and
      $70,363
                  
                  $
                  330,519
                  
                  
                  $
                  363,655Above-market
      leases, net of accumulated amortization of $30,882 and
    $22,601
                  
                  
                  78,502
                  
                  
                  
                  86,823Amounts
      related to assets held for sale, net of accumulated amortization of $9 and
      $6
                  
                  
                  (39
                  )
                  
                  
                  (42
                  )Total
      intangible assets
                  
                  $
                  408,982
                  
                  
                  $
                  450,436Intangible
      liabilities:Below-market
      leases, net of accumulated amortization of $201,207 and
      $144,261
                  
                  $
                  713,807
                  
                  
                  $
                  770,839Amounts
      related to assets held for sale, net of accumulated amortization of $13
      and $8
                  
                  
                  (54
                  )
                  
                  
                  (58
                  )Total
      intangible liabilities
                  
                  $
                  713,753
                  
                  
                  $
                  770,781





Valuation
of Financial Instruments




ASC
820-10, “Fair Value Measurements and Disclosures,” which among other things,
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 is
inversely correlated with the degree of judgment utilized in measuring the fair
value of financial instruments. Less judgment is utilized in measuring fair
value of financial instruments, that have readily available active quoted prices
or for which fair value can be measured from actively quoted prices in active
markets. Conversely, financial instruments rarely traded or not quoted have less
observability and are measured at fair value using valuation models that require
more judgment.




16




Gramercy Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





The three
broad levels defined are as follows:





Level I  — This
level is comprised of financial instruments that have quoted prices that are
available in active markets for identical assets or liabilities. The type of
financial instruments included in this category are highly liquid instruments
with quoted prices.





Level II  — This
level is comprised of financial instruments that have pricing inputs other than
quoted prices in active markets that are either directly or indirectly
observable. The nature of these financial instruments includes instruments for
which quoted prices are available but traded less frequently and instruments
that are fair valued using other financial instruments, the parameters of which
can be directly observed.





Level III  — This
level is comprised of financial instruments that have little to no pricing
observability as of the reported date. These financial instruments do not have
active markets and are measured using management’s best estimate of fair value,
where the inputs into the determination of fair value require significant
management judgment and assumptions. Instruments that are generally included in
this category are derivatives, whole loans, subordinate interests in whole loans
and mezzanine loans.





For a
further discussion regarding the measurement of financial instruments see Note
11.





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, use of parking facilities 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, which includes loan and CMBS investments, are
recognized over the life of the investments 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.


17





Gramercy Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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, 2010, the Company had one first mortgage loan,
one second lien loan and one third lien loan with an aggregate carrying value of
$23,123, which were classified as non-performing. At December 31, 2009, the
Company had three first mortgage loans, four mezzanine loans, one second lien
loan and one third lien loan with an aggregate carrying value of $55,441 which
were classified as non-performing loans.





The
Company classifies loans as sub-performing if they are materially not performing
in 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, 2010, the Company had one first mortgage loan and two
mezzanine loans with an aggregate carrying value of $70,209 classified as
sub-performing. At December 31, 2009, four first mortgage loans with a total
carrying value of $160,212 were classified as sub-performing.




Reserve
for Loan Losses




Specific
valuation allowances are established for loan losses on loans in instances where
it is deemed probable that the Company may be unable to collect all amounts of
principal and interest due according to the contractual terms of the loan. The
reserve is increased through the provision for loan losses on the Condensed
Consolidated Statements of Operations and is decreased by charge-offs when
losses are realized through sale, foreclosure, or when significant collection
efforts have ceased.




The
Company considers the present value of payments expected to be received,
observable market prices or the estimated fair value of the collateral (for
loans that are dependent on the collateral for repayment), and compares it to
the carrying value of the loan. The determination of the estimated fair value is
based on the key characteristics including collateral type, collateral location,
quality and prospects of the sponsor, the amount and status of any senior debt,
and other factors. The Company also includes 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. The Company
also considers if the loans terms have been modified in a troubled debt
restructuring. 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 loan
losses. The allowance for each loan is maintained at a level the Company
believes is adequate to absorb losses. During the nine months ended September
30, 2010, the Company incurred charge-offs totaling $208,815 relating to
realized losses on nine loans. During the year ended December 31, 2009, the
Company incurred charge-offs totaling $188,574 relating to realized losses on 16
loans. The Company maintained a reserve for loan losses of $273,777 against 21
separate investments with a carrying value of $534,412 as of September 30, 2010,
and a reserve for loan losses of $418,202 against 23 investments with a carrying
value of $536,455 as of December 31, 2009.





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 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 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 Class B limited partner
interests have been cancelled. No incentive distribution was earned for the
three and nine months ended September 30, 2009.


18


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





Derivative
Instruments




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 and
the 2006 CDO and the 2007 CDO permit 5% of the net outstanding principal balance
to be unhedged. 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.





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.




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 14.





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
TRSs are subject to U.S. federal, state and local income taxes.




For the
three and nine months ended September 30, 2010, the Company recorded $19 and
$123 of income tax expense, respectively. For the three and nine months ended
September 30, 2009, the Company recorded $88 and $2,489 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 all or a
portion of this gain until 2014; however, not all states follow this federal
rule.


19


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010




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.





Concentrations of Credit
Risk




Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash investments, debt investments 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 its loans and other lending investments
portfolio by evaluating exposure to various markets, underlying property types,
investment structure, term, sponsors, tenants and other credit
metrics.




Four
investments accounted for approximately 22.4% of the total carrying value of the
Company's debt investments as of September 30, 2010 compared to four investments
which accounted for approximately 20.8% of the total carrying value of the
Company's debt investments as of December 31, 2009. Seven investments
accounted for approximately 18.2% and 16.3% of the revenue earned on the
Company's loan and other lending investments for the three and nine months ended
September 30, 2010 compared to six investments which 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,
respectively. The largest sponsor accounted for approximately 9.9% and 9.5% of
the total carrying value of the Company’s debt investments as of September 30,
2010 and December 31, 2009, respectively. The largest sponsor accounted for
approximately 6.9% and 6.3% of the revenue earned on the Company's loan and
other lending investments for the three and nine months ended September 30,
2010, respectively, compared to 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.





Additionally,
two tenants, Bank of America and Wells Fargo, accounted for approximately 40.5%
and 15.6% of the Company's rental revenue for the three months ended September
30, 2010, respectively, and approximately 40.4% and 15.6% of the Company's
rental revenue for the nine months ended September 30, 2010,
respectively.




Recently
Issued Accounting Pronouncements




In June
2009, the FASB amended 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.
Adoption of this guidance did not have a material impact on the Company’s
Condensed Consolidated Financial Statements.




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. Adoption of this guidance
did not have a material impact on the Company’s Condensed Consolidated Financial
Statements.


20





Gramercy Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010




In
January 2010, the FASB amended guidance to require a number of additional
disclosures regarding fair value measurements. Specifically, the guidance
revises two disclosure requirements concerning fair value measurements and
clarifies two others. It requires separate presentation of significant transfers
into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the
reasons for such transfers. Also, it requires the presentation of purchases,
sales, issuances and settlements within Level 3 on a gross basis rather than on
a net basis. The amendments clarify that disclosures should be disaggregated by
class of asset or liability and that disclosures about inputs and valuation
techniques should be provided for both recurring and non-recurring fair value
measurements. The Company has determined the adoption of this guidance did not
have a material impact on the Company’s Condensed Consolidated Financial
Statements.




In
March 2010, the FASB issued a clarification of previous guidance that exempts
certain credit related features from analysis as potential embedded derivatives
subject to bifurcation and separate fair value accounting.  This guidance
specifies that an embedded credit derivative feature related to the transfer of
credit risk that is only in the form of subordination of one financial
instrument to another is not subject to bifurcation from a host contract. 
All other embedded credit derivative features should be analyzed to determine
whether their economic characteristics and risks are “clearly and closely
related” to the economic characteristics and risks of the host contract and
whether bifurcation and separate fair value accounting is required.  The
adoption of this guidance by the Company on July 1, 2010 had no material effect
on the Company’s Condensed Consolidated Financial Statements.




In June
2010, FASB issued guidance which outlines specific disclosures that will be
required for the allowance for credit losses and all finance receivables.
Finance receivables includes loans, lease receivables and other arrangements
with a contractual right to receive money on demand or on fixed or determinable
dates that is recognized as an asset on an entity's statement of financial
position. This guidance will require companies to provide disaggregated levels
of disclosure by portfolio segment and class to enable users of the financial
statement to understand the nature of credit risk, how the risk is analyzed in
determining the related allowance for credit losses and changes to the allowance
during the reporting period. Required disclosures under this guidance as of the
end of a reporting period are effective for the Company's December 31, 2010
reporting period and disclosures regarding activities during a reporting period
are effective for the Company's March 31, 2011 interim reporting period.
The Company is currently evaluating the impact of these disclosures on its
Condensed Consolidated Financial Statements.




21


Gramercy Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





3.
Loans and Other Lending Investments





The
aggregate carrying values, allocated by product type and weighted-average
coupons, of the Company’s loans, other lending investments and CMBS investments
as of September 30, 2010 and December 31, 2009, were as follows:





Carrying Value (1)
                        
                        
                        Allocation
      by
                          Investment
      Type
                        
                        
                        Fixed Rate:

                            Average
      Yield
                        
                        Floating Rate:

                            Average Spread over
                            LIBOR  (2)2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009
                        
                        2010
                        
                        2009Whole
      loans, floating rate
                        
                        $
                        707,934
                        
                        
                        $
                        830,617
                        
                        
                        
                        58.4
                        %
                        
                        
                        60.2
                        %
                        
                        
                        
                        
                        
                        
                        329
      bps
                        
                        454
      bpsWhole
      loans, fixed rate
                        
                        
                        122,829
                        
                        
                        
                        122,846
                        
                        
                        
                        10.1
                        %
                        
                        
                        8.9
                        %
                        
                        
                        6.77
                        %
                        
                        
                        6.89
                        %Subordinate
      interests in whole loans, floating rate
                        
                        
                        75,406
                        
                        
                        
                        76,331
                        
                        
                        
                        6.2
                        %
                        
                        
                        5.5
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        295
      bps
                        
                        246
      bpsSubordinate
      interests in whole loans, fixed rate
                        
                        
                        47,055
                        
                        
                        
                        44,988
                        
                        
                        
                        3.9
                        %
                        
                        
                        3.2
                        %
                        
                        
                        6.01
                        %
                        
                        
                        7.46
                        %Mezzanine
      loans, floating rate
                        
                        
                        141,122
                        
                        
                        
                        190,668
                        
                        
                        
                        11.6
                        %
                        
                        
                        13.7
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        621
      bps
                        
                        577
      bpsMezzanine
      loans, fixed rate
                        
                        
                        87,100
                        
                        
                        
                        85,898
                        
                        
                        
                        7.2
                        %
                        
                        
                        6.2
                        %
                        
                        
                        10.74
                        %
                        
                        
                        8.08
                        %Preferred
      equity, floating rate
                        
                        
                        28,224
                        
                        
                        
                        28,228
                        
                        
                        
                        2.3
                        %
                        
                        
                        2.0
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        349
      bps
                        
                        1,064
      bpsPreferred
      equity, fixed rate
                        
                        
                        4,225
                        
                        
                        
                        4,256
                        
                        
                        
                        0.3
                        %
                        
                        
                        0.3
                        %
                        
                        
                        7.22
                        %
                        
                        
                        7.23
                        %Subtotal/ weighted
      average (3)
                        
                        
                        1,213,895
                        
                        
                        
                        1,383,832
                        
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %
                        
                        
                        7.97
                        %
                        
                        
                        7.39
                        %
                        370
      bps
                        
                        476
      bpsCMBS,
      floating rate
                        
                        
                        48,218
                        
                        
                        
                        67,876
                        
                        
                        
                        4.8
                        %
                        
                        
                        6.9
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        189
      bps
                        
                        254
      bpsCMBS,
      fixed rate
                        
                        
                        960,940
                        
                        
                        
                        916,833
                        
                        
                        
                        95.2
                        %
                        
                        
                        93.1
                        %
                        
                        
                        6.53
                        %
                        
                        
                        7.84
                        %Subtotal/
      weighted average
                        
                        
                        1,009,158
                        
                        
                        
                        984,709
                        
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %
                        
                        
                        6.53
                        %
                        
                        
                        7.84
                        %
                        189
      bps
                        
                        254
      bpsTotal
                        
                        $
                        2,223,053
                        
                        
                        $
                        2,368,541
                        
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %
                        
                        
                        6.84
                        %
                        
                        
                        7.74
                        %
                        361
      bps
                        
                        463
      bps





(1)
            Loans and other lending
      investments and CMBS investments are presented net of unamortized fees,
      discounts, unfunded commitments, reserves for loan losses, impairments and
      other adjustments.




(2)
              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.(3)
              Weighted
      average yield and weighted average spread calculations include a
      non-performing loan with a carrying value net of loan loss reserves,
      classified as whole loans floating rate of approximately $23,123 with
      an average spread of 297 basis
  points .




22





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





As of
September 30, 2010, 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 Total2010
      (October 1 - December 31)
                                
                                
                                6
                                (1)
                                
                                $
                                111,892
                                
                                
                                
                                9.2
                                %2011
                                
                                
                                25
                                
                                
                                
                                478,294
                                
                                
                                
                                39.4
                                %2012
                                
                                
                                10
                                
                                
                                
                                294,979
                                
                                
                                
                                24.3
                                %2013
                                
                                
                                2
                                
                                
                                
                                88,944
                                
                                
                                
                                7.3
                                %2014
                                
                                
                                3
                                
                                
                                
                                68,049
                                
                                
                                
                                5.6
                                %Thereafter
                                
                                
                                7
                                
                                
                                
                                171,737
                                
                                
                                
                                14.2
                                %Total
                                
                                
                                53
                                
                                
                                $
                                1,213,895
                                
                                
                                
                                100.0
                                %Weigthed average maturity
                                
                                
                                
                                
                                
                                1.9
      years
                                (2)





(1)
            Of the loans scheduled to mature
      in 2010, three investments with a carrying value of $88,769 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, 2010 and 2009, the Company’s
investment income from loans, other lending investments and CMBS
investments, was generated by the following investment types:





Three
      months ended
                                  September
      30, 2010
                                
                                
                                Three
      months ended
                                  September
      30, 2009Investment
                                  Income
                                
                                
                                %
      of
                                  Total
                                
                                
                                Investment
                                  Income
                                
                                
                                % ofTotalWhole
      loans
                                
                                $
                                13,085
                                
                                
                                
                                32.1
                                %
                                
                                $
                                15,162
                                
                                
                                
                                35.9
                                %Subordinate
      interests in whole loans
                                
                                
                                776
                                
                                
                                
                                1.9
                                %
                                
                                
                                1,342
                                
                                
                                
                                3.2
                                %Mezzanine
      loans
                                
                                
                                5,799
                                
                                
                                
                                14.2
                                %
                                
                                
                                7,229
                                
                                
                                
                                17.1
                                %Preferred
      equity
                                
                                
                                687
                                
                                
                                
                                1.7
                                %
                                
                                
                                591
                                
                                
                                
                                1.4
                                %CMBS
                                
                                
                                20,426
                                
                                
                                
                                50.1
                                %
                                
                                
                                17,898
                                
                                
                                
                                42.4
                                %Total
                                
                                $
                                40,773
                                
                                
                                
                                100.0
                                %
                                
                                $
                                42,222
                                
                                
                                
                                100.0
                                %Nine
      months ended
                                  September
      30, 2010
                                
                                
                                Nine
      months ended
                                  September
      30, 2009Investment
                                  Income
                                
                                
                                %
      of
                                  Total
                                
                                
                                Investment
                                  Income
                                
                                
                                % ofTotalWhole
      loans
                                
                                $
                                46,048
                                
                                
                                
                                35.7
                                %
                                
                                $
                                57,880
                                
                                
                                
                                41.3
                                %Subordinate
      interests in whole loans
                                
                                
                                2,244
                                
                                
                                
                                1.7
                                %
                                
                                
                                3,653
                                
                                
                                
                                2.6
                                %Mezzanine
      loans
                                
                                
                                19,072
                                
                                
                                
                                14.8
                                %
                                
                                
                                31,042
                                
                                
                                
                                22.2
                                %Preferred
      equity
                                
                                
                                2,041
                                
                                
                                
                                1.6
                                %
                                
                                
                                1,208
                                
                                
                                
                                0.9
                                %CMBS
                                
                                
                                59,426
                                
                                
                                
                                46.2
                                %
                                
                                
                                46,231
                                
                                
                                
                                33.0
                                %Total
                                
                                $
                                128,831
                                
                                
                                
                                100.0
                                %
                                
                                $
                                140,014
                                
                                
                                
                                100.0
                                %





23





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





At
September 30, 2010 and December 31, 2009, the Company’s loans and other lending
investments, excluding CMBS investments, had the following geographic
diversification:




September
      30, 2010
                      
                      
                      December
      31, 2009Region
                      
                      Carrying
                        Value
                      
                      
                      % ofTotal
                      
                      
                      Carrying
                        Value
                      
                      
                      % ofTotalNortheast
                      
                      $
                      555,076
                      
                      
                      
                      45.7
                      %
                      
                      $
                      638,937
                      
                      
                      
                      46.2
                      %West
                      
                      
                      309,614
                      
                      
                      
                      25.5
                      %
                      
                      
                      347,531
                      
                      
                      
                      25.1
                      %South
                      
                      
                      119,361
                      
                      
                      
                      9.8
                      %
                      
                      
                      132,961
                      
                      
                      
                      9.6
                      %Mid-Atlantic
                      
                      
                      116,493
                      
                      
                      
                      9.6
                      %
                      
                      
                      127,872
                      
                      
                      
                      9.2
                      %Midwest
                      
                      
                      50,337
                      
                      
                      
                      4.2
                      %
                      
                      
                      22,165
                      
                      
                      
                      1.6
                      %Various
      (1)
                      
                      
                      32,186
                      
                      
                      
                      2.7
                      %
                      
                      
                      42,406
                      
                      
                      
                      3.1
                      %Southwest
                      
                      
                      30,828
                      
                      
                      
                      2.5
                      %
                      
                      
                      71,960
                      
                      
                      
                      5.2
                      %Total
                      
                      $
                      1,213,895
                      
                      
                      
                      100.0
                      %
                      
                      $
                      1,383,832
                      
                      
                      
                      100.0
                      %





(1)
              Includes
      interest-only strips and at December 31, 2009, included a defeased
      loan.




At
September 30, 2010 and December 31, 2009, the Company’s loans and other lending
investments, excluding CMBS investments, by property type were as
follows:





September
      30, 2010
                    
                    
                    December
      31, 2009Property
      Type
                    
                    Carrying
                      Value
                    
                    
                    % ofTotal
                    
                    
                    Carrying
                      Value
                    
                    
                    % ofTotalOffice
                    
                    $
                    523,156
                    
                    
                    
                    43.1
                    %
                    
                    $
                    644,720
                    
                    
                    
                    46.6
                    %Retail
                    
                    
                    192,929
                    
                    
                    
                    15.9
                    %
                    
                    
                    107,115
                    
                    
                    
                    7.7
                    %Hotel
                    
                    
                    183,857
                    
                    
                    
                    15.1
                    %
                    
                    
                    220,385
                    
                    
                    
                    15.9
                    %Land
      - Commercial
                    
                    
                    143,454
                    
                    
                    
                    11.8
                    %
                    
                    
                    167,300
                    
                    
                    
                    12.1
                    %Multifamily
                    
                    
                    55,295
                    
                    
                    
                    4.6
                    %
                    
                    
                    88,975
                    
                    
                    
                    6.4
                    %Industrial
                    
                    
                    47,317
                    
                    
                    
                    3.9
                    %
                    
                    
                    50,842
                    
                    
                    
                    3.7
                    %Condo
                    
                    
                    33,250
                    
                    
                    
                    2.7
                    %
                    
                    
                    24,203
                    
                    
                    
                    1.8
                    %Mixed-Use
                    
                    
                    28,616
                    
                    
                    
                    2.4
                    %
                    
                    
                    53,475
                    
                    
                    
                    3.9
                    %Other
      (1)
                    
                    
                    6,021
                    
                    
                    
                    0.5
                    %
                    
                    
                    9,621
                    
                    
                    
                    0.7
                    %Land
      - Residential
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    17,196
                    
                    
                    
                    1.2
                    %Total
                    
                    $
                    1,213,895
                    
                    
                    
                    100.0
                    %
                    
                    $
                    1,383,832
                    
                    
                    
                    100.0
                    %





(1)
            Includes
      interest-only strips and a loan to one sponsor secured by the equity
      interests in seven properties.




The
Company recorded provisions for loan losses of $10,000 and $64,390 for the three
and nine months ended September 30, 2010, respectively. The Company recorded
provisions for loan losses of $205,508 and $425,692 for the three and nine
months ended September 30, 2009, respectively. These provisions represent
increases in loan loss reserves based on management's estimates considering
delinquencies, loss experience, presence or absence of credit enhancement to the
Company’s debt investments and collateral quality by individual asset or
category of asset.





For the
nine months ended September 30, 2010, the Company incurred charge-offs of
$208,815 related to realized losses on nine loan investments. During the year
ended December 31, 2009, the Company incurred charge-offs totaling $188,574
related to 16 loan investments.


24





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010




The
interest income recognized from impaired loans during the time within the
financial statement period that they were impaired or reserved for was $9,205
and $33,551 for the three and nine months ended September 30, 2010,
respectively. The interest income recognized from impaired loans during the time
within the financial statement period that they were impaired was $7,015 and
$35,023 for the three and nine months ended September 30, 2009,
respectively.





Changes
in the reserve for loan losses were as follows:





Reserve
      for possible loan losses, December 31, 2009
                  
                  $
                  418,202Additional
      provision for loan losses
                  
                  
                  41,160Charge-offs
                  
                  
                  (54,310
                  )Reserve
      for possible loan losses, March 31, 2010
                  
                  
                  405,052Additional
      provision for loan losses
                  
                  
                  13,230Charge-offs
                  
                  
                  (26,856
                  )Reserve
      for possible loan losses, June 30, 2010
                  
                  
                  391,426Additional
      provision for loan losses
                  
                  
                  10,000Charge-offs
                  
                  
                  (127,649
                  )Reserve
      for possible loan losses, September 30, 2010
                  
                  $
                  273,777





The
following is a summary of the Company’s CMBS investments at September 30,
2010:




Description
                              
                              Number
      of
                                Securities
                              
                              
                              Face
      Value
                              
                              
                              Book
      Value
                              
                              
                              Gross
                                Unrealized
                                Gain
                              
                              
                              Gross
                                Unrealized
                                Loss
                              
                              
                              Fair
      ValueFloating
      rate CMBS-Held to maturity
                              
                              
                              5
                              
                              
                              $
                              55,664
                              
                              
                              $
                              48,218
                              
                              
                              $
                              142
                              
                              
                              $
                              (7,542
                              )
                              
                              $
                              40,818Fixed
      rate CMBS-Held to maturity
                              
                              
                              101
                              
                              
                              
                              1,158,086
                              
                              
                              
                              945,528
                              
                              
                              
                              73,916
                              
                              
                              
                              (272,740
                              )
                              
                              
                              747,966Fixed rate
      CMBS-Available for sale
                              
                              
                              3
                              
                              
                              
                              17,305
                              
                              
                              
                              15,412
                              
                              
                              
                              1,262
                              
                              
                              
                              -
                              
                              
                              
                              15,412Total
                              
                              
                              109
                              
                              
                              $
                              1,231,055
                              
                              
                              $
                              1,009,158
                              
                              
                              $
                              75,320
                              
                              
                              $
                              (280,282
                              )
                              
                              $
                              804,196





The
following is a summary of the Company’s CMBS investments at December 31,
2009:




Description
                          
                          Number
      of
                            Securities
                          
                          
                          Face
      Value
                          
                          
                          Book
      Value
                          
                          
                          Gross
                            Unrealized
                            Gain
                          
                          
                          Gross
                            Unrealized
                            Loss
                          
                          
                          Fair
      ValueHeld
      to maturity:Floating
      rate CMBS
                          
                          
                          9
                          
                          
                          $
                          81,664
                          
                          
                          $
                          67,876
                          
                          
                          $
                          -
                          
                          
                          $
                          (25,512
                          )
                          
                          $
                          42,364Fixed
      rate CMBS
                          
                          
                          90
                          
                          
                          
                          1,096,968
                          
                          
                          
                          916,833
                          
                          
                          
                          30,662
                          
                          
                          
                          (433,465
                          )
                          
                          
                          514,031Total
                          
                          
                          99
                          
                          
                          $
                          1,178,632
                          
                          
                          $
                          984,709
                          
                          
                          $
                          30,662
                          
                          
                          $
                          (458,977
                          )
                          
                          $
                          556,395




25





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





The
following table shows the Company’s fair value unrealized losses, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position, at September 30, 2010.





Less
      than 12 Months
                  
                  
                  12
      months or More
                  
                  
                  TotalDescription
                  
                  Estimated
                    Fair
      Value
                  
                  
                  Gross
                    Unrealized
                    Loss
                  
                  
                  Estimated
                    Fair
      Value
                  
                  
                  Gross
                    Unrealized
                    Loss
                  
                  
                  Estimated
                    Fair
      Value
                  
                  
                  Gross
                    Unrealized
                    LossFloating
      rate CMBS
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  40,013
                  
                  
                  $
                  (7,542
                  )
                  
                  $
                  40,013
                  
                  
                  $
                  (7,542
                  )Fixed
      rate CMBS
                  
                  
                  15,001
                  
                  
                  
                  (1,987
                  )
                  
                  
                  500,595
                  
                  
                  
                  (270,753
                  )
                  
                  
                  515,596
                  
                  
                  
                  (272,740
                  )Total
      temporarily impaired securities
                  
                  $
                  15,001
                  
                  
                  $
                  (1,987
                  )
                  
                  $
                  540,608
                  
                  
                  $
                  (278,295
                  )
                  
                  $
                  555,609
                  
                  
                  $
                  (280,282
                  )




As of
September 30, 2010, the Company’s CMBS investments had the following maturity
characteristics:





Year of Maturity
                        
                        Number
      of
                          Investments
                          Maturing
                        
                        
                        Current
      Carrying
                          Value
                        
                        
                        Percent
      of
                          Total
      Carrying
                          Value
                        
                        
                        Current
      Fair
                          Value
                        
                        
                        Percent
      of
                          Total
                          FairValueLess
      than 1 year
                        
                        
                        1
                        
                        
                        $
                        5,835
                        
                        
                        
                        0.6
                        %
                        
                        $
                        5,561
                        
                        
                        
                        0.7
                        %1 -
      5 years
                        
                        
                        10
                        
                        
                        
                        92,638
                        
                        
                        
                        9.2
                        %
                        
                        
                        78,784
                        
                        
                        
                        9.8
                        %5 -
      10 years
                        
                        
                        98
                        
                        
                        
                        910,685
                        
                        
                        
                        90.2
                        %
                        
                        
                        719,851
                        
                        
                        
                        89.5
                        %Thereafter
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        
                        109
                        
                        
                        $
                        1,009,158
                        
                        
                        
                        100.0
                        %
                        
                        $
                        804,196
                        
                        
                        
                        100.0
                        %




26


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





The
following is a summary of the underlying credit ratings of the Company’s CMBS
investments at September 30, 2010 and December 31, 2009 (for split-rated
securities, the higher rating was used):




September
      30, 2010
                                        
                                        
                                        December
      31, 2009Carrying
                                          Value
                                        
                                        
                                        Percentage
                                        
                                        
                                        Carrying
                                          Value
                                        
                                        
                                        PercentageAAA
                                        
                                        $
                                        124,935
                                        
                                        
                                        
                                        12.4
                                        %
                                        
                                        $
                                        111,902
                                        
                                        
                                        
                                        11.4
                                        %AA+
                                        
                                        
                                        5,835
                                        
                                        
                                        
                                        0.6
                                        %
                                        
                                        
                                        13,701
                                        
                                        
                                        
                                        1.4
                                        %AA
                                        
                                        
                                        81,309
                                        
                                        
                                        
                                        8.1
                                        %
                                        
                                        
                                        139,449
                                        
                                        
                                        
                                        14.2
                                        %AA-
                                        
                                        
                                        30,039
                                        
                                        
                                        
                                        3.0
                                        %
                                        
                                        
                                        25,967
                                        
                                        
                                        
                                        2.6
                                        %A+
                                        
                                        
                                        51,016
                                        
                                        
                                        
                                        5.1
                                        %
                                        
                                        
                                        84,214
                                        
                                        
                                        
                                        8.6
                                        %A
                                        
                                        
                                        149,121
                                        
                                        
                                        
                                        14.7
                                        %
                                        
                                        
                                        219,563
                                        
                                        
                                        
                                        22.4
                                        %A-
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        29,441
                                        
                                        
                                        
                                        3.0
                                        %BBB+
                                        
                                        
                                        29,602
                                        
                                        
                                        
                                        2.9
                                        %
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -BBB
                                        
                                        
                                        121,618
                                        
                                        
                                        
                                        12.1
                                        %
                                        
                                        
                                        79,231
                                        
                                        
                                        
                                        8.0
                                        %BBB-
                                        
                                        
                                        109,824
                                        
                                        
                                        
                                        10.9
                                        %
                                        
                                        
                                        93,626
                                        
                                        
                                        
                                        9.5
                                        %BB+
                                        
                                        
                                        55,586
                                        
                                        
                                        
                                        5.5
                                        %
                                        
                                        
                                        55,606
                                        
                                        
                                        
                                        5.6
                                        %BB
                                        
                                        
                                        73,938
                                        
                                        
                                        
                                        7.3
                                        %
                                        
                                        
                                        100,631
                                        
                                        
                                        
                                        10.2
                                        %BB-
                                        
                                        
                                        74,012
                                        
                                        
                                        
                                        7.3
                                        %
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -B+
                                        
                                        
                                        57,881
                                        
                                        
                                        
                                        5.7
                                        %
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -B
                                        
                                        
                                        3,888
                                        
                                        
                                        
                                        0.4
                                        %
                                        
                                        
                                        1,477
                                        
                                        
                                        
                                        0.1
                                        %B-
                                        
                                        
                                        29,490
                                        
                                        
                                        
                                        2.9
                                        %
                                        
                                        
                                        932
                                        
                                        
                                        
                                        0.1
                                        %CCC
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        12,164
                                        
                                        
                                        
                                        1.2
                                        %CCC-
                                        
                                        
                                        11,064
                                        
                                        
                                        
                                        1.1
                                        %
                                        
                                        
                                        6,374
                                        
                                        
                                        
                                        0.6
                                        %C
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        4,644
                                        
                                        
                                        
                                        0.5
                                        %D
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,787
                                        
                                        
                                        
                                        0.6
                                        %Not
      rated
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
                                        
                                        $
                                        1,009,158
                                        
                                        
                                        
                                        100.0
                                        %
                                        
                                        $
                                        984,709
                                        
                                        
                                        
                                        100.0
                                        %





The
Company evaluates CMBS investments to determine if there has been an
other-than-temporary impairment. The Company’s unrealized losses are primarily
the result of market factors other than credit impairment. Credit impairment 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 two CMBS investments. Therefore, the Company
recognized an other-than-temporary impairment of $6,730 during the three months
ended September 30, 2010 that was recorded as an impairment in the Company’s
Condensed Consolidated Statements of Operations. 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 Condensed Consolidated Statements of Operations. To determine
the component of the other-than-temporary impairment related to expected credit
losses, the Company compares the amortized cost basis of each
other-than-temporarily impaired security to the present value of its revised
expected cash flows, discounted using its pre-impairment yield. Significant
judgment of management is required in this analysis that includes, but is not
limited to, (i) assumptions regarding the collectability of principal and
interest, net of related expenses, on the underlying loans, and (ii) current
subordination levels for individual loans which serve as collateral under the
Company’s securities, and (iii) current subordination levels for the securities
themselves. 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 and the fair value.
The Company has considered rating downgrades in its evaluation and apart from
the two bonds noted above, it believes that the book value of its CMBS
investments is recoverable at September 30, 2010. The Company attributes the
current difference between carrying value and market value to current market
conditions including a decrease in demand for structured financial products and
commercial real estate. The Company has concluded that, excluding its securities
classified as available-for-sale with a carrying value of $15,412 as of
September 30, 2010, 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 cost basis.


27






Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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 was previously a preferred equity investor, in the event of a borrower
default under such loan. The loan matures in 2032. This guarantee in the event
of a borrower default under such loan 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 is recorded. The Company’s maximum exposure under this
guarantee is approximately $1,371 as of September 30, 2010. 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





Whiteface
Lodge





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.
In July 2010, the Company acquired the remaining 60% joint venture interest in
the Whiteface Lodge for $4,550.  The Whiteface Lodge is a fractional
residential condominium complex.  The Company acquired 521 unsold
fractional residential condominium units of a total of 1,104 units and the
related amenities for use by the unit owners and guests. The Company accounted
for the acquisition of the remaining joint venture interest utilizing the
purchase method of accounting and recorded a net impairment of
$2,722.




5.
Dispositions and Assets Held for Sale




During
the three and nine months ended September 30, 2010, the Company sold or disposed
of three and 14 properties, respectively, for net sales proceeds of $17,029 and
$35,141, respectively. During the three and nine months ended September 30,
2009, the Company sold or disposed of 16 and 51 properties, respectively, for
net sales proceeds of $68,368 and $112,960, respectively. The sales transactions
resulted in gains totaling $1,127 and $2,370 for the three and nine months ended
September 30, 2010, 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
Company separately classifies properties held-for-sale in the consolidated
balance sheets and consolidated statements of operations. In the normal course
of business, the Company identifies non-strategic assets for sale. Changes in
the market may compel the Company to decide to classify a property held-for-sale
or classify a property that was designated as held-for-sale back to
held-for-investment. During the year ended December 31, 2009, the Company
reclassified 69 properties, with a total carrying value of $37,174, previously
identified as held-for-sale to held-for-investment. Each property was impaired
to value it at the lesser of (i) fair value as the date of transfer, or (ii) its
carrying value before the asset was classified as held-for-sale, adjusted for
any depreciation expense that would have been recognized had the property been
continuously classified as held-for-investment.


28





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





The
Company classified two properties as held-for-sale as of September 30, 2010. As
of December 31, 2009, the Company classified two properties as
held-for-sale. The following table summarizes information for these
properties:




September
      30,
                    2010
                  
                  
                  December
      31,
                    2009Assets
      held for sale:Real
      estate investments, at cost:Land
                  
                  $
                  10,057
                  
                  
                  $
                  279Building
      and improvement
                  
                  
                  303
                  
                  
                  
                  565Total
      real estate investments, at cost
                  
                  
                  10,360
                  
                  
                  
                  844Less:  accumulated
      depreciation
                  
                  
                  (7
                  )
                  
                  
                  (6
                  )Real
      estate investments held for sale, net
                  
                  
                  10,353
                  
                  
                  
                  838Accrued
      interest and receivables
                  
                  
                  4
                  
                  
                  
                  (35
                  )Acquired
      lease assets, net of accumulated amortization
                  
                  
                  39
                  
                  
                  
                  42Other
      Assets
                  
                  
                  41
                  
                  
                  
                  (4
                  )Total
      assets held for sale
                  
                  $
                  10,437
                  
                  
                  $
                  841Liabilities
      related to assets held for sale:Accrued
      expenses
                  
                  $
                  52
                  
                  
                  $
                  55Deferred
      revenue
                  
                  
                  156
                  
                  
                  
                  125Below
      market lease liabilities, net of accumulated amortization
                  
                  
                  54
                  
                  
                  
                  58Total
      liabilities related to assets held for sale:
                  
                  
                  262
                  
                  
                  
                  238Net
      assets held for sale
                  
                  $
                  10,175
                  
                  
                  $
                  603





The
following operating results of the assets held-for-sale as of September 30, 2010
and the assets sold during the nine months ended September 30, 2010 and 2009,
are included in discontinued operations for all periods presented:





Three
      months ended
                    September
      30,
                  
                  
                  Nine
      months ended
                    September
      30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Operating
      Results:Revenues
                  
                  $
                  (9,928
                  )
                  
                  $
                  6,606
                  
                  
                  $
                  (9,811
                  )
                  
                  $
                  19,623Operating
      expenses
                  
                  
                  (330
                  )
                  
                  
                  (6,782
                  )
                  
                  
                  (1,346
                  )
                  
                  
                  (28,468
                  )Marketing,
      general and administrative
                  
                  
                  (386
                  )
                  
                  
                  (518
                  )
                  
                  
                  (729
                  )
                  
                  
                  (1,003
                  )Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (686
                  )
                  
                  
                  -
                  
                  
                  
                  (1,804
                  )Depreciation
      and amortization
                  
                  
                  (30
                  )
                  
                  
                  (356
                  )
                  
                  
                  (232
                  )
                  
                  
                  (1,874
                  )Equity
      in net income from unconsolidated joint venture
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (474
                  )Net
      income (loss) from operations
                  
                  
                  (10,674
                  )
                  
                  
                  (1,736
                  )
                  
                  
                  (12,118
                  )
                  
                  
                  (14,000
                  )Net
      gains from disposals
                  
                  
                  1,127
                  
                  
                  
                  3,021
                  
                  
                  
                  2,439
                  
                  
                  
                  11,531Net
      income (loss) from discontinued operations
                  
                  $
                  (9,547
                  )
                  
                  $
                  1,285
                  
                  
                  $
                  (9,679
                  )
                  
                  $
                  (2,469
                  )





Subsequent
to September 30, 2010, the Company entered into an agreement of sale on one
property for approximately $2,170 with a total carrying value of $2,159 as of
September 30, 2010, and net income of $16 for the nine months ended September
30, 2010.





Discontinued
operations have not been segregated in the Condensed Consolidated Statements of
Cash Flows.


29


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





6.
Investments in Unconsolidated Joint Ventures





At
September 30, 2010 and December 31, 2009, the carrying values of the Company’s
joint venture investments were as follows:





Carrying
      ValueOwnership
                          Interest
                        
                        
                        September
      30,
                          2010
                        
                        
                        December
      31,
                          2009Unconsolidated
      Joint Ventures:200
      Franklin Square Drive, Somerset, New Jersey
                        
                        
                        25.0
                        %
                        
                        $
                        808
                        
                        
                        $
                        9972
      Herald Square, New York, New York (1)
                        
                        
                        45.0
                        %
                        
                        
                        35,775
                        
                        
                        
                        31,567885
      Third Avenue, New York, New York(1)
                        
                        
                        45.0
                        %
                        
                        
                        52,194
                        
                        
                        
                        45,695Citizens
      Portfolio
                        
                        various
                        (2)
                        
                        
                        3,689
                        
                        
                        
                        6,38692,466
                        
                        
                        
                        84,645Consolidated
      VIE:Whiteface,
      Lake Placid, New York (3)
                        
                        
                        100.0
                        %
                        
                        
                        -
                        
                        
                        
                        23,820Total
                        
                        
                        
                        
                        
                        $
                        92,466
                        
                        
                        $
                        108,465





(1)
            SL
      Green has remaining ownership interest in joint
  venture.


(2)
            The
      Company has 99% ownership interest in 52 properties and 1% ownership
      interest in 2 properties.


(3)
            In
      July 2010, the Company purchased the remaining 60% interest from the joint
      venture partner. In connection with the acquisition, the Company controls
      100% of the joint venture's interest and has consolidated its
      accounts.





For the
three and nine months ended September 30, 2010 and 2009, the Company’s pro rata
share of net income (loss) of the joint ventures were as follows:





Three
      Months Ended
                    
                    
                    Nine
      Months EndedJoint
      Ventures
                    
                    September
      30,
                      2010
                    
                    
                    September
      30,
                      2009
                    
                    
                    September
      30,
                      2010
                    
                    
                    September
      30,
                      2009200
      Franklin Square Drive, Somerset, New Jersey
                    
                    $
                    28
                    
                    
                    $
                    27
                    
                    
                    $
                    89
                    
                    
                    $
                    86101
      S. Marengo Avenue, Pasadena, California(1)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (474
                    )2
      Herald Square, New York, New York
                    
                    
                    1,224
                    
                    
                    
                    1,237
                    
                    
                    
                    4,505
                    
                    
                    
                    3,750885
      Third Avenue, New York, New York
                    
                    
                    1,481
                    
                    
                    
                    1,478
                    
                    
                    
                    3,750
                    
                    
                    
                    4,494Citizens
      Portfolio
                    
                    
                    (757
                    )
                    
                    
                    (659
                    )
                    
                    
                    (2,099
                    )
                    
                    
                    (1,975
                    )Whiteface,
      Lake Placid, New York (2)
                    
                    
                    30
                    
                    
                    
                    314
                    
                    
                    
                    (1,375
                    )
                    
                    
                    229Total
                    
                    $
                    2,006
                    
                    
                    $
                    2,397
                    
                    
                    $
                    4,870
                    
                    
                    $
                    6,110





(1)
            In
      April 2009, the Company sold its 50% interest for a gain of
      $6,317 which is included in
      discontinued operations.


(2)
            In
      July 2010, the Company purchased the remaining 60% interest from the joint
      venture partner. In connection  with the acquisition, the
      Company controls 100% of the joint venture's interest and has
      consolidated its accounts.





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.


30





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010




During
2006, the Company issued approximately $1,000,000 of CDO bonds through two
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 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.





In
connection with the closing of the Company’s first CDO in July 2005, pursuant to
the collateral management agreement, the Manager 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. 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.





The
Company 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 using cash generated by debt investments that are repaid
during the reinvestment periods which expire in July 2010, July 2011 and August
2012 for the 2005, 2006 and 2007 CDO, respectively. Thereafter, the CDO
securities will be retired in sequential order from senior-most to junior-most
as debt investments are repaid or otherwise resolved. The financial statements
of the Issuer of each CDO are consolidated in the Company’s financial
statements. The securities originally rated as investment grade at time of
issuance are treated as a secured financing, and are non-recourse to the
Company.


31





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





Proceeds
from the sale of the securities originally rated as investment grade 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 are owned by the Issuers and the Co-Issuers, serve as collateral for
the Company’s CDO securities, and the income generated from these investments is
used to fund interest obligations of the Company’s CDO securities and the
remaining income, if any, is retained by the Company. The CDO indentures contain
minimum interest coverage and asset overcollateralization covenants that must be
satisfied in order for the Company to receive cash flow on the interests
retained in its CDOs and to receive the subordinate collateral management fee
earned. If some or all of the Company’s CDOs fail these covenants, 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
securities, and the Company may not receive some or all residual payments or the
subordinate collateral management fee until the applicable CDO regained
compliance with such tests. As of October 2010, the most recent distribution
date, the Company’s 2006 CDO was in compliance with its interest coverage and
asset overcollateralization covenants; however, the compliance margin was narrow
and relatively small declines in collateral performance and credit metrics could
cause the CDO to fall out of compliance. The Company’s 2005 CDO failed its
overcollateralization test at the October 2010, July 2010 and April 2010
distribution dates and its 2007 CDO failed its overcollaterization test at the
August 2010, May 2010 and February 2010 distribution dates.





During
the three and nine months ended September 30, 2010, the Company repurchased, at
a discount, $20,000 and $39,000, respectively, of notes previously issued by two
of the Company’s three CDOs. The Company recorded a net gain on the early
extinguishment of debt of $11,703 and $19,443 for the three and nine months
ended September 30, 2010, respectively, in connection with the repurchase of
notes of such Issuers.




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 June 2007, the
facility was modified further by reducing the credit spreads. 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. The term of the credit facility was two
years and the Company could have extended the term for an additional
twelve-month period if certain conditions were met. 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. 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. In December 2009, the Company entered
into a termination agreement with Wachovia, to settle and satisfy in full the
pre-existing loan obligation of $44,542 under the secured term loan and credit
facility. The Company made a one-time cash payment of $22,500 and executed and
delivered to Wachovia a subordinate participation interest in the Company’s 50%
interest in one of the four mezzanine loans formerly pledged under the credit
agreement. Upon termination, all of the security interests and liens in favor of
Wachovia under the credit agreement were released.





Subsidiaries
of the Company also had 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. 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 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. On
October 27, 2009, the Company repaid the borrowings in full and terminated the
Goldman repurchase facility.


32





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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 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 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 the Company’s CDOs. The
remaining balance of $85 in potential cash distribution was recorded in other
liabilities on the Company’s Consolidated Balance Sheet as of December 31, 2009
and was fully paid in January 2010. The Company recorded a gain on
extinguishment of debt of $107,229 as a result of this agreement.





Mortgage
and Mezzanine Loans





Certain
real estate assets are subject to mortgage and mezzanine liens. As of September
30, 2010, 953 (including 54 properties held by an unconsolidated joint venture)
of the Company’s real estate investments were encumbered with mortgage and
mezzanine loans with a cumulative outstanding balance of $2,258,835. 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. 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. As of September 30, 2010 and December
31, 2009, the Company was in covenant compliance on all of its mortgage and
mezzanine loans, except that, as of September 30, 2010, the Company was out of
debt service coverage compliance under two of its mortgage note financings. Such
non-compliance does not constitute an event of default under the applicable loan
agreements. Under one of the loans, the lender has the ability to restrict
distributions which are limited to budgeted property operating expenses; under
the other loan, the lender has the right to replace the management of the
property.





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. These charges will be separately classified in the
statement of operations as yield maintenance fees within discontinued operations
during the period in which the charges are incurred.





Goldman
Mortgage Loan





On April
1, 2008, certain subsidiaries of the Company, collectively, the Goldman Loan
Borrowers, entered into the Goldman Mortgage Loan with GSCMC, 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 terms of the Goldman Mortgage Loan were negotiated between the
Goldman Loan 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 has accrued interest of $240 and $253 and borrowings of $240,523 and
$241,324 as of September 30, 2010 and December 31, 2009,
respectively.


33





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





In March
2010, the Company extended the maturity date of the Goldman Mortgage Loan to
March 2011, and amended certain terms of the loan agreement, including, among
others, (i) a prohibition on distributions from the Goldman Loan Borrowers to
the Company, other than to cover  direct costs related to executing the
extension and reimbursement of not more than $2,500 per quarter of corporate
overhead actually incurred and allocated to Gramercy Realty, (ii) requirement of
$5,000 of available cash on deposit in a designated account on the commencement
date of the Goldman Mortgage Loan extension term, and (iii) within 90 days after
the first day of the Goldman Mortgage Loan extension term, delivery by the
Goldman Loan Borrowers to GSMC, Citicorp and SL Green of a comprehensive
long-term business plan and restructuring proposal addressing repayment of the
Goldman Mortgage Loan.  The Company continues to negotiate with its
lenders to further extend or modify the Goldman Mortgage Loan and the Goldman
Mezzanine Loans. However, the Company and its lenders have made no significant
progress in these negotiations to date. There can be no assurance of when or if
the Company will be able to accomplish such extension or modification or on what
terms such extension or modification would be.





Secured
Term Loan





On April
1, 2008, First States Investors 3300 B, L.P., an indirect wholly-owned
subsidiary of the Company, or the 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, 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 a 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 $349 and $418
and borrowings of $219,513 and $234,851 as of September 30, 2010 and December
31, 2009 respectively.





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 covenants relating to liquidity and tangible net
worth. As of June 30, 2010 and December 31, 2009, the last testing dates, 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 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 Goldman Mezzanine Loan was
bifurcated into two separate mezzanine loans (the Junior Mezzanine Loan and the
Senior Mezzanine Loan) by the lenders, and the Senior Mezzanine Loan was
assigned to KBS. 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 loan. The Goldman Mezzanine Loans encumber all
properties held by Gramercy Realty. The Company has accrued interest of $1,368
and $1,455 and borrowings of $550,731 and $553,522 as of September 30, 2010 and
December 31, 2009, respectively.


34





Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





In March
2010, the Company extended the maturity date of the Goldman Mezzanine Loans to
March 2011, and amended certain terms of the Senior Mezzanine Loan agreement and
the Junior Mezzanine Loan agreement, including, among others, with respect to
the Senior Mezzanine Loan agreement, (i) a prohibition on distributions from the
Senior Mezzanine Loan borrowers to the Company, other than to cover direct costs
related to executing the extension and reimbursement of not more than $2,500 per
quarter of corporate overhead actually incurred and allocated to Gramercy
Realty, (ii) requirement of $5,000 of available cash on deposit in a designated
account on the commencement date of the Senior Mezzanine Loan extension term and
agreement, upon request, to grant a security interest in that account to KBS,
and (iii) within 90 days after the first day of the Senior Mezzanine Loan
extension term, delivery by the Senior Mezzanine Loan borrowers  to KBS of
a comprehensive long-term business plan and restructuring proposal addressing
repayment of the Senior Mezzanine Loan, and with respect to the Junior
Mezzanine Loan agreement, (i) a prohibition on distributions from the Junior
Mezzanine Loan borrower to the Company, other than to cover direct costs related
to executing the extension and reimbursement of not more than $2,500 per quarter
of corporate overhead actually incurred and allocated to Gramercy Realty, (ii)
requirement of $5,000 of available cash on deposit in a designated account on
the commencement date of the Junior Mezzanine Loan extension term and agreement,
upon request, to grant a security interest in that account to GSMC, Citicorp and
SL Green, and (iii) within 90 days after the first day of the Junior Mezzanine
Loan extension term, delivery by the Junior Mezzanine Loan borrower to GSMC,
Citicorp and SL Green of a comprehensive long-term business plan and
restructuring proposal addressing repayment of the Junior Mezzanine
Loan. The Company continues to negotiate with its lenders to further extend
or modify the Goldman Mortgage Loan and the Goldman Mezzanine Loans. However,
the Company and its lenders have made no significant progress in these
negotiations to date. There can be no assurance of when or if the Company will
be able to accomplish such extension or modification or on what terms such
extension or modification would be.





The
following is a summary of first mortgage loans as of September 30,
2010:





Encumbered
                              Properties
                            
                            
                            Balance
                            
                            Interest
      Rate
                            
                            Maturity
      DateFixed-rate
      mortgages
                            
                            
                            474
                            
                            
                            $
                            1,235,355
                            (1)
                            5.06%
      to 10.29%
                            
                            January
      2012 to August 2030Variable-rate
      mortgages
                            
                            
                            236
                            
                            
                            
                            460,036
                            
                            1.91%
      to 6.26%
                            
                            March
      2011 to April 2013Total
      mortgage notes payable
                            
                            
                            710
                            
                            
                            
                            1,695,391Above-
      / below-market interest
                            
                            
                            -
                            
                            
                            
                            12,713Balance,
      September 30, 2010
                            
                            
                            710
                            
                            
                            $
                            1,708,104


(1)
                Includes $86,518 of
      debt that is collateralized by $93,986 of pledged treasury securities, net
      of discounts and premiums and $4,339 of debt that relates to the
      proportionate share of the 11% minority interest holder in Holdings
      as of September 30,
2010.





Combined
aggregate principal maturities of the Company’s consolidated CDOs and mortgage
loans (including the Goldman Mortgage Loan, Senior Mezzanine Loan and Junior
Mezzanine Loan) as of September 30, 2010 are as follows:




CDOs
                  
                  
                  Mortgage
      and
                    Mezzanine
                    Loans
                  
                  
                  Interest
                    Payments
                  
                  
                  Total2010
                  
                  $
                  -
                  
                  
                  $
                  7,376
                  
                  
                  $
                  45,620
                  
                  
                  $
                  52,9962011
                  
                  
                  -
                  
                  
                  
                  816,718
                  
                  
                  
                  153,116
                  
                  
                  
                  969,8342012
                  
                  
                  -
                  
                  
                  
                  80,710
                  
                  
                  
                  145,045
                  
                  
                  
                  225,7552013
                  
                  
                  -
                  
                  
                  
                  602,901
                  
                  
                  
                  136,883
                  
                  
                  
                  739,7842014
                  
                  
                  -
                  
                  
                  
                  12,883
                  
                  
                  
                  113,901
                  
                  
                  
                  126,784Thereafter
                  
                  
                  2,697,928
                  
                  
                  
                  725,534
                  
                  
                  
                  311,816
                  
                  
                  
                  3,735,278Above-
      / below-market interest
                  
                  
                  -
                  
                  
                  
                  12,713
                  
                  
                  
                  -
                  
                  
                  
                  12,713Total
                  
                  $
                  2,697,928
                  
                  
                  $
                  2,258,835
                  
                  
                  $
                  906,381
                  
                  
                  $
                  5,863,144




35


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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 also
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 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
contained 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. In
October 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. In June 2010, the Company
redeemed the remaining $52,500 of junior subordinated notes by transferring an
equivalent par value amount of various classes of bonds issued by the Company’s
CDOs previously purchased by the Company in the open market, and cash
equivalents of $5,000. This redemption eliminates the Company’s junior
subordinated notes from its consolidated financial statements, which had an
original balance of $150,000.





9.
Operating Partnership Agreement/Manager





At
September 30, 2010 and December 31, 2009, 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, all of the Class B limited partner interests
were owned by SL Green OP. For the period January 1, 2009 through April 24,
2009, 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 Class B
limited partner interests have been cancelled.





10.
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,
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. No
distributions were due on the Class B limited partner interests 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 was 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.


36


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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, 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 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
provide that starting January 1, 2009, the incentive distribution could have
been paid, at the Company’s option, in cash or shares of common stock. 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. 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.





In
October 2008, 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 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 was 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
expired effective June 23, 2009. Effective May 2009, the Company 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. For the three and nine
months ended September 30, 2010, the Company incurred expense of $159 and $307,
respectively, pursuant to the special servicing arrangement. For the three and
nine months ended September 30, 2009, the Company incurred expense of $617 and
$868, respectively, pursuant to the special servicing
arrangement.


37




Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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.




Commencing
in May 2005, the Company is party to a lease agreement with SLG Graybar Sublease
LLC, an affiliate of SL Green, for its corporate offices at 420 Lexington
Avenue, New York, New York. The lease is for approximately 7.3 thousand 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 2.3 thousand square feet. The additional
premises is leased on a co-terminus basis with the remainder of its 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, 2010, the Company paid $77 and $228 under this lease,
respectively. For the three and nine months ended September 30, 2009, the
Company paid $30 and $315 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, 2010 and December 31, 2009, the loan has a book value of $39,089 and
$39,285, 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 Operating Partnership, L.P. The property
was comprised of three buildings totaling approximately 670
thousand 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
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, 2010 and December 31, 2009, the Company’s interest in the whole loan had a
carrying value of $0 and $63,894, respectively. The investment in the whole loan
was repaid at a discount in September 2010 and 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 $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, 2010 and December 31, 2009, the investment had a
carrying value of $35,775 and $31,557, respectively. The Company recorded its
pro rata share of net income of $1,224 and $3,750 for the three and nine months
ended September 30, 2010, respectively. The Company recorded its pro rata share
of net income of $1,237 and $3,750 for the three and nine months ended September
30, 2009, respectively.




38




Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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 SL Green. The TIC interests are pari passu. As of
September 30, 2010 and December 31, 2009, the investment had a carrying value of
$52,194 and $45,695, respectively. The Company recorded its pro rata share of
net income of $1,481 and $4,505 for the three and nine months ended September
30, 2010, respectively. The Company recorded its pro rata share of net income of
$1,477 and $4,493 for the three and nine months ended September 30, 2009,
respectively.





The
Company’s agreements with SL Green in connection with the Company’s commercial
property investments in 885 Third Avenue and 2 Herald Square contain buy-sell
provisions 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.  Such agreements also contain certain
restrictions on sale or transfer of interests, including mutually applicable
rights of first refusal at 90% of a third party bona fide offer price, a fair
market value call option in favor of SL Green and mutually applicable qualified
transferee and consent to assignment provisions.





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, 2010 and December
31, 2009, the loan has a book value of $0. 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, 2010 and December 31, 2009, the loan has a book
value of $0 and $319, 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 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, 2010 and December 31, 2009, the loan had a book value of $0.





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 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, 2010 and
December 31, 2009, the loan has a book value of $28,224 and $28,228,
respectively.





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 6.50%. As of September 30, 2010 and
December 31, 2009, the loan has a book value of $9,920 and $9,926,
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, 2010 and December 31, 2009, the loan has a book value of
$27,783 and $29,925, respectively.





11.
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.


39


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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:





Cash and cash equivalents, accrued
interest, and accounts payable:   These balances in the Condensed
Consolidated Financial Statements reasonably approximate their fair values due
to the short maturities of these items.





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 the Company’s real estate portfolio. These
securities are presented in the Condensed Consolidated Financial Statements on a
held-to-maturity basis and not at fair value. The fair values were based upon
valuations obtained from dealers of those securities.





Lending investments:  
These instruments are presented in the Condensed Consolidated Financial
Statements at the lower of cost or market value and not at fair value. The fair
values were estimated by using market floating rate and fixed rate yields (as
appropriate) for loans with similar credit characteristics.





CMBS:   These investments
are presented in the Condensed Consolidated Financial Statements on a
held-to-maturity basis and not at fair value. The fair values were based upon
valuations obtained from dealers of those securities, and internal
models.





Repurchase agreements:  
The repurchase agreements are presented in the Condensed Consolidated Financial
Statements on the basis of the proceeds received and are not at a fair value.
The fair value was estimated by using estimates of market yields for similarly
placed financial instruments.





Collateralized debt
obligations:   These obligations are presented in the Condensed
Consolidated Financial Statements on the basis of proceeds received at issuance
and not at fair value. The fair value was estimated based upon the amount at
which similarly placed financial instruments would be valued today.





Derivative instruments:  
The Company’s derivative instruments, which are primarily comprised of interest
rate swap agreements, are carried at fair value in the Condensed Consolidated
Financial Statements based upon third party valuations.





Junior subordinated
debentures:   These instruments bear interest at fixed rates. The
fair value was estimated by calculating the present value based on current
market interest rates.





The
following table presents the carrying value in the financial statements and
approximate fair value of other financial instruments at September 30, 2010 and
December 31, 2009:




September
      30, 2010
                  
                  
                  December
      31, 2009Carrying
      Value
                  
                  
                  Fair
      Value
                  
                  
                  Carrying
      Value
                  
                  
                  Fair
      ValueFinancial
      assets:Government
      securities
                  
                  $
                  93,986
                  
                  
                  $
                  98,853
                  
                  
                  $
                  97,286
                  
                  
                  $
                  98,832Lending
      investments
                  
                  $
                  1,213,895
                  
                  
                  $
                  1,154,467
                  
                  
                  $
                  1,383,832
                  
                  
                  $
                  1,313,127CMBS
                  
                  $
                  1,009,158
                  
                  
                  $
                  804,196
                  
                  
                  $
                  984,709
                  
                  
                  $
                  556,395Financial
      liabilities:Mortgage
      note payable and senior and junior mezzanine loans
                  
                  $
                  2,258,835
                  
                  
                  $
                  2,080,979
                  
                  
                  $
                  2,297,190
                  
                  
                  $
                  2,099,450Collateralized
      debt obligations
                  
                  $
                  2,697,928
                  
                  
                  $
                  1,362,226
                  
                  
                  $
                  2,710,946
                  
                  
                  $
                  1,097,485Junior
      subordinated debentures
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  52,500
                  
                  
                  $
                  9,533


40


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





Disclosure
about fair value of financial instruments is based on pertinent information
available to the Company at September 30, 2010 and December 31, 2009. 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, 2010 and
December 31, 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 Company 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





Assets
and 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.





At September 30,
2010
                    
                    Total
                    
                    
                    Level
      I
                    
                    
                    Level
      II
                    
                    
                    Level
      IIIFinancial
      Assets:Derivative
      instruments
                    
                    $
                    859
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    859CMBS
      available for sale(1)
                    
                    $
                    15,412
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    15,412Financial
      Liabilities:Derivative
      instruments
                    
                    $
                    199,246
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    199,246At December 31, 2009
                    
                    Total
                    
                    
                    Level
      I
                    
                    
                    Level
      II
                    
                    
                    Level
      IIIFinancial
      Liabilities:Derivative
      instruments
                    
                    $
                    88,786
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    88,786


(1)
              During
      the quarter ended September 30, 2010, the Company reclassified $6,851 of
      CMBS investments from Held to Maturity to Available for Sale and purchased
      $7,298 of CMBS investments and classified them as Available for Sale. A
      fair value adjustment to increase the carrying value of these assets by
      $1,263 was recorded in Other Comprehensive
  Income.




Derivative instruments:
Interest rate caps and swaps were valued using advice from a third party
derivative specialist, based on a combination of observable market-based inputs,
such as interest rate curves, and unobservable inputs such as credit valuation
adjustments due to the risk of non-performance by both the Company and its
counterparties. See Note 14 for additional details on the Company’s interest
rate caps and swaps.





Derivatives
were classified as Level III due to the significance of the credit valuation
allowance which is based upon less observable inputs.





Total
losses from derivatives for the three and nine months ended September 30, 2010
are $50,836 and $112,417, respectively, and are included in Accumulated Other
Comprehensive Loss. During the nine months ended September 30, 2010, the Company
entered into six interest rate caps for a total purchase price of
$2,999.


41


Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





Fair
Value on a Non-Recurring Basis





The
Company uses fair value measurements on a non-recurring 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 loan losses and CMBS which are reported at cost and
have been written down to fair value due to other-than-temporary impairments.
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 during the nine months ended September 30, 2010:





At September 30, 2010
                      
                      Total
                      
                      
                      Level I
                      
                      
                      Level II
                      
                      
                      Level IIIFinancial
      Assets:Lending
      investments:Loans
      held for sale
                      
                      $
                      37,700
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      37,700Loans
      subject to impairments or reservesfor loan losses
                      
                      $
                      549,032
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      549,032CMBS
                      
                      $
                      664
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      664At December 31, 2009
                      
                      Total
                      
                      
                      Level I
                      
                      
                      Level II
                      
                      
                      Level IIIFinancial
      Assets:Lending
      investments:Loans
      subject to impairments or reservesfor
      loan losses
                      
                      $
                      536,445
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      536,445CMBS
                      
                      $
                      1,324
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      1,324





Loans held-for-sale:  The Company’s only
loan held-for-sale is carried at fair value, which was determined by taking into
consideration the value of the underlying collateral, creditworthiness of the
borrower, and expected proceeds from the sale of the loan.





Loans subject to impairments or
reserves for loan loss:   The loans identified for impairment or
reserves for loan loss are collateral dependant loans. Impairment or reserves
for loan loss on these loans are measured by comparing management’s estimation
of fair value of the underlying collateral to the carrying value of the
respective loan. These valuations require significant judgments, which include
assumptions regarding capitalization rates, leasing, creditworthiness of major
tenants, occupancy rates, availability of financing, exit plan, loan
sponsorship, actions of other lenders and other factors deemed necessary by
management. The table above includes all impaired loans, regardless of the
period in which impairment was recognized.




CMBS: CMBS securities
which are other-than-temporarily impaired are generally valued by a combination
of (i) obtaining assessments from third-party dealers and, (ii) in limited cases
where such assessments are unavailable or, in the opinion of management, deemed
not to be indicative of fair value, discounting expected cash flows using
internal cash flow models and estimated market discount rates. In the case of
internal models, expected cash flows of each security are based on management’s
assumptions regarding the collection of principal and interest on the underlying
loans and securities. The table above includes only securities which were
impaired during the three months ended September 30, 2010. Previously impaired
securities have been subsequently adjusted for amortization, and are therefore
no longer reported at fair value as of September 30, 2010.





The
valuations derived from pricing models 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.




42




Gramercy Capital
Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





12.
Stockholders’ Equity





The
Company’s authorized capital stock consists of 125 million shares, $0.001
par value, of which the Company has authorized the issuance of up to 100
million shares of common stock, $0.001 par value per share, and 25
million shares of preferred stock, par value $0.001 per share. As of
September 30, 2010, 49.9 million shares of common stock and 4.6
million shares of preferred stock were issued and outstanding.





Preferred
Stock





In April
2007, the Company issued 4.6 million shares of its 8.125% Series A
cumulative redeemable preferred stock (including the underwriters’
over-allotment option of 600 thousand 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 dividends of
$0.50781 per share. As of September 30, 2010 and December 31, 2009, the Company
accrued Series A preferred stock dividends of $18,688 and $11,707,
respectively.





Earnings
per Share





Earnings
per share for the three months ended September 30, 2010 and 2009 are computed as
follows:





Three months ended
                                September 30,(1)
                              
                              
                              Nine months ended
                                September
      30,(1)2010
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2009Numerator – Income
      (loss):Net
      income (loss) from continuing operations
                              
                              $
                              16,696
                              
                              
                              $
                              (202,043
                              )
                              
                              $
                              3,349
                              
                              
                              $
                              (420,161
                              )Net
      income (loss) from discontinued operations
                              
                              
                              (9,546
                              )
                              
                              
                              1,263
                              
                              
                              
                              (9,579
                              )
                              
                              
                              (1,380
                              )Net
      income (loss)
                              
                              
                              7,150
                              
                              
                              
                              (200,780
                              )
                              
                              
                              (6,230
                              )
                              
                              
                              (421,541
                              )Preferred
      stock dividends
                              
                              
                              (2,336
                              )
                              
                              
                              (2,336
                              )
                              
                              
                              (7,008
                              )
                              
                              
                              (7,008
                              )Numerator
      for basic income per share – netincome
      (loss) available to common stockholders:
                              
                              
                              4,814
                              
                              
                              
                              (203,116
                              )
                              
                              
                              (13,238
                              )
                              
                              
                              (428,549
                              )Effect
      of dilutive securities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Diluted
      Earnings:Net
      income (loss) available to common stockholders
                              
                              $
                              4,814
                              
                              
                              $
                              (203,116
                              )
                              
                              $
                              (13,238
                              )
                              
                              $
                              (428,549
                              )Denominator – weighted
      average shares:Denominator
      for basic income per share – weightedaverage shares
                              
                              
                              49,920
                              
                              
                              
                              49,857
                              
                              
                              
                              49,906
                              
                              
                              
                              49,844Effect
      of dilutive securitiesStock
      based compensation plans
                              
                              
                              132
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Phantom
      stock units
                              
                              
                              371
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Diluted
      shares
                              
                              
                              50,423
                              
                              
                              
                              49,857
                              
                              
                              
                              49,906
                              
                              
                              
                              49,844




(1)Net
income adjusted for non-controlling interests. Shares in thousands.




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 anti-dilutive.
For the three and nine months ended September 30, 2010, 209,818 share options
and 370,943 phantom share units, respectively, were computed using the
treasury share method, respectively. For the three and nine months ended
September 30, 2009, 160,554 and 149,873 share options and 247,961 and 247,961
phantom share units, respectively, were computed using the treasury share
method.




43




Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





Accumulated
Other Comprehensive Income (Loss)





Accumulated
other comprehensive income (loss) for the nine months ended September 30, 2010
and September 30, 2009 is comprised of the following:





September 30,2010
                  
                  
                  September 30,2009Net
      unrealized (loss) gain on held-to-maturity securities
                  
                  $
                  (2,882
                  )
                  
                  $
                  1,522Net
      realized and unrealized losses on interest rate swap and cap agreements
      accounted for as cash flow hedges and FV adjustment of available-for-sale
      securities
                  
                  
                  (203,286
                  )
                  
                  
                  (143,782
                  )Total
      accumulated other comprehensive loss
                  
                  $
                  (206,168
                  )
                  
                  $
                  (142,260
                  )





13.
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.





On
December 28, 2009, the Company received a letter from Citigroup Global Markets
Realty Corp., or Citigroup Realty, seeking payment by a Company affiliate of
approximately $17,500 alleged to be due under a 2005 profit and loss sharing
agreement between Citigroup Realty and the Company affiliate. In April 2010, the
Company made a payment of $1,000 to Citigroup Realty as full settlement of all
claims.





The
Company’s corporate office at 420 Lexington Avenue, New York, New York is
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 7.3
thousand 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 2.3 thousand 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, 2010, 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,
2010 are as follows:





Operating Leases2010
      (October 1 - December 31)
                      
                      $
                      5,0362011
                      
                      
                      20,3212012
                      
                      
                      19,9752013
                      
                      
                      19,4002014
                      
                      
                      18,897Thereafter
                      
                      
                      144,731Total
      minimum lease payments
                      
                      $
                      228,360





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.




44




Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





Certain
real estate assets are pledged as collateral for three mortgage loans held by
two of its CDOs. One mortgage borrowing of $64,172 is also guaranteed
by the Company.





14.
Financial Instruments: Derivatives and Hedging





The
Company recognizes all derivatives on the Condensed Consolidated 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, 2010. The notional value is an
indication of the extent of the Company’s involvement in this instrument at that
time, but does not represent exposure to credit, interest rate or market
risks:





BenchmarkRate
                                                      
                                                      NotionalValue
                                                      
                                                      
                                                      StrikeRate
                                                      
                                                      
                                                      EffectiveDate
                                                      
                                                      ExpirationDate
                                                      
                                                      Fair
                                                        ValueAssets
      of Non-VIEs:Interest
      Rate Cap
                                                      
                                                      1
      month LIBOR
                                                      
                                                      $
                                                      91,698
                                                      
                                                      
                                                      
                                                      2.00
                                                      %
                                                      
                                                      Mar-10
                                                      
                                                      Mar-11
                                                      
                                                      $
                                                      -Interest
      Rate Cap
                                                      
                                                      1
      month LIBOR
                                                      
                                                      
                                                      241,324
                                                      
                                                      
                                                      
                                                      6.00
                                                      %
                                                      
                                                      Mar-10
                                                      
                                                      Mar-11
                                                      
                                                      
                                                      -Interest
      Rate Cap
                                                      
                                                      1
      month LIBOR
                                                      
                                                      
                                                      461,573
                                                      
                                                      
                                                      
                                                      2.00
                                                      %
                                                      
                                                      Mar-10
                                                      
                                                      Mar-11
                                                      
                                                      
                                                      -Interest
      Rate Cap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      38,500
                                                      
                                                      
                                                      
                                                      6.00
                                                      %
                                                      
                                                      Jul-10
                                                      
                                                      Jul-12
                                                      
                                                      
                                                      2833,095
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2Assets
      of Consolidated VIEs:Interest
      Rate Cap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      23,000
                                                      
                                                      
                                                      
                                                      4.96
                                                      %
                                                      
                                                      Jun-10
                                                      
                                                      Apr-17
                                                      
                                                      
                                                      203Interest
      Rate Cap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      48,945
                                                      
                                                      
                                                      
                                                      4.80
                                                      %
                                                      
                                                      Mar-10
                                                      
                                                      Jul-17
                                                      
                                                      
                                                      65471,945
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      857Liabilities
      of Consolidated VIEs:Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      12,000
                                                      
                                                      
                                                      
                                                      3.06
                                                      %
                                                      
                                                      Jan-08
                                                      
                                                      Jul-10
                                                      
                                                      
                                                      -Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      2,000
                                                      
                                                      
                                                      
                                                      3.07
                                                      %
                                                      
                                                      Jan-08
                                                      
                                                      Jul-10
                                                      
                                                      
                                                      -Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      12,000
                                                      
                                                      
                                                      
                                                      9.85
                                                      %
                                                      
                                                      Aug-06
                                                      
                                                      Aug-11
                                                      
                                                      
                                                      (495
                                                      )Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      4,700
                                                      
                                                      
                                                      
                                                      3.17
                                                      %
                                                      
                                                      Apr-08
                                                      
                                                      Apr-12
                                                      
                                                      
                                                      (193
                                                      )Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      10,000
                                                      
                                                      
                                                      
                                                      3.92
                                                      %
                                                      
                                                      Oct-08
                                                      
                                                      Oct-13
                                                      
                                                      
                                                      (895
                                                      )Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      17,500
                                                      
                                                      
                                                      
                                                      3.92
                                                      %
                                                      
                                                      Oct-08
                                                      
                                                      Oct-13
                                                      
                                                      
                                                      (1,566
                                                      )Interest
      Rate Swap
                                                      
                                                      1
      month LIBOR
                                                      
                                                      
                                                      9,037
                                                      
                                                      
                                                      
                                                      4.26
                                                      %
                                                      
                                                      Aug-08
                                                      
                                                      Jan-15
                                                      
                                                      
                                                      (1,088
                                                      )Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      14,650
                                                      
                                                      
                                                      
                                                      4.43
                                                      %
                                                      
                                                      Nov-07
                                                      
                                                      Jul-15
                                                      
                                                      
                                                      (1,961
                                                      )Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      24,143
                                                      
                                                      
                                                      
                                                      5.11
                                                      %
                                                      
                                                      Feb-08
                                                      
                                                      Jan-17
                                                      
                                                      
                                                      (4,440
                                                      )Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      281,823
                                                      
                                                      
                                                      
                                                      5.41
                                                      %
                                                      
                                                      Aug-07
                                                      
                                                      May-17
                                                      
                                                      
                                                      (47,235
                                                      )Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      16,412
                                                      
                                                      
                                                      
                                                      5.20
                                                      %
                                                      
                                                      Feb-08
                                                      
                                                      May-17
                                                      
                                                      
                                                      (3,175
                                                      )Interest
      Rate Swap
                                                      
                                                      3
      month LIBOR
                                                      
                                                      
                                                      699,442
                                                      
                                                      
                                                      
                                                      5.33
                                                      %
                                                      
                                                      Aug-07
                                                      
                                                      Jan-18
                                                      
                                                      
                                                      (138,198
                                                      )1,103,707
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (199,246
                                                      )Total
                                                      
                                                      
                                                      
                                                      $
                                                      2,008,747
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      (198,387
                                                      )




45




Gramercy Capital
Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





The
Company is hedging exposure to variability in future interest payments on its
debt facilities. At September 30, 2010, derivative instruments were reported at
their fair value as a net liability of $198,387. Offsetting adjustments are
represented as deferred gains in Accumulated Other Comprehensive Loss of
$112,417, which includes the amortization of gain or (loss) on terminated hedges
of $98 for the three months ended September 30, 2010. The Company anticipates
recognizing approximately $370 in amortization over the next 12 months. For the
three and nine months ended September 30, 2010, the Company recognized a
decrease to interest expense of $51 and $127 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 will be reclassified into earnings in the
same periods in which the hedged interest payments affect earnings.





15.
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 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 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 is subject to certain state and local taxes. The Company’s
TRSs are subject to U.S. federal, state and local income taxes.





Beginning
with the third quarter of 2008, the Company’s board of directors elected to not
pay a dividend to common stockholders. The Company may elect to pay dividends on
its 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. The 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 unpaid preferred stock dividend has been accrued. In accordance
with the provisions of the Company’s charter, the Company may not pay any
dividends on its common stock until all accrued dividends and the dividend for
the then current quarter on the Series A preferred stock are paid in
full.





For the
three and nine months ended September 30, 2010, the Company recorded $19 and
$123 of income tax expense, respectively. For the three and nine months ended
September 30, 2009, the Company recorded $88 and $2,489 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 all or a
portion of this gain until 2014; however, not all states follow this federal
rule.





16.
Segment Reporting





The
Company has determined that it has two reportable operating segments: Realty and
Finance. 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.





46




Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





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





Realty
                                
                                
                                Finance
                                
                                
                                Corporate/Other(1)
                                
                                
                                Total CompanyThree
      months ended September 30, 2010Total revenues(2)
                                
                                $
                                108,435
                                
                                
                                $
                                51,157
                                
                                
                                $
                                -
                                
                                
                                $
                                159,592Earnings
      (loss) from unconsolidated joint ventures
                                
                                
                                (757
                                )
                                
                                
                                2,763
                                
                                
                                
                                -
                                
                                
                                
                                2,006Total operating and
      interest expense(3)
                                
                                
                                (102,680
                                )
                                
                                
                                (35,392
                                )
                                
                                
                                (6,769
                                )
                                
                                
                                (144,841
                                )Net
      income (loss) from continuing operations
                                
                                $
                                4,998
                                
                                
                                $
                                18,528
                                
                                
                                $
                                (6,769
                                )
                                
                                $
                                16,757Three
      months ended September 30, 2009Total revenues(2)
                                
                                $
                                109,148
                                
                                
                                $
                                44,811
                                
                                
                                $
                                -
                                
                                
                                $
                                153,959Earnings
      (loss) from unconsolidated joint ventures
                                
                                
                                (659
                                )
                                
                                
                                3,056
                                
                                
                                
                                -
                                
                                
                                
                                2,397Total operating and
      interest expense(3)
                                
                                
                                (105,894
                                )
                                
                                
                                (244,507
                                )
                                
                                
                                (7,960
                                )
                                
                                
                                (358,361
                                )Net
      income (loss) from continuing operations
                                
                                $
                                2,595
                                
                                
                                $
                                (196,640
                                )
                                
                                $
                                (7,960
                                )
                                
                                $
                                (202,005
                                )Realty
                                
                                
                                Finance
                                
                                
                                Corporate/Other(1)
                                
                                
                                Total
      CompanyNine
      months ended September 30, 2010Total revenues(2)
                                
                                $
                                322,987
                                
                                
                                $
                                148,539
                                
                                
                                $
                                -
                                
                                
                                $
                                471,526Earnings
      (loss) from unconsolidated joint ventures
                                
                                
                                (2,099
                                )
                                
                                
                                6,969
                                
                                
                                
                                -
                                
                                
                                
                                4,870Total operating and
      interest expense(3)
                                
                                
                                (305,785
                                )
                                
                                
                                (142,934
                                )
                                
                                
                                (24,144
                                )
                                
                                
                                (472,863
                                )Net
      income (loss) from continuing operations
                                
                                $
                                15,103
                                
                                
                                $
                                12,574
                                
                                
                                $
                                (24,144
                                )
                                
                                $
                                3,533Nine
      months ended September 30, 2009Total revenues(2)
                                
                                $
                                329,867
                                
                                
                                $
                                146,644
                                
                                
                                $
                                -
                                
                                
                                $
                                476,511Earnings
      (loss) from unconsolidated joint ventures
                                
                                
                                (1,975
                                )
                                
                                
                                8,559
                                
                                
                                
                                -
                                
                                
                                
                                6,584Total operating and
      interest expense(3)
                                
                                
                                (322,997
                                )
                                
                                
                                (551,529
                                )
                                
                                
                                (28,585
                                )
                                
                                
                                (903,111
                                )Net
      income (loss) from continuing operations
                                
                                $
                                4,895
                                
                                
                                $
                                (396,326
                                )
                                
                                $
                                (28,585
                                )
                                
                                $
                                (420,016
                                )Total
      Assets:September
      30, 2010
                                
                                $
                                3,791,521
                                
                                
                                $
                                3,746,482
                                
                                
                                $
                                (940,797
                                )
                                
                                $
                                6,597,206December
      31, 2009
                                
                                $
                                3,883,279
                                
                                
                                $
                                3,787,371
                                
                                
                                $
                                (905,213
                                )
                                
                                $
                                6,765,437




(1)
            Corporate / 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 Realty 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 Realty business, and
      interest expense and 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 $26,652
      and $80,867 and $27,228 and $84,185 for the three and nine months ended
      September 30, 2010 and 2009, respectively, is included in the amounts
      presented above.





(4)
            Net operating income represents
      income before provision for taxes, minority interest and discontinued
      operations.




47




Gramercy
Capital Corp.


Notes
to Condensed Consolidated Financial Statements


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


September
30, 2010





17.
Supplemental Disclosure of Non-Cash Investing and Financing
Activities





The
following table represents non-cash activities recognized in other comprehensive
income for the nine months ended September 30, 2010 and 2009:





2010
                  
                  
                  2009Deferred
      losses and other non-cash activity related to derivatives
                  
                  $
                  (112,417
                  )
                  
                  $
                  17,852Deferred
      gains related to securities available-for -sale
                  
                  $
                  2,287
                  
                  
                  $
                  627




18.
Subsequent Events




In
October 2010, the Company completed the foreclosure of the collateral consisting
of three separate office buildings located in Ontario, California, which secured
a first mortgage loan. As of September 30, 2010, the first mortgage loan was
classified as non-performing and had an original unpaid principal balance of
$55,584 and a carrying value net of loan loss reserves of $23,123.





In
October 2010, the Company commenced a tender offer to purchase up to 4,000,000
shares of the Company’s Series A preferred stock for $15.00 per share, net to
seller in cash. The tender offer expired on November 4, 2010 and 1,074,178
shares of the Series A preferred stock had been tendered and not withdrawn. At
settlement, which is expected to occur on November 9, 2010, the Company will pay
an aggregate of approximately $16,113 to acquire the tendered Series A preferred
stock. Under the terms of the tender offer, no dividends will be paid
on either the tendered or untendered shares of the Series A preferred
stock. At the expiration of the tender offer, the accrued and unpaid dividends
of $4,364, or $4.0625 per share of the Series A preferred stock, was eliminated
for those shares validly tendered and not withdrawn.




48




ITEM
2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Dollar amounts in thousands, except for per share)





Overview





Gramercy
Capital Corp. is a self-managed, integrated, commercial real estate finance and
property investment company.





Our
property investment business, which operates under the name Gramercy Realty,
targets commercial properties leased primarily to financial institutions and
affiliated users throughout the United States. Our commercial real estate
finance business, which operates under the name Gramercy Finance, focuses on the
direct origination, acquisition and portfolio management of whole loans,
subordinate interests in whole loans, mezzanine loans, preferred equity,
commercial mortgage-backed securities, or CMBS, and other real estate related
securities. Neither Gramercy Realty nor Gramercy Finance is a separate legal
entity, but are divisions through which our property investment and commercial
real estate finance businesses are conducted.





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, then a wholly-owned subsidiary of SL Green Realty Corp. (NYSE: SLG), or
SL Green, which owned approximately 12.5% of the outstanding shares of our
common stock as of September 30, 2010 and is our largest stockholder. On April
24, 2009, we completed the internalization of our management through the direct
acquisition of the Manager from SL Green. 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 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 taxable income, if any, 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.





During
2009 and to date in 2010, the global capital markets continued to experience
volatility and distress. The impact of the global credit crisis has lingered in
the commercial real estate sectors, especially for the structured real estate
loans, and is reflected in reduced availability of debt and equity capital for
all but the highest quality borrowers and properties. Transaction volume remains
well below historical levels, credit spreads for most forms of mortgage debt
investments remain wide, and other forms of financing from the debt markets have
been dramatically curtailed. Despite signs of improvement, we believe that the
continuing dislocation in the debt capital markets, coupled with a measured
recovery from a recession in the United States, 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. Among other things, such
conditions have resulted in our recognizing significant amounts of loan loss
reserves and impairments, narrowed our margin of compliance with debt and
collateralized debt obligation, or CDO, covenants, depressed the price of our
common stock and has effectively removed our ability to raise public and private
capital. It has reduced our borrowers’ ability to repay their loans, and when
combined with declining real estate values on our collateral for such loans,
increased the likelihood that we will continue to take further loan loss
reserves. Additionally, it has led to increased vacancies in our properties.
Furthermore, changes in the regulatory environment and business practices for
capital markets participants 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.





In March
2010, we amended our $240,523 mortgage loan with Goldman Sachs Commercial
Mortgage Capital, L.P., or GSCMC, Citicorp North America, Inc., or
Citicorp, and SL Green, or the Goldman Mortgage Loan, and our $550,731 senior
and junior mezzanine loans with KBS Real Estate Investment Trust, Inc., or KBS,
GSCMC, Citicorp and SL Green, or the Goldman Mezzanine Loans, to extend the
maturity date to March 11, 2011. The Goldman Mortgage Loan is collateralized by
approximately 195 properties held by Gramercy Realty and the Goldman Mezzanine
Loans are collateralized by the equity interest in substantially all of the
entities comprising our Gramercy Realty division, including its cash and cash
equivalents totaling $32,428 of our unrestricted cash as of September 30, 2010.
We do not expect that we will be able to refinance the entire amount of
indebtedness under the Goldman Mortgage Loan and the Goldman Mezzanine Loans
prior to their final maturity, and we likely will not have sufficient capital to
satisfy any shortfall. Failure to refinance
or restructure the Goldman Mortgage Loan and the Goldman Mezzanine Loans prior
to their March 2011 maturity dateswill result in a default and
could result in the foreclosure of the underlying Gramercy Realty properties
and/or our equity interests in substantially all of the entities that
comprise our Gramercy Realty division. Such default would materially and
adversely affect our business, financial condition and results of operations. A
loss of our Gramercy Realty portfolio or the lack of resolution of the Goldman
Mortgage Loan and the Goldman Mezzanine Loans at or prior to maturity would
trigger a substantial book loss and would likely result in our company having
negative book value. We continue to negotiate with our lenders to further extend
or modify the Goldman Mortgage Loan and the Goldman Mezzanine Loans, and we have
retained EdgeRock Realty Advisors LLC, an FTI Company, to assist in evaluating
strategic alternatives for Gramercy Realty and the potential restructure of such
debt. However, we and our lenders have made no significant progress in these
negotiations to date. There can be no assurance of when or if we will be able to
accomplish such restructuring or on what terms such restructuring would
be.




49




We rely
on the credit and equity markets to finance and grow our business. Despite signs
of improvement, market conditions remain significantly challenging and offer us
few, if any, attractive opportunities to raise new debt or equity capital,
particularly while our efforts to extend or restructure the Goldman Mortgage
Loan and the Goldman Mezzanine Loans remain ongoing. In this environment, we are
focused on extending or restructuring the Goldman Mortgage Loan and
the Goldman Mezzanine Loans, actively managing portfolio credit, generating
liquidity from existing assets, accretively investing repayments in loan and
CMBS investments, executing new leases and renewing expiring leases.
Nevertheless, we remain committed to identifying and pursuing strategies and
transactions that would preserve or improve our cash flows from our CDOs,
increase our net asset value per share of common stock, improve our future
access to capital or otherwise potentially create value for our
stockholders.





Beginning
with the third quarter of 2008, our board of directors elected to not pay a
dividend on our common stock. 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 a result, we have accrued dividends for eight
quarters which pursuant to the terms of our charter, permits the Series A
preferred stockholders to elect an additional director to our board of
directors. We may, or upon request of the holders of the Series A preferred
stock representing 20% or more of the liquidation value of the Series A
preferred stock shall, call a special meeting of our stockholders to elect such
additional director in accordance with the provisions of our bylaws and other
procedures established by our board of directors relating to election of
directors. We expect that we will continue to elect to retain capital for
liquidity purposes until the requirement to make a cash distribution to satisfy
our REIT requirements arise. In accordance with the provisions of our charter,
we may not pay any dividends on our common stock until all accrued dividends and
the dividend for the then current quarter on the Series A preferred stock are
paid in full. Given our current financial condition, we do not know when or if
we will pay future dividends, including accumulated and unpaid dividends on the
Series A preferred stock.





We may
need to modify our strategies, businesses or operations, and we may incur
increased capital requirements and constraints to compete in a changed business
environment. 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.





During
the second quarter, our board of directors retained a financial adviser to
conduct discussions with various third parties regarding potential transactions
to recapitalize our company. We received indications of interest from several of
these parties regarding a variety of potential transactions that ranged from the
acquisition of our entire company to acquisitions of parts of our assets or
business, joint ventures with either or both of our Finance and Realty
divisions, externalization of our management function and investment of capital
through new issuances of our equity or debt securities. Some indications of
interest contemplated change of control transactions or, at a minimum,
significant changes in the composition of our management team and board of
directors. All indications of interest were subject to significant additional
due diligence by the parties submitting them and to the satisfaction of
substantial qualifications and conditions, including but not limited to
eliminating various of our contingent and other liabilities, restructuring
Gramercy Realty indebtedness, repurchasing certain of our equity securities
(including our Series A preferred stock), selling certain of our assets and
obtaining the approval of our stockholders.




After
reviewing the indications of interest received, and conducting discussions to
understand the likelihood that the indicated terms could be improved, our board
of directors decided to discontinue discussions regarding the indications of
interest because, among other reasons, each of the proposed transactions was
subject to conditions and contingencies that made consummation highly uncertain
and none of the indications of interest appeared to offer a level of value to
our stockholders that our board of directors deemed acceptable.  Our board
of directors continues to explore various means by which we might improve our
position and thereby potentially create value for our stockholders, but it is
not possible to predict whether or when any such actions can or will be
implemented.





On
October 1, 2010, we commenced a tender offer to purchase up to 4,000,000 shares
of our Series A preferred stock, at a price of $15.00 per share, net to seller
in cash. We conducted the tender offer because we believe a significant
reduction of the outstanding Series A preferred stock may create significant
additional financial flexibility for us, potentially including enhanced access
to the capital markets and other sources of capital and additional flexibility
to implement potential strategic initiatives. The tender offer expired on
November 4, 2010 and 1,074,178 shares of the Series A preferred stock had been
tendered and not withdrawn. At settlement, which is expected to occur on
November 9, 2010, we will pay an aggregate of approximately $16,113 to acquire
the tendered Series A preferred stock. Under the terms of the tender offer, no
dividends will be paid on either the tendered or untendered shares of our
Series A preferred stock. At the expiration of the tender offer, the accrued and
unpaid dividends of $4,364, or $4.0625 per share of the Series A preferred
stock, was eliminated for those shares validly tendered and not
withdrawn.





50





The
aggregate carrying values, allocated by product type and weighted average
coupons of Gramercy Finance’s loans, and other lending investments and CMBS
investments as of September 30, 2010 and December 31, 2009, were as
follows:





Fixed Rate:
                                                              
                                                              
                                                              Floating Rate:Carrying Value (1)
                                                              
                                                              
                                                              Allocation byInvestment Type
                                                              
                                                              
                                                              Average Yield
                                                              
                                                              
                                                              Average Spread overLIBOR  (2)2010
                                                              
                                                              
                                                              2009
                                                              
                                                              
                                                              2010
                                                              
                                                              
                                                              2009
                                                              
                                                              
                                                              2010
                                                              
                                                              
                                                              2009
                                                              
                                                              
                                                              2010
                                                              
                                                              2009Whole loans,
      floating rate
                                                              
                                                              $
                                                              707,934
                                                              
                                                              
                                                              $
                                                              830,617
                                                              
                                                              
                                                              
                                                              58.4
                                                              %
                                                              
                                                              
                                                              60.2
                                                              %
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              329
      bps
                                                              
                                                              454
      bpsWhole
      loans, fixed rate
                                                              
                                                              
                                                              122,829
                                                              
                                                              
                                                              
                                                              122,846
                                                              
                                                              
                                                              
                                                              10.1
                                                              %
                                                              
                                                              
                                                              8.9
                                                              %
                                                              
                                                              
                                                              6.77
                                                              %
                                                              
                                                              
                                                              6.89
                                                              %Subordinate
      interests in whole loans, floating rate
                                                              
                                                              
                                                              75,406
                                                              
                                                              
                                                              
                                                              76,331
                                                              
                                                              
                                                              
                                                              6.2
                                                              %
                                                              
                                                              
                                                              5.5
                                                              %
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              295
      bps
                                                              
                                                              246
      bpsSubordinate
      interests in whole loans, fixed rate
                                                              
                                                              
                                                              47,055
                                                              
                                                              
                                                              
                                                              44,988
                                                              
                                                              
                                                              
                                                              3.9
                                                              %
                                                              
                                                              
                                                              3.2
                                                              %
                                                              
                                                              
                                                              6.01
                                                              %
                                                              
                                                              
                                                              7.46
                                                              %Mezzanine
      loans, floating rate
                                                              
                                                              
                                                              141,122
                                                              
                                                              
                                                              
                                                              190,668
                                                              
                                                              
                                                              
                                                              11.6
                                                              %
                                                              
                                                              
                                                              13.7
                                                              %
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              621
      bps
                                                              
                                                              577
      bpsMezzanine
      loans, fixed rate
                                                              
                                                              
                                                              87,100
                                                              
                                                              
                                                              
                                                              85,898
                                                              
                                                              
                                                              
                                                              7.2
                                                              %
                                                              
                                                              
                                                              6.2
                                                              %
                                                              
                                                              
                                                              10.74
                                                              %
                                                              
                                                              
                                                              8.08
                                                              %Preferred
      equity, floating rate
                                                              
                                                              
                                                              28,224
                                                              
                                                              
                                                              
                                                              28,228
                                                              
                                                              
                                                              
                                                              2.3
                                                              %
                                                              
                                                              
                                                              2.0
                                                              %
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              349
      bps
                                                              
                                                              1,064
      bpsPreferred
      equity, fixed rate
                                                              
                                                              
                                                              4,225
                                                              
                                                              
                                                              
                                                              4,256
                                                              
                                                              
                                                              
                                                              0.3
                                                              %
                                                              
                                                              
                                                              0.3
                                                              %
                                                              
                                                              
                                                              7.22
                                                              %
                                                              
                                                              
                                                              7.23
                                                              %Subtotal/ weighted
      average (3)
                                                              
                                                              
                                                              1,213,895
                                                              
                                                              
                                                              
                                                              1,383,832
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              7.97
                                                              %
                                                              
                                                              
                                                              7.39
                                                              %
                                                              
                                                              370
      bps
                                                              
                                                              476
      bpsCMBS,
      floating rate
                                                              
                                                              
                                                              48,218
                                                              
                                                              
                                                              
                                                              67,876
                                                              
                                                              
                                                              
                                                              4.8
                                                              %
                                                              
                                                              
                                                              6.9
                                                              %
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              189
      bps
                                                              
                                                              254
      bpsCMBS,
      fixed rate
                                                              
                                                              
                                                              960,940
                                                              
                                                              
                                                              
                                                              916,833
                                                              
                                                              
                                                              
                                                              95.2
                                                              %
                                                              
                                                              
                                                              93.1
                                                              %
                                                              
                                                              
                                                              6.53
                                                              %
                                                              
                                                              
                                                              7.84
                                                              %Subtotal/
      weighted average
                                                              
                                                              
                                                              1,009,158
                                                              
                                                              
                                                              
                                                              984,709
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              6.53
                                                              %
                                                              
                                                              
                                                              7.84
                                                              %
                                                              
                                                              189
      bps
                                                              
                                                              254
      bpsTotal
                                                              
                                                              $
                                                              2,223,053
                                                              
                                                              
                                                              $
                                                              2,368,541
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              6.84
                                                              %
                                                              
                                                              
                                                              7.74
                                                              %
                                                              
                                                              361
      bps
                                                              
                                                              463
      bps




(1)
            Loans and other lending
      investments and CMBS investments are presented net of unamortized fees,
      discounts, unfunded commitments, reserves for loan losses, impairments and
      other adjustments.





(2)
            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.





(3)
            Weighted  average
      yield and weighted average spread calculations include a non-performing
      loan with a carrying value net of loan loss reserves, classified as whole
      loans floating rate, of approximately $23,123 with an average spread of
      297 basis points.





The
period during which we are permitted to reinvest principal payments on the
underlying assets into qualifying replacement collateral for our 2005 CDO
expired in July 2010 and will expire for our 2006 and 2007 CDOs in July 2011 and
August 2012, respectively. In the past, our ability to reinvest has been
instrumental in maintaining compliance with the overcollateralization and
interest coverage tests for our CDOs. Following the conclusion of the
reinvestment period in each of our CDOs, our ability to maintain compliance with
such tests for that CDO will be negatively impacted.





As of
September 30, 2010, Gramercy Finance also held interests in one credit tenant
net lease investment, or CTL investment, three interests in joint ventures
holding fee positions on properties subject to long-term ground leases, seven
interests in real estate acquired through foreclosures, and a 100% fee interest
in a property subject to a long-term lease.





As of
September 30, 2010, Gramercy Realty owned a portfolio comprised of 627 bank
branches, 323 office buildings and two land parcels, of which 54 bank branches
were owned through an unconsolidated joint venture. Gramercy Realty’s
consolidated properties aggregated approximately 25.4 million rentable square
feet and its unconsolidated properties aggregated approximately 251
thousand rentable square feet. As of September 30, 2010, the occupancy of
Gramercy Realty’s consolidated properties was 83.7% and the occupancy for its
unconsolidated properties was 100%. Gramercy Realty’s two largest tenants are
Bank of America, N.A., or Bank of America, and Wells Fargo, N.A. (formerly
Wachovia Bank, National Association), or Wells Fargo, and as of September 30,
2010, they represented approximately 40.4% and 15.6%, respectively, of the
rental income of Gramercy Realty’s portfolio and occupied approximately 43.6%
and 16.5%, respectively, of its total rentable square feet.




51




Summarized
in the table below are our key property portfolio statistics as of September 30,
2010:





Number of Properties
                
                
                Rentable Square feet
                
                
                OccupancyProperties (1)
                
                September 30,2010
                
                
                December 31,2009
                
                
                September 30,2010
                
                
                December 31,2009
                
                
                September 30,2010
                
                
                December 31,2009Branches
                
                
                573
                
                
                
                583
                
                
                
                3,695,190
                
                
                
                3,726,399
                
                
                
                84.4
                %
                
                
                85.5
                %Office
      Buildings
                
                
                323
                
                
                
                324
                
                
                
                21,669,842
                
                
                
                21,847,249
                
                
                
                83.6
                %
                
                
                85.9
                %Land
                
                
                2
                
                
                
                6
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                
                898
                (2)
                
                
                913
                
                
                
                25,365,032
                
                
                
                25,573,648
                
                
                
                83.7
                %
                
                
                85.9
                %




(1)
            Excludes investments in
      unconsolidated joint
ventures.





(2)
            As of September 30, 2010,
      includes the sale of 13 properties, the termination of three leasehold
      interests and the assumption of a leasehold interest in a building
      previously sold.





Due to
the nature of the business of Gramercy Realty’s 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, 2010, the weighted average remaining term of our leases was
8.8 years and approximately 71.9% of our base revenue was derived from net
leases. 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, effective and efficient property management, executing
new leases and renewing expiring leases.





As of
September 30, 2010, cash flow from Gramercy Realty’s portfolio, after debt
service and capital requirements, is negative and is expected to remain so
throughout the extended term of the Goldman Mortgage Loan, which is
collateralized by approximately 195 properties held by Gramercy Realty, and the
Goldman Mezzanine Loans, which are secured by the equity interest in
substantially all of the entities comprising our Gramercy Realty division. The
negative cash flow is primarily attributable to the Dana Portfolio, which
consists of 13 office buildings and two parking facilities containing
approximately 3.8 million square feet, of which approximately 2.4 million square
feet is leased to Bank of America. Under the terms of that lease, which was
originally entered into between Bank of America, as tenant, and Dana Commercial
Credit Corporation, as landlord, as part of a larger bond-net lease transaction,
Bank of America is required to make a future annual base rental payment of
approximately $2,983 in January 2011 and no annual base rental payments from
2012 through lease expiration in June 2022. The 2010 rent payment of
approximately $40,388 for the Dana Portfolio was prepaid by Bank of America in
December 2009, so there will be no additional cash flow from this lease during
2010. Also, beginning in July 2010, under existing terms of a lease agreement
with affiliates of Regions Financial Corporation, or Regions Financial, rent for
approximately 570 thousand square feet declined by approximately $5,100
annually. Additionally, sustaining occupancy in our portfolio remains
challenging in the current environment.





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 (within the next 12 months)
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 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 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. However, we do not expect that we will be able to refinance the
entire amount of indebtedness under the Goldman Mortgage Loan and the Goldman
Mezzanine Loans prior to their final maturity and it is unlikely that we will
have sufficient capital to satisfy any shortfall. Failure to refinance
or restructure the Goldman Mortgage Loan and the Goldman Mezzanine Loans prior
to their March 2011 maturity dates will result in a default and could
result in the foreclosure of the underlying Gramercy Realty properties and/or
our equity interests in the entities that comprise substantially all of our
Gramercy Realty division. Such default would materially and adversely affect our
business, financial condition and results of operations. A loss of the Gramercy
Realty portfolio, or the lack of resolution of the Goldman Mortgage Loan
and the Goldman Mezzanine Loans at or prior to maturity would trigger a
substantial book loss and would likely result in our having negative book value.
We continue to negotiate with our lenders to further extend or modify the
Goldman Mortgage Loan and the Goldman Mezzanine Loans and we have retained
EdgeRock Realty Advisors LLC, an FTI Company, to assist in evaluating strategic
alternatives for Gramercy Realty and the potential restructure of such debt.
However, we and our lenders have made no significant progress in these
negotiations to date. There can be no assurance of when or if we will be able to
accomplish such restructuring or on what terms such restructuring would be. 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, ability to make
distributions to our stockholders and ability to continue as a going
concern.




52






On
October 1, 2010, we commenced a tender offer to purchase up to 4,000,000 shares
of our Series A preferred stock, at a price of $15.00 per share, net to seller
in cash. The tender offer expired on November 4, 2010 and 1,074,178 shares of
the Series A preferred stock had been tendered and not withdrawn. At settlement,
which is expected to occur on November 9, 2010, we will pay an aggregate of
approximately $16,113 to acquire the tendered Series A preferred stock, which
represented approximately 11.4% of the $141,625 of unrestricted cash we held at
September 30, 2010. Our unrestricted cash as of September 30, 2010 included
$32,428 of unrestricted cash held by Gramercy Realty, which is not currently
available for general corporate purposes. While the tender offer will initially
reduce the amount of our available unrestricted cash, we believe a significant
reduction of the outstanding Series A preferred stock will benefit us over time
by reducing the amount of cash dividend payments that we may be obligated to
make in the future and may create significant additional financial flexibility
for us, potentially including enhanced access to the capital markets and other
sources of capital and additional flexibility to implement potential strategic
initiatives.   Under the terms of the tender offer,
no dividends will be paid on either the tendered or untendered
shares of our Series A preferred stock. At the expiration of the tender offer,
the accrued and unpaid dividends of $4,364, or $4.0625 per share of the Series A
preferred stock, was eliminated for those shares validly tendered and not
withdrawn.





Substantially
all 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
overcollateralization covenants that must be met in order for us to receive cash
flow on the interests retained by us in the CDOs and to receive the subordinate
collateral management fee earned. If we fail these covenants in some or all of
the 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. As of October 2010, the most recent distribution
date, our 2006 CDO was in compliance with its interest coverage and asset
overcollateralization covenants. However, the compliance margin was narrow and
relatively small declines in collateral performance and credit metrics could
cause the CDO to fall out of compliance. Our 2005 CDO failed its
overcollateralization test at the October 2010, July 2010 and April 2010
distribution dates and our 2007 CDO failed its overcollateralization test at the
August 2010, May 2010 and February 2010 distribution dates. The chart below is a
summary of our CDO compliance tests as of the most recent distribution date
(October 15, 2010 for our 2005 and 2006 CDOs and August 15, 2010 for our 2007
CDO):





Cash
      Flow Triggers
                                                                        
                                                                        CDO
      2005-1
                                                                        
                                                                        
                                                                        CDO
      2006-1
                                                                        
                                                                        
                                                                        CDO
      2007-1Overcollateralization
      (1)Current
                                                                        
                                                                        
                                                                        111.37
                                                                        %
                                                                        
                                                                        
                                                                        107.00
                                                                        %
                                                                        
                                                                        
                                                                        94.06
                                                                        %Limit
                                                                        
                                                                        
                                                                        117.85
                                                                        %
                                                                        
                                                                        
                                                                        105.15
                                                                        %
                                                                        
                                                                        
                                                                        102.05
                                                                        %Compliance
      margin
                                                                        
                                                                        
                                                                        -6.48
                                                                        %
                                                                        
                                                                        
                                                                        1.85
                                                                        %
                                                                        
                                                                        
                                                                        -7.99
                                                                        %Pass/Fail
                                                                        
                                                                        Fail
                                                                        
                                                                        
                                                                        Pass
                                                                        
                                                                        
                                                                        FailInterest
      Coverage (2)Current
                                                                        
                                                                        
                                                                        522.37
                                                                        %
                                                                        
                                                                        
                                                                        544.60
                                                                        %
                                                                        
                                                                        
                                                                        N/ALimit
                                                                        
                                                                        
                                                                        132.85
                                                                        %
                                                                        
                                                                        
                                                                        105.15
                                                                        %
                                                                        
                                                                        
                                                                        N/ACompliance
      margin
                                                                        
                                                                        
                                                                        389.52
                                                                        %
                                                                        
                                                                        
                                                                        439.45
                                                                        %
                                                                        
                                                                        
                                                                        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 a loan 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.




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 solely with (i) cash on hand,
(ii) sale of assets, and (iii) accessing the equity or debt capital markets, if
available.





Notwithstanding
the challenges which confront our company and continued volatility within the
capital markets, our board of directors remains committed to identifying and
pursuing strategies and transactions that could preserve or improve our cash
flows from our CDOs, increase our net asset value per share of common stock,
improve our future access to capital or otherwise potentially create value for
our stockholders. In considering these alternatives (which could include
additional repurchases or issuances of our debt or equity securities or
strategic sales of our assets), we expect our board of directors will carefully
consider the potential impact of any such transaction on our liquidity position
before deciding to pursue it. Particularly given our existing liquidity and
limited projected near-term future cash flows, we expect our board of directors
will only authorize us to take any of these actions if they can be accomplished
on terms our board of directors finds attractive. Accordingly, there is a
substantial possibility that not all such actions can or will be
implemented.




53




The
following discussion related to our Condensed 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.




Refer to
our 2009 Annual Report on Form 10-K for a discussion of our critical accounting
policies, which include real estate and CTL investments, leasehold interests,
investment in unconsolidated joint ventures, assets held-for-sale, commercial
mortgage-backed securities, pledged government securities, tenant and other
receivables, intangible assets, deferred costs, revenue recognition, reserve for
loan losses, rent expense, stock-based compensation plans, incentive
distribution (Class B Limited Partnership Interest), derivative instruments and
income taxes.  There have been no changes to these policies in 2010. Our
Significant Accounting Policies are set forth within Note 2.




Variable
Interest Entities





Consolidated
VIEs





As of
September 30, 2010, the Condensed Consolidated Balance Sheet includes $2,534,423
of assets and $2,957,169 of liabilities related to four consolidated variable
interest entities, or VIEs. Due to the non-recourse nature of these VIEs and
other factors discussed below, our net exposure to loss from investments in
these entities is limited to $2,341.





Real
Estate Investments, Net





We,
through our acquisition of American Financial Realty Trust (NYSE: AFR), or
American Financial, on April 1, 2008, obtained a wholly-owned interest of First
States Investors 801 GP II, LLC and First States Investors 801, L.P. which owns
the 0.51% and 88.4% general partnership interests in 801 Market Street Holdings,
L.P., or Holdings, for the purpose of owning and leasing a condominium interest
located at 801 Market Street, Philadelphia, Pennsylvania. The original
acquisition of the condominium interest was financed with a $42,904 non-recourse
mortgage loan held by Holdings. The loan bears interest at a fixed rate of 6.17%
and matures in 2013. Excluding the lien placed on the property by the mortgage
lender, there are no other restrictions on the assets of Holdings. We do not
have any arrangements to provide additional financial support to Holdings. Our
share of the net income of Holdings totals $350 and $1,060 for the three and
nine months ended September 30, 2010, respectively, and the cash flows from the
real estate investment is insignificant compared to our cash flow. We manage the
real estate investment and have control of major operational decisions and
therefore have concluded that we are the primary beneficiary of the real estate
investment.





Collateralized
Debt Obligations





We
currently consolidate three CDOs, which are VIEs. These CDOs invest in
commercial real estate debt instruments, the majority of which we originated
within the CDOs, and are financed by the debt and equity issued. We are named as
collateral manager of all three CDOs. As a result of consolidation, our
subordinate debt and equity ownership interests in these CDOs have been
eliminated, and the Condensed Consolidated Balance Sheets reflects both the
assets held and debt issued by these CDOs to third parties. Similarly, the
operating results and cash flows include the gross amounts related to the assets
and liabilities of the CDOs, as opposed to our net economic interests in these
CDOs.





Our
interest in the assets held by these CDOs is restricted by the structural
provisions of these entities, and the recovery of these assets will be limited
by the CDOs’ distribution provisions, which are subject to change due to
non-compliance with covenants. The liabilities of the CDO trusts are
non-recourse, and can generally only be satisfied from the respective asset pool
of each CDO.





We are
not obligated to provide any financial support to these CDOs. As of September
30, 2010, we have no exposure to loss as a result of the investment in these
CDOs. Since we are the collateral manager of the three CDOs and can make
decisions related to the collateral that would most significantly impact the
economic outcome of the CDOs, we have concluded that we are the primary
beneficiary of the CDOs.




54




Unconsolidated
VIEs





Investment
in Commercial Mortgage-Backed Securities





We have
investments in CMBS, which are considered to be VIEs. These securities were
acquired through investment, and are comprised of primarily securities that were
originally investment grade securities, and do not represent a securitization or
other transfer of our assets. We are not named as the special servicer or
collateral manager of these investments, except as discussed further
below.





We are
not obligated to provide, nor have we provided, any financial support to these
entities. The majority of our securities portfolio, with an aggregate face
amount of $1,231,055, is financed by our CDOs, and our exposure to loss is
therefore limited to its interests in these consolidated entities described
above. We have not consolidated the aforementioned CMBS investments due to the
determination that based on the structural provisions and nature of each
investment, we do not directly control the activities that most significantly
impact the VIEs’ economic performance.





We
further analyzed our investment in controlling class CMBS to determine if we are
the primary beneficiary. At September 30, 2010, we owned securities of two
controlling class CMBS trusts, including a non-investment grade CMBS
investment, GS Mortgage Securities Trust 2007-GKK1, or the Trust. The carrying
value of both investments were $11,064 at September 30, 2010. The total par
amounts of CMBS issued by the two CMBS trusts was $903,654.




The Trust
is a resecuritization of approximately $634,000 of CMBS originally rated AA
through BB. We 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. We have determined that we are the non-transferor
sponsor of the Trust. As collateral administrator, the Manager has the
right to purchase defaulted securities from the Trust at fair value if very
specific triggers have been reached. We have no other rights or obligations that
could impact the economics of the Trust and therefore have concluded that we are
not the primary beneficiary. The Manager can be removed as collateral
administrator, for cause only, with the vote of 66 2/3% of the certificate
holders. There are no liquidity facilities or financing agreements associated
with the Trust. Neither we nor the Manager have any on-going financial
obligations, including advancing, funding or purchasing collateral in the
Trust.





Our
maximum exposure to loss as a result of its investment in these CMBS trusts
totaled $11,064 which equals the book value of these investments as of September
30, 2010.





Investment
in Unconsolidated Joint Ventures





In April
2007, we 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.
As of September 30, 2010 and December 31, 2009, the investment had a carrying
value of $35,775 and $31,567, respectively. We are required to make additional
capital contributions to the entity to supplement the entity’s operational cash
flow needs. We are not the managing member and have no control over the
decisions that most impact the economics of the entity and therefore have
concluded that we are not the primary beneficiary of the VIE.





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 ten-year fixed-rate mortgage loan.
The property is subject to a 70-year leasehold ground lease with an unaffiliated
third party. As of September 30, 2010 and December 31, 2009, the investment had
a carrying value of $52,194 and $45,659, respectively. We are required to make
additional capital contributions to the entity to supplement the entity’s
operational cash flow needs. We are not the managing member and have no control
over the decisions that most impact the economics of the entity and therefore
have concluded that we are not the primary beneficiary of the VIE.





Unless
otherwise noted, we are not obligated to provide any financial support to these
entities. Our maximum exposure to loss as a result of its investment in these
entities is limited to the book value of these investments as of September 30,
2010 and any further contributions required to enable the VIEs to meet operating
cash flow needs.





Real
Estate Investments





In April
2008, we 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. In July
2010, we acquired the remaining 60% interest in Whiteface Lodge. In connection
with this acquisition, we acquired 521 fractional residential condominium units.
These fractional residential condominium units are included in Other Real Estate
Assets on our Condensed Consolidated Balance Sheets.




55




Results
of Operations





Comparison
of the three months ended September 30, 2010 to the three months ended September
30, 2009





Revenues




2010
                      
                      
                      2009
                      
                      
                      $ ChangeRental
      revenue
                      
                      $
                      78,182
                      
                      
                      $
                      79,840
                      
                      
                      $
                      (1,658
                      )Investment
      income
                      
                      
                      40,773
                      
                      
                      
                      42,222
                      
                      
                      
                      (1,449
                      )Operating
      expense reimbursement
                      
                      
                      31,656
                      
                      
                      
                      30,634
                      
                      
                      
                      1,022Gain
      on sales and other income
                      
                      
                      8,981
                      
                      
                      
                      1,263
                      
                      
                      
                      7,718Total
      revenues
                      
                      $
                      159,592
                      
                      
                      $
                      153,959
                      
                      
                      $
                      5,633Equity
      in net income of joint ventures
                      
                      $
                      2,006
                      
                      
                      $
                      2,397
                      
                      
                      $
                      (391
                      )Gain
      on extinguishment of debt
                      
                      $
                      11,703
                      
                      
                      $
                      -
                      
                      
                      $
                      11,703




Rental
revenue for the three months ended September 30, 2010 is primarily comprised of
revenue earned on our portfolio of 898 properties owned by our Gramercy Realty
division. The decrease in rental revenue of $1,658 is primarily due to
accelerated amortization of lease intangibles and reduced rental income due to
lease terminations and expirations primarily within our Bank of America and
Wells Fargo portfolios of $1,885 which was offset by $283 of additional parking
income on our Bank of America Dana portfolio.





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, 2010, $25,573 was earned on fixed rate investments while the
remaining $15,200 was earned on floating rate investments. The decrease of
$1,449 over the prior period is primarily due to a decrease in the size of our
portfolio of loans and other lending instruments, additional foreclosure
activity on non-performing loans and a decline in LIBOR interest rates in 2010
compared to 2009.





Operating
expense reimbursement was $31,656 for the three months ended September 30, 2010
and $30,634 for the three months ended September 30, 2009, an increase of
$1,022. The increase is due to $327 of additional reimbursements from our
Bank of America Dana portfolio due to the assumption of third party tenants as
part of the required space reduction by Bank of America, $837 due to a
reclassification of operating expenses associated with our Bank of America lease
at 101 Independence and $703 due to increased expenses on properties within our
Bank of America portfolio.  The increases are partially offset by
decreases of $420 related to a change of the Bank of America lease at 101
Independence from a net to a base year lease and a decrease in reimbursements
due to changes in occupancy by tenants and reductions in billable property
operating expenses.





Gain on
sales and other income of $8,981 for the three months ended September 30, 2010
is primarily composed of revenues from our foreclosed properties of $7,524, and
interest on restricted cash balances and other cash balances held by us. 
For the three months ended September 30, 2009, other income is primarily
composed of interest on restricted cash balances.





The
income on investments in unconsolidated joint ventures of $2,006 for the three
months ended September 30, 2010 represents our proportionate share of the income
generated by our joint venture interests including $1,091 of real estate-related
depreciation and amortization, which when added back, results in a contribution
to Funds from Operations, or FFO, of $3,097. The income on investments in
unconsolidated joint ventures of $2,397 for the three months ended September 30,
2009 represents our proportionate share of 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 FFO of $3,479. Our use of
FFO as an important non-GAAP financial measure is discussed in more detail
below.




During
the quarter ended September 30, 2010, we repurchased, at a discount,
approximately $20,000 of notes previously issued by two of our three CDOs,
generating a net gain on early extinguishment of debt of
$11,703.  During the quarter ended September 30, 2009, we did not
repurchase any investment grade notes previously issued by our three
CDOs.





56




Expenses





2010
                    
                    
                    2009
                    
                    
                    $ ChangeProperty
      operating expenses
                    
                    $
                    52,741
                    
                    
                    $
                    48,091
                    
                    
                    $
                    4,650Interest
      expense
                    
                    
                    50,911
                    
                    
                    
                    55,935
                    
                    
                    
                    (5,024
                    )Depreciation
      and amortization
                    
                    
                    26,652
                    
                    
                    
                    27,228
                    
                    
                    
                    (576
                    )Management,
      general and administrative
                    
                    
                    6,769
                    
                    
                    
                    7,960
                    
                    
                    
                    (1,191
                    )Impairment
      on loans held for sale and CMBS
                    
                    
                    6,730
                    
                    
                    
                    13,551
                    
                    
                    
                    (6,821
                    )Impairment
      on business acquisition, net
                    
                    
                    2,722
                    
                    
                    
                    -
                    
                    
                    
                    2,722Provision
      for loan loss
                    
                    
                    10,000
                    
                    
                    
                    205,508
                    
                    
                    
                    (195,508
                    )Provision
      for taxes
                    
                    
                    19
                    
                    
                    
                    88
                    
                    
                    
                    (69
                    )Total
      expenses
                    
                    $
                    156,544
                    
                    
                    $
                    358,361
                    
                    
                    $
                    (201,817
                    )




Property
operating expenses for the three months ended September 30, 2010 is primarily
comprised of expenses incurred on our portfolio of 898 properties owned by our
Gramercy Realty division, which increased $4,650 from the $48,091 recorded in
the three months ended September 30, 2009 to $52,741 recorded in the three
months ended September 30, 2010. The increase is primarily attributable to
expenses totaling $5,870 from foreclosed properties, a decrease of non-cash
impairment charges related to properties reclassified from held-for-sale to
held-for-investment during 2009 of $1,076, and cost savings initiatives related
to the operations of our real estate.





Interest
expense was $50,911 for the three months ended September 30, 2010 compared to
$55,935 for the three months ended September 30, 2009. The decrease of $5,024 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, 2010 compared to the three months ended September 30, 2009, as
well as lower average principal balances outstanding over the same periods due
to debt extinguishments, repayments using proceeds from additional cash
repayments and sales of certain investments classified as held-for-sale that
served as collateral for these borrowings.





We
recorded depreciation and amortization expenses of $26,652 for the three months
ended September 30, 2010, compared to $27,228 for the three months ended
September 30, 2009. The decrease of $576 is primarily due to reduced
amortization of in-place lease intangible assets related to lease terminations
and expirations, and offset by increases in amortization of leasing costs and
tenant improvements of $311.





Management,
general and administrative expenses were $6,769 for the three months ended
September 30, 2010, compared to $7,960 for the same period in 2009. The decrease
of $1,191 includes lower legal and professional fees related to loan enforcement
and restructurings completed during 2010.





During
the three months ended September 30, 2010 and September 30, 2009, we recorded an
other-than-temporary impairment of $6,730 and $1,360, respectively, due to
adverse change in expected cash flows related to credit losses for
three CMBS investments and one CMBS investment,
respectively.  Also, during the three months ended September 30, 2009,
we recorded impairment charges of $12,191 on six loans previously classified as
held-for-sale.





During
the three months ended September 30, 2010, we recorded a net impairment charge
of $2,722 on the acquisition of the remaining 60% interest of the Whiteface
Lodge.





Provision
for loan loss was $10,000 for the three months ended September 30, 2010,
compared to $205,508 for the three months ended September 30, 2009, a decrease
of $195,508. The provision was based upon periodic credit reviews of our loan
portfolio, and reflects the challenging economic conditions, illiquidity in
the capital markets and a difficult operating environment.




Provision
for taxes was $19 for the three months ended September 30, 2010, compared
to $88 for the three months ended September 30, 2009.




57




Comparison of the
nine months ended September 30, 2010 to the nine months ended September 30,
2009




Revenues





2010
                        
                        
                        2009
                        
                        
                        $ ChangeRental
      revenue
                        
                        $
                        236,570
                        
                        
                        $
                        242,078
                        
                        
                        $
                        (5,508
                        )Investment
      income
                        
                        
                        128,831
                        
                        
                        
                        140,014
                        
                        
                        
                        (11,183
                        )Operating
      expense reimbursement
                        
                        
                        89,780
                        
                        
                        
                        90,644
                        
                        
                        
                        (864
                        )Gain
      on sales and other income
                        
                        
                        16,345
                        
                        
                        
                        3,775
                        
                        
                        
                        12,570Total
      revenues
                        
                        $
                        471,526
                        
                        
                        $
                        476,511
                        
                        
                        $
                        (4,985
                        )Equity
      in net income of joint ventures
                        
                        $
                        4,870
                        
                        
                        $
                        6,584
                        
                        
                        $
                        (1,714
                        )Gain
      on extinguishment of debt
                        
                        $
                        19,443
                        
                        
                        $
                        107,229
                        
                        
                        $
                        (87,786
                        )




Rental
revenue of $236,570 and $242,078 for the nine months ended September 30, 2010
and 2009, respectively, is primarily comprised of revenue earned our portfolio
of 898 properties owned by our Gramercy Realty division.  The decrease of
$5,508 is related to accelerated amortization of lease intangibles and reduced
rental income due to lease terminations and expiration primarily within our Bank
of America and Wells Fargo portfolios in 2009 and 2010 of $8,632 and lower
non-cash market lease amortization reflecting the impact of purchase price
allocation adjustments finalized in the first quarter of 2009.  These are
offset by $4,560 of additional rental income on our Bank of America Dana
portfolio due to the assumption of third party tenants as part of the required
space reduction by Bank of America and increased occupancy and contractual rent
increases on our remaining portfolio.





Investment
income is generated on our whole loans, subordinate interests in whole loans,
mezzanine loans, preferred equity interests and CMBS. For the nine months ended
September 30, 2010, $74,907 was earned on fixed rate investments while the
remaining $53,924 was earned on floating rate investments. The decrease of
$11,183 over the prior period is primarily due to a decrease in the size of our
portfolio of loans and other lending instruments, additional foreclosure
activity on non-performing loans and a decline in LIBOR interest rates in 2010
compared to 2009.




Operating
expense reimbursement of $89,780 for the nine months ended September 30, 2010
and $90,644 for the nine months ended September 30, 2009, a decrease of
$864.  The decrease is attributable to reduction in reimbursements by Bank
of America related to space reductions or lease terminations of $459, $629
decrease related to a change of the Bank of America lease at 101 Independence
from a net to a base year lease and a decrease in reimbursements due to changes
in occupancy by tenants and reductions in billable property operating
expenses.  The decreases are partially offset by $1,185 of
reimbursements from our Bank of America Dana portfolio due to the assumption of
third party tenants as part of the required space reduction by Bank of
America.




Gain on
sales and other income totaled $16,345 for the nine months ended September 30,
2010 compared to $3,775 for the nine months ended September 30, 2009, an
increase of $12,570. The increase in other income is primarily related to
revenues from properties we foreclosed on since June 2009 of $11,673 and
increased termination fees of $542.





The
income on investments in unconsolidated joint ventures of $4,870 for the nine
months ended September 30, 2010 represents our proportionate share of the income
generated by our joint venture interests including $3,251 of real estate-related
depreciation and amortization, which when added back, results in a contribution
to FFO of $8,121. 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.  Our use of FFO as an important
non-GAAP financial measure is discussed in more detail below.




During
the nine months ended September 30, 2010, we repurchased, at a discount,
approximately $39,000 of notes previously issued by two of our three CDOs,
generating a net gain on early extinguishment of debt of $19,443.  In
March 2009, we entered into an amendment and compromise agreement with KeyBank,
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 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.  In connection with this debt extinguishment, we recorded a gain
on extinguishment of debt of $107,229.




58




Expenses





2010
                    
                    
                    2009
                    
                    
                    $ ChangeProperty
      operating expenses
                    
                    $
                    147,155
                    
                    
                    $
                    144,703
                    
                    
                    $
                    2,452Interest
      expense
                    
                    
                    151,572
                    
                    
                    
                    179,745
                    
                    
                    
                    (28,173
                    )Depreciation
      and amortization
                    
                    
                    80,867
                    
                    
                    
                    84,185
                    
                    
                    
                    (3,318
                    )Management,
      general and administrative
                    
                    
                    24,144
                    
                    
                    
                    25,809
                    
                    
                    
                    (1,665
                    )Management
      fees
                    
                    
                    -
                    
                    
                    
                    7,787
                    
                    
                    
                    (7,787
                    )Impairment
      on loans held for sale and CMBS
                    
                    
                    21,333
                    
                    
                    
                    139,930
                    
                    
                    
                    (118,597
                    )Impairment
      on business acquistion, net
                    
                    
                    2,722
                    
                    
                    
                    -
                    
                    
                    
                    2,722Provision
      for loan loss
                    
                    
                    64,390
                    
                    
                    
                    425,692
                    
                    
                    
                    (361,302
                    )Provision
      for taxes
                    
                    
                    123
                    
                    
                    
                    2,489
                    
                    
                    
                    (2,366
                    )Total
      expenses
                    
                    $
                    492,306
                    
                    
                    $
                    1,010,340
                    
                    
                    $
                    (518,034
                    )




Property
operating expenses were $147,155 and $144,703 for the nine months ended
September 30, 2010 and 2009, respectively, and increased $2,452.  The
increase was attributed to increased expenses from properties we foreclosed on
since June 2009 totaling $10,332 and partially offset by a decrease of non-cash
impairment charges related to properties reclassified from held-for-sale to
held-for-investment during 2009 of $5,543, a reduction in accruals for bad debt
expense of $1,442 and cost savings initiatives related to the operations of our
real estate.





Interest
expense was $151,572 for the nine months ended September 30, 2010 compared to
$179,745 for the nine months ended September 30, 2009. The decrease of $28,173
is primarily attributed to reductions in the interest rate indexes, primarily
LIBOR-based, charged on our variable rate debt over the nine months ended
September 30, 2010 compared to the nine months ended September 30, 2009, as well
as lower average principal balances outstanding over the same periods due to
debt extinguishments, repayments using proceeds from additional cash repayments
and sales of certain investments classified as held-for-sale that served as
collateral for these borrowings.




We
recorded depreciation and amortization expenses of $80,867 for the nine months
ended September 30, 2010 and $84,185 for the nine months ended September 30,
2009. The decrease of $3,318 compared to the comparable period in the prior year
is primarily attributable to reduced amortization of in-place lease intangible
asset of $3,882 related to lease terminations and expirations and offset by
increases in amortization of leasing costs and tenant improvements of
$769.




Management,
general and administrative expenses were $24,144 for the nine months ended
September 30, 2010, compared to $25,809 for the same period in 2009. The
decrease of $1,665 primarily reflects a $5,010 decrease in expense related to
the costs incurred in connection with the internalization of the Manager in
2009.  The decrease was partially offset by additional costs incurred in
2010 for the salaries, benefits and other administrative costs previously borne
by SL Green, costs incurred with the redemption of the remaining $52,500 of
junior subordinated notes in June 2010, and higher legal and professional fees
related to loan enforcement and restructurings completed during
2010.




Management
fees decreased $7,787 for the nine months ended September 30, 2010.  We
recorded expense of $7,787 for the nine months ended September 30, 2009, and did
not record any expense for the nine months ended September 30, 2010.  The
decrease is 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.




During
the nine months ended September 30, 2010 we recorded impairment charges totaling
$21,333 consisting of $19,333 of other-than-temporary impairments due to adverse
change in expected cash flows related to credit losses for ten CMBS investments,
a $2,000 impairment on one loan classified as held-for-sale as of September
30, 2010, and an impairment of $277 on the disposition of two CMBS
investments. During the nine months ended September 30, 2009, we recorded
impairment charges totaling $139,930 on ten loans classified as
held-for-sale.





Provision
for loan loss was $64,390 for the nine months ended September 30, 2010, compared
to $425,692 for the nine months ended September 30, 2009, a decrease of
$361,302. The provision was based upon periodic credit reviews of our loan
portfolio, and reflects the challenging economic conditions, illiquidity in the
capital markets, and a difficult operating environment.





Provision
for taxes was $123 for the three months ended September 30, 2010, compared to
$2,489 for the three months ended September 30, 2009.





59




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, if any, 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 financings or additional
securitizations or CDO offerings; and (vi) proceeds from additional common or
preferred equity offerings. 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. However, we do not expect that we will be able to refinance the
entire amount of indebtedness under the Goldman Mortgage Loan and the Goldman
Mezzanine Loans prior to their final maturity and it is unlikely that we will
have sufficient capital to satisfy any shortfall. Failure to refinance or
restructure the Goldman Mortgage Loan and the Goldman Mezzanine Loans prior to
their March 2011 maturity dates will result in a default and could result in the
foreclosure of the underlying Gramercy Realty properties and/or our equity
interests in the entities that comprise substantially all of our Gramercy Realty
division. Such default would materially and adversely affect our business,
financial condition and results of operations. A loss of the Gramercy Realty
portfolio or the lack of resolution of the Goldman Mortgage Loan and the Goldman
Mezzanine Loans at or prior to maturity would trigger a substantial book loss
and would likely result in our having negative book value. We continue to
negotiate with our lenders to further extend or modify the Goldman Mortgage Loan
and the Goldman Mezzanine Loans and we have retained EdgeRock Realty Advisors
LLC, an FTI Company, to assist in evaluating strategic alternatives and the
potential restructure of such debt. However, we and our lenders have made no
significant progress on these negotiations to date. There can be no assurance of
when or if we will be able to accomplish such refinancing or on what terms such
refinancing would be. 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, our ability to make distributions to our stockholders and to
continue as a going concern.





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, and will be subject to
obtaining additional debt financing and equity capital.





Beginning
with the third quarter of 2008 our board of directors elected not to pay a
dividend on our common stock. 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, 2010 and December 31, 2009, we
accrued $18,688 and $11,707, respectively, for the Series A preferred stock
dividends. As a result, we have accrued dividends for eight quarters which
pursuant to the terms of our charter permits the Series A preferred stockholders
to elect an additional director to our board of directors. We may, or upon
request of the holders of the Series A preferred stock representing 20% or more
of the liquidation value of the Series A preferred stock shall, call a special
meeting of our stockholders to elect such additional director in accordance with
the provisions of our bylaws and other procedures established by our board of
directors. In accordance with the provisions of our charter, we may not pay any
dividends on our common stock until all accrued dividends and the dividend for
the then current quarter on the Series A preferred stock are paid in full. Given
our current financial condition, we do not know when or if we will pay future
dividends, including accumulated and unpaid dividends on the Series A preferred
stock.





Our
ability to meet our long-term liquidity (beyond the next 12 months) 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.





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 with assets. These conditions
could limit our ability to do further borrowings. 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 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.




Gramercy
Realty’s office buildings include a group of 13 office buildings and two parking
facilities containing approximately 3.8 million square feet, of which
approximately 2.4 million square feet is leased to Bank of America, which
collectively are referred to as the Dana Portfolio. Under the terms of the Dana
Portfolio lease, which was originally entered into by Bank of America, as
tenant, and Dana Commercial Credit Corporation, as landlord, as part of a larger
bond-net lease transaction, Bank of America was required to make annual base
rental payments of approximately $40,388 through January 2010, approximately
$3,000 in January 2011, and no annual base rental payments thereafter through
lease expiration in June 2022. In December 2009, Gramercy Realty received the
full 2010 rental payment from Bank of America of approximately $40,388 from the
Dana Portfolio. We have also received termination notices from Bank of America
covering approximately 360 thousand square feet of currently leased space,
which terminations will become effective at various times prior to December 31,
2010. Additionally, under the terms of the lease agreement with Regions
Financial, rent for approximately 570 thousand square feet will step down
by approximately $5,100 annually, beginning in July 2010. As a result of these
and other factors, beginning in 2010, Gramercy Realty’s operating cash flow has
been significantly lower.




60




Substantially
all 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
overcollateralization covenants that must be met in order for us to receive cash
flow on the interests retained by us in the CDOs and to receive the
subordinate collateral management fee earned. If some or all of our CDOs fail to
comply with the covenants 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. As of October 2010, the most recent
distribution date, our 2006 CDO was in compliance with the interest coverage and
asset overcollateralization covenants; however, the compliance margin was narrow
and relatively small declines in collateral performance and credit metrics could
cause the CDO fall out of compliance. Our 2005 CDO failed its
overcollateralization test at the October 2010, July 2010 and April 2010
distribution dates and our 2007 CDO failed the overcollateralization test at the
August 2010, May 2010 and February 2010 distribution dates.





Notwithstanding
the challenges which confront our company and continued volatility within the
capital markets, our board of directors remains committed to identifying and
pursuing strategies and transactions that could preserve or improve our cash
flows from our CDOs, increase our net asset value per share of common stock,
improve our future access to capital or otherwise potentially create value for
our stockholders. In considering these alternatives (which could include
additional repurchases or issuances of our debt or equity securities or
strategic sales of our assets), we expect our board of directors will carefully
consider the potential impact of any such transaction on our liquidity position
before deciding to pursue it. Particularly given our existing liquidity and
limited projected near-term future cash flows, we expect our board of directors
will only authorize us to take any of these actions if they can be accomplished
on terms our board of directors finds attractive. Accordingly, there is a
substantial possibility that not all such actions can or will be
implemented.





On
October 1, 2010, we commenced a tender offer to purchase up to 4,000,000 shares
of our Series A preferred stock, at a price of $15.00 per share, net to seller
in cash. The tender offer expired on November 4, 2010 and 1,074,178 shares of
the Series A preferred stock had been tendered and not withdrawn. At settlement,
which is expected to occur on November 9, 2010, we will pay an aggregate of
approximately $16,113 to acquire the tendered Series A preferred stock, which
represented approximately 11.4% of the $141,625 of unrestricted cash we held at
September 30, 2010. Our unrestricted cash as of September 30, 2010 included
$32,428 of unrestricted cash held by Gramercy Realty, which is not currently
available for general corporate purposes. While the tender offer will initially
reduce the amount of our available unrestricted cash, we believe a significant
reduction of the outstanding Series A preferred stock will benefit us over time
by reducing the amount of cash dividend payments that we may be obligated to
make in the future and may create significant additional financial flexibility
for us, potentially including enhanced access to the capital markets and other
sources of capital and additional flexibility to implement potential strategic
initiatives.   Under the terms of the tender
offer, no dividends will be paid on either the tendered or
untendered shares of our Series A preferred stock. At the expiration of the
tender offer, the accrued and unpaid dividends of $4,364, or $4.0625 per share
of the Series A preferred stock, was eliminated for those shares validly
tendered and not withdrawn.





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. However, in accordance with the provisions of our charter, we may
not pay any dividends on our common stock until all accrued dividends and the
dividend for the then current quarter on the Series A Preferred Stock are paid
in full.





Cash
Flows





Net cash
provided by operating activities increased $40,054 to $75,372 for the nine
months ended September 30, 2010 compared to cash provided by of $35,318 for same
period in 2009. Operating cash flow was generated primarily by net interest
income from our commercial real estate finance segment and net rental income
from our property investment segment. The increase in operating cash flow for
the nine months ended September 30, 2010 compared to the same period in 2009 was
primarily due to a decrease in operating assets and liabilities of $14,784. The
decreased net loss of $416,339 is primarily attributable to the decrease of
non-cash impairment charges of $130,384, a gain on extinguishment of debt of
$87,786 and provision for loan loss of $361,302.





Net cash
used in investing activities for the nine months ended September 30, 2010
was $42,223 compared to net cash provided by investing activities of $73,749
during the same period in 2009. The decrease in cash flow from operating
activities reflects reduced sale activity of real estate for the nine months
ended September 30, 2010 as compared to the nine months ended September 30,
2009.




61




Net cash
used in financing activities for the nine months ended September 30, 2010
was $114,315 as compared to net cash used by financing activities of $149,150
during the same period in 2009. The decrease in cash used in financing
activities for the nine months ended September 30, 2010 is primarily
attributable to the extinguishment of our unsecured credit facility in the prior
period.





Capitalization





Our
authorized capital stock consists of 125 million shares, $0.001 par value,
of which we have authorized the issuance of up to 100 million shares of
common stock, $0.001 par value per share, and 25 million shares of
preferred stock, par value $0.001 per share. As of September 30, 2010,
49,922,393 shares of common stock and 4,600,000 shares of 8.125% Series A
cumulative redeemable preferred stock were issued and outstanding.




62




Market
Capitalization





At
September 30, 2010, our CDOs and mortgage loans (including the Goldman Mortgage
Loan and the Goldman Mezzanine Loans) represented 96% of our consolidated market
capitalization of $5,141,133 (based on a common stock price of $1.39 per share,
the closing price of our common stock on the New York Stock Exchange on
September 30, 2010). Market capitalization includes our consolidated debt and
common and preferred stock.




Indebtedness




The table
below summarizes secured and other debt at September 30, 2010 and December 31,
2009, including our junior subordinated debentures:





September 30, 2010
                        
                        
                        December 31, 2009Mortgage
      notes payable
                        
                        $
                        1,708,104
                        
                        
                        $
                        1,743,668Mezzanine
      notes payable
                        
                        
                        550,731
                        
                        
                        
                        553,522Collateralized
      debt obligations
                        
                        
                        2,697,928
                        
                        
                        
                        2,710,946Junior
      subordinated notes
                        
                        
                        -
                        
                        
                        
                        52,500Total
                        
                        $
                        4,956,763
                        
                        
                        $
                        5,060,636Cost
      of debt
                        
                        LIBOR+
      2.56%
                        
                        
                        LIBOR+2.31%




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 June 2007, the
facility was modified further by reducing the credit spreads. 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. The term of the credit facility was two
years and we could have extended the term for an additional twelve-month period
if certain conditions were met. 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. 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 our other indebtedness. We made a $13,000 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 to forego additional
borrowing under the facility. In December 2009, we entered into a termination
agreement with Wachovia, to settle and satisfy in full the pre-existing loan
obligation of $44,542 under the secured term loan and credit facility. We made a
one-time cash payment of $22,500 and executed and delivered to Wachovia a
subordinate participation interest in our 50% interest in one of the four
mezzanine loans formerly pledged under the credit agreement. Upon termination,
all of the security interests and liens in favor of Wachovia under the credit
agreement were released.




Our
subsidiaries also had 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. 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. In
October 2009, we repaid the borrowings in full and terminated the Goldman
repurchase 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.




63




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 $85 in potential cash distribution is recorded in other
liabilities on our balance sheet as of December 31, 2009 and was fully paid in
January 2010. We recorded a gain on extinguishment of debt of $107,229 as a
result of this agreement.




Mortgage
and Mezzanine Loans




Certain
real estate assets are subject to mortgage and mezzanine liens. As of September
30, 2010, 953 (including 54 properties held by an unconsolidated joint venture)
of our real estate investments were encumbered with mortgages and mezzanine debt
with a cumulative outstanding balance of $2,258,835. 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. As of September 30, 2010 and
December 31, 2009, we were in covenant compliance on all of our mortgage and
mezzanine loans, except that, as of September 30, 2010, we were out of debt
service coverage compliance under two of our mortgage note financings. Such
non-compliance does not constitute an event of default under the applicable loan
agreements. Under one of the loans, the lender has the ability to restrict
distributions which are limited to budgeted property operating expenses; under
the other loan, the lender has the right to replace the management of the
property.





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.
These charges will be separately classified in the statement of operations as
yield maintenance fees within discontinued operations during the period in which
the charges are incurred.




Goldman
Mortgage Loan




On April
1, 2008, certain of our subsidiaries, collectively, the Goldman Loan Borrowers,
entered into the Goldman Mortgage Loan with GSCMC, 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
terms of the Goldman Mortgage Loan were negotiated between the Goldman Loan
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
Loans (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 have accrued interest of
$240 and $253, borrowings of $240,523 and $241,324 as of both September 30, 2010
and December 31, 2009, respectively.





In March
2010, we extended the maturity date of the Goldman Mortgage Loan to March 2011,
and amended certain terms of the loan agreement, including, among others, (i) a
prohibition on distributions from the Goldman Loan Borrowers to us, other than
to cover direct costs related to executing the extension and reimbursement of
not more than $2,500 per quarter of corporate overhead actually incurred and
allocated to Gramercy Realty, (ii) requirement of $5,000 of available cash on
deposit in a designated account on the commencement date of the Goldman Mortgage
Loan extension term, and (iii) within 90 days after the first day of the Goldman
Mortgage Loan extension term, delivery by the Goldman Loan Borrowers to
GSMC, Citicorp and SL Green of a comprehensive long-term business plan and
restructuring proposal addressing repayment of the Goldman Mortgage Loan.  
  We continue to negotiate with our lenders to further extend or modify the
Goldman Mortgage Loan and the Goldman Mezzanine Loans. However, we and our
lenders have made no significant progress in these negotiations to date.
There can be no assurance of when or if we will be able to accomplish
such extension or modification or on what terms such extension or modification
would be.




Secured
Term Loan




On April
1, 2008 First States Investors 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 a 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 $349 and $418 and borrowings of $219,513 and
$234,851 as of September 30, 2010 and December 31, 2009,
respectively.




64




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.




The PB
Loan Agreement contains covenants relating to liquidity and tangible net worth.
As of June 30, 2010 and December 31, 2009, the last testing dates, we were in
compliance with these covenants.




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 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 Goldman Mezzanine Loan was bifurcated
into two separate mezzanine loans (the Junior Mezzanine Loan and the Senior
Mezzanine Loan) by the lenders and the Senior Mezzanine Loan was assigned to
KBS. 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. The Goldman Mezzanine Loans encumber all properties held
by Gramercy Realty. We have accrued interest of $1,368 and $1,455 and borrowings
of $550,731 and $553,522 as of September 30, 2010 and December 31, 2009,
respectively.




In March
2010, we extended the maturity date of the Goldman Mezzanine Loan to March 2011,
and amended certain terms of the Senior Mezzanine Loan agreement and the Junior
Mezzanine Loan agreement, including, among others, with respect to the Senior
Mezzanine Loan Agreement, (i) a prohibition on distributions from the Senior
Mezzanine Loan borrowers to us, other than to cover direct costs related to
executing the extension and reimbursement of not more than $2,500 per quarter of
corporate overhead actually incurred and allocated to Gramercy Realty, (ii)
requirement of $5,000 of available cash on deposit in a designated account on
the commencement date of the Senior Mezzanine Loan extension term and agreement,
upon request, to grant a security interest in that account to KBS and (iii)
within 90 days after the first day of the Senior Mezzanine Loan extension term,
delivery by the Senior Mezzanine Loan (capital) borrowers to KBS of a
comprehensive long-term business plan and restructuring proposal addressing
repayment of the Senior Mezzanine Loan and with respect to the Junior Mezzanine
Loan Agreement, (i) a prohibition on distributions from the Junior Mezzanine
Loan borrower to us, other than to cover direct costs related to executing the
extension and reimbursement of not more than $2,500 per quarter of
corporate overhead actually incurred and allocated to Gramercy Realty, (ii)
requirement of $5,000 of available cash on deposit in a designated account on
the commencement date of the Junior Mezzanine Loan extension term and agreement,
upon request, to grant a security interest in that account to GSMC, Citicorp and
SL Green and (iii) within 90 days after the first day of the Junior Mezzanine
Loan extension term, delivery by the Junior Mezzanine Loan borrower to GSMC,
Citicorp and SL Green of a comprehensive long-term business plan and
restructuring proposal addressing repayment of the Junior Mezzanine Loan. 
We continue to negotiate with our lenders to further extend or modify the
Goldman Mortgage Loan and the Goldman Mezzanine Loans. However, we and our
lenders have made no significant progress in these negotiations to date. There
can be no assurance of when or if we will be able to accomplish such extension
or modification or on what terms such extension or modification would
be.




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 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.




65




In August
2007, we issued $1,100,000 of CDO bonds through two 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, 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%. 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.




In
connection with the closing of our first CDO in July 2005, pursuant to the
collateral management agreement, the Manager 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. 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.





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 using cash generated by debt investments that are repaid
during the reinvestment periods which expire in July 2010, July 2011 and August
2012 for the 2005, 2006 and 2007 CDO, respectively.




Thereafter,
the CDO securities will be retired in sequential order from senior-most to
junior-most as debt investments are repaid or otherwise resolved. The financial
statements of the Issuer of each CDO are consolidated in our financial
statements. The securities originally rated as investment grade at time of
issuance are treated as a secured financing, and are non-recourse to us.
Proceeds from the sale of the securities originally rated as investment grade 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 securities, and the income generated from these investments is used to
fund interest obligations of our CDO securities and the remaining income, if
any, is retained by us. The CDO indentures contain minimum interest coverage and
asset overcollateralization 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 some or all of our CDOs fail
these covenants, 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 securities, and we may not receive some or all
residual payments or the subordinate collateral management fee until the
applicable CDO regained compliance with such tests. As of October 2010, the most
recent distribution date, our 2006 CDO was in compliance with its interest
coverage and asset overcollateralization covenants; however, the compliance
margin was narrow and relatively small declines in collateral performance and
credit metrics could cause the CDO to fall out of compliance. Our 2005 CDO
failed its overcollateralization test at the October 2010, July 2010 and April
2010 distribution dates and our 2007 CDO failed its overcollateralization test
at the August 2010, May 2010 and February 2010 distribution dates.





During
the three and nine months ended September 30, 2010, we repurchased, at a
discount, $20,000 and $39,000, respectively of notes previously issued by two of
our three CDOs. We recorded a net gain on the early extinguishment of debt of
$11,703 and $19,443 for the three and nine months ended September 30, 2010,
respectively.




66




Junior
Subordinated Debentures




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 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 contained 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. In October
2009, a subsidiary of our 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. In June 2010, we redeemed the remaining $52,500
of junior subordinated notes by transferring an equivalent par value amount of
various classes of bonds issued by our CDOs previously purchased by us in the
open market, and cash equivalents of $5,000. This redemption eliminates our
junior subordinated notes from our consolidated financial statements, which had
an original balance of $150,000.





Contractual
Obligations




Combined
aggregate principal maturities of our CDOs, mortgage loans (including the
Goldman Mortgage and Senior and Junior Mezzanine Loans), unfunded loan
commitments and operating leases as of September 30, 2010 are as
follows:




CDOs
                      
                      
                      Mortgageand
                        MezzanineLoans (1)
                      
                      
                      InterestPayments
                      
                      
                      Unfunded loancommitments (2)
                      
                      
                      OperatingLeases
                      
                      
                      Total2010
      (October 1 - December 31)
                      
                      $
                      -
                      
                      
                      $
                      7,376
                      
                      
                      $
                      45,620
                      
                      
                      $
                      -
                      
                      
                      $
                      5,036
                      
                      
                      $
                      58,0322011
                      
                      
                      -
                      
                      
                      
                      816,718
                      
                      
                      
                      153,116
                      
                      
                      
                      4,883
                      
                      
                      
                      20,321
                      
                      
                      
                      995,0382012
                      
                      
                      -
                      
                      
                      
                      80,710
                      
                      
                      
                      145,045
                      
                      
                      
                      -
                      
                      
                      
                      19,975
                      
                      
                      
                      245,7302013
                      
                      
                      -
                      
                      
                      
                      602,901
                      
                      
                      
                      136,883
                      
                      
                      
                      -
                      
                      
                      
                      19,400
                      
                      
                      
                      759,1842014
                      
                      
                      -
                      
                      
                      
                      12,883
                      
                      
                      
                      113,901
                      
                      
                      
                      -
                      
                      
                      
                      18,897
                      
                      
                      
                      145,681Thereafter
                      
                      
                      2,697,928
                      
                      
                      
                      725,534
                      
                      
                      
                      311,816
                      
                      
                      
                      -
                      
                      
                      
                      144,731
                      
                      
                      
                      3,880,009Above-
      / Below- Market Interest
                      
                      
                      -
                      
                      
                      
                      12,713
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      12,713Total
                      
                      $
                      2,697,928
                      
                      
                      $
                      2,258,835
                      
                      
                      $
                      906,381
                      
                      
                      $
                      4,883
                      
                      
                      $
                      228,360
                      
                      
                      $
                      6,096,387





(1)
            Certain
      of our real estate assets are subject to mortgage liens. As of September
      30, 2010, 710 real estate assets were encumbered with 28 mortgages with a
      cumulative outstanding balance of approximately $1,695,391. As of
      September 30, 2010, the mortgages’ balance ranged in amount from
      approximately $397 to $459,454 and had maturity dates ranging from
      approximately six months to 20 years. As of September 30, 2010, 24 of the
      loans had fixed interest rates ranging 5.06% to 10.29% and four variable
      rate loans had interest rates ranging from 1.91% to
  6.26%.





(2)
            Based on loan budgets and
      estimates.




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
“Unconsolidated VIEs – Investment in Unconsolidated Joint Ventures” and Note 6,
“Investments in Unconsolidated Joint Ventures” in the accompanying financial
statements.




67





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, 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. However, in accordance
with the provisions of our charter, we may not pay any dividends on our common
stock until all accrued dividends and the dividend for the then current quarter
on the Series A preferred stock are paid in full.




Beginning
with the third quarter of 2008, our board of directors elected to not pay a
dividend on our common stock. 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 a result, we have accrued dividends for eight
quarters which pursuant to the terms of our charter, permits the Series A
preferred stockholders to elect an additional director to our board of
directors. We may, or upon request of the holders of the Series A preferred
stock representing 20% or more of the liquidation value of the Series A
preferred stock shall, call a special meeting of our stockholders to elect such
additional director in accordance with the provisions of our bylaws and other
procedures established by our board of directors. Given our current financial
condition, we do not know when or if we will pay future dividends, including
accumulated and unpaid dividends on the Series A preferred stock.




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 and, in each case, our activities and
balance sheet are measured with reference to historical costs or fair market
value without considering inflation.




Related
Party Transactions




On April
24, 2009, in connection with the internalization, we entered into a securities
transfer agreement with SL Green Operating Partnership L.P., or 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
our Operating Partnership its Class B limited partner interests in our 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 in connection with the internalization.




Concurrently
with the execution of the securities transfer agreement, we 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 us certain management information
systems services from April 24, 2009 through the date that was 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 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 to us. 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.




Prior to
the internalization, to provide an incentive to enhance the value of 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 provide that starting January 1,
2009, the incentive distribution could have been paid, at our option, in cash or
shares of common stock. No incentive distribution was earned by the Class B
limited partner interests for the three and nine months ended September 30,
2009.





68




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. 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. In October 2008, 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 was 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 expired effective June 23, 2009. Effective May 2009, we 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. For the three and nine months ended September 30,
2010, we incurred expense of $159 and $307, respectively, pursuant to the
special servicing arrangement. For the three and nine months ended September 30,
2009, we incurred expense of $617 and $868, respectively, pursuant to the
special servicing arrangement.




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 $200 per month,
payable, at our 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 our 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.





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 7.3 thousand 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 2.3 thousand 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,
2010, we paid $77 and $228 under this lease, respectively. For the three and
nine months ended September 30, 2009, we paid $30 and $315 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, 2010 and December 31, 2009, the loan has a book value of $39,089 and
$39,285, 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 Operating Partnership, L.P. The property was comprised
of three buildings totaling approximately 670 thousand 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 Drive.




69




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, 2010 and
December 31, 2009, our interest in the whole loan had a carrying value of $0 and
$63,894, respectively. The investment in the whole loan was repaid at a discount
in September 2010 and 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 $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, 2010 and December 31, 2009, the investment had a
carrying value of $35,775 and $31,557, respectively. We recorded our pro rata
share of net income of $1,224 and $3,750 for the three and nine months ended
September 30, 2010, 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.





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, 2010 and
December 31, 2009, the investment had a carrying value of $52,194 and $45,695,
respectively. We recorded our pro rata share of net income of $1,481 and $4,505
for the three and nine months ended September 30, 2010, 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.




Our
agreements with SL Green in connection with our commercial property investments
in 885 Third Avenue and 2 Herald Square contain  buy-sell provisions
that can be triggered by us in the event we 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. Such agreements also contain certain restrictions on sale or
transfer of interests, including mutually applicable rights of first refusal at
90% of a third party bona fide offer price, a fair market value call option in
favor of SL Green and mutually applicable qualified transferee and consent to
assignment provisions.




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 our
interests in the loan to an unaffiliated third party. Additionally, we 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 we participated 50% of our interest in the loan back to SL Green. As
of September 30, 2010 and December 31, 2009, the loan has a book value of $0. 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, 2010 and December
31, 2009, the loan has a book value of $0 and $319, 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
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, 2010 and December 31, 2009, the loan had a book
value of $0.




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, 2010 and December 31, 2009, the loan has a book value
of $28,224 and $28,228, respectively.




70




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, 2010 and
December 31, 2009 the loan has a book value of $9,920 and $9,926,
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, 2010 and December 31, 2009, the loan has a book value of
$27,783 and $29,925, 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 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, 2010 and 2009 are as
follows:





Three months endedSeptember 30,
                          
                          
                          Nine months endedSeptember 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Net
      income (loss) available to common stockholders
                          
                          $
                          4,814
                          
                          
                          $
                          (203,116
                          )
                          
                          $
                          (13,238
                          )
                          
                          $
                          (428,549
                          )Add:Depreciation
      and amortization
                          
                          
                          28,254
                          
                          
                          
                          29,328
                          
                          
                          
                          86,047
                          
                          
                          
                          92,456FFO
      adjustments for unconsolidated joint ventures
                          
                          
                          1,091
                          
                          
                          
                          1,082
                          
                          
                          
                          3,251
                          
                          
                          
                          3,370Less:Non
      real estate depreciation and amortization
                          
                          
                          (1,918
                          )
                          
                          
                          (2,450
                          )
                          
                          
                          (6,039
                          )
                          
                          
                          (8,098
                          )Gain
      on sale of real estate
                          
                          
                          (11,692
                          )
                          
                          
                          (3,020
                          )
                          
                          
                          (13,083
                          )
                          
                          
                          (4,974
                          )Funds
      from operations
                          
                          $
                          20,549
                          
                          
                          $
                          (178,176
                          )
                          
                          $
                          56,938
                          
                          
                          $
                          (345,795
                          )Funds
      from operations per share - basis
                          
                          $
                          0.41
                          
                          
                          $
                          (3.57
                          )
                          
                          $
                          1.14
                          
                          
                          $
                          (6.94
                          )Funds
      from operations per share - diluted
                          
                          $
                          0.41
                          
                          
                          $
                          (3.57
                          )
                          
                          $
                          1.14
                          
                          
                          $
                          (6.94
                          )




71




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 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:




•     the reduction in cash flow received
from our investments, in particular our CDOs and the Gramercy Realty
portfolio;





•     our ability to extend or
restructure the terms of our Gramercy Realty mortgage and mezzanine loan
obligations;





•     our ability to comply with financial
covenants in our debt instruments, but specifically in our loan agreement with
PB Capital Corporation;





•     the adequacy of our cash reserves,
working capital and other forms of liquidity;





•     maintenance of our liquidity needs,
including as required to meet balloon debt payments and any distributions
required to maintain REIT status;




•     reduced liquidity resulting
from the tender offer of our Series A preferred stock;





•     the cost and availability of our
financings, which depends in part on our asset quality, the nature of our
relationships with our lenders and other capital providers, our business
prospects and outlook and general market conditions;





•     the availability, terms and deployment
of short-term and long-term capital;




•     the resolution of our non-performing
and sub-performing assets and any loss we might recognize in connection with
such investments;





•     the success or failure of our efforts
to implement our current business strategy;





•     economic conditions generally and the
strength of the commercial finance and real estate markets, and the banking
industry specifically;





•     the performance and financial condition
of borrowers, tenants, and corporate customers;





•     our ability to maintain compliance with
overcollateralization and interest coverage tests in our 2006
CDO;





•     the timing of cash flows, if any, from
our investments;





•     the actions of our competitors and our
ability to respond to those actions;





•     availability of, and ability to retain,
qualified personnel;





•     availability of investment
opportunities on real estate assets and real estate-related and other
securities;





•     our ability to raise debt and equity
capital;





•     our ability to satisfy all covenants in
our CDOs;





•     changes
to our management and our board of directors;





•     our
ability to profitably dispose of non-core assets;





•     unanticipated increases in financing
and other costs, including a rise in interest rates;




72




•     our ability to lease-up assumed
leasehold interests above the leasehold liability
obligation;





•     demand for office
space;




•     risks of real estate
acquisitions;





•     our ability to maintain our current
relationships with financial institutions and to establish new relationships
with additional financial institutions;





•     our ability to identify and complete
additional property acquisitions;





•     changes in governmental regulations,
tax rates and similar matters;





•     legislative and regulatory changes
(including changes to laws governing the taxation of REITs or the exemptions
from registration as an investment company);





•     environmental and/or safety
requirements;





•     our ability to satisfy complex rules in
order for us to qualify as a REIT, for federal income tax purposes and qualify
for our exemption under the Investment Company Act, our operating partnership's
ability to satisfy the rules in order for it to qualify as a partnership for
federal income tax purposes, and the ability of certain of our subsidiaries to
qualify as REITs and certain of our subsidiaries to qualify as TRSs for federal
income tax purposes, and our ability and the ability of our subsidiaries to
operate effectively within the limitations imposed by these
rules;





•     the continuing threat of terrorist
attacks on the national, regional and local economies; and





•     other factors discussed under
Item IA Risk Factors of the Annual Report on Form 10-K for the year
ended December 31, 2009 and those factors that may be contained in any
filing we make with the SEC.




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





For a
discussion of the impact of new accounting pronouncements on our financial
condition or results of operation, see Note 2 of the Consolidated Financial
Statements.





The
Recently Issued Accounting Pronouncements are discussed in Note 2, “Significant
Accounting Policies - Recently Issued Accounting Pronouncements” in the
accompanying Condensed Consolidated Financial Statements.





73




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.




We rely
on the credit and equity markets to finance and grow our business. Despite signs
of improvement, market conditions remain significantly challenging, and offer us
few, if any, attractive opportunities to raise new debt or equity capital,
particularly while our efforts to extend or restructure the Goldman Mortgage
Loan and Goldman Mezzanine Loans remain ongoing. In this environment, we
are focused on extending or restructuring Gramercy Realty’s $240,523
Goldman Mortgage Loan and $550,731 of Goldman Mezzanine Loans, actively
managing portfolio credit, generating liquidity from existing assets,
accretively investing repayments in loan and CMBS investments, executing
new leases and renewing expiring leases. Nevertheless, we remain committed
to identifying and pursuing strategies and transactions that could preserve or
improve our cash flows from our CDOs, increase our net asset value per share of
common stock, improve our future access to capital or otherwise potentially
create value for our stockholders.




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, 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 cost of funds. We
seek to 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 on our commercial
real estate finance assets principally from the spread between the yields on our
assets and the cost of our borrowing and hedging activities, our net income on
our commercial real estate finance assets will generally increase if LIBOR
increases and decrease if LIBOR decreases. Our real estate assets generate
income principally from fixed long-term leases and we are exposed to changes in
interest rates primarily from our floating rate borrowing arrangements. We have
used interest rate caps to manage our exposure to interest rate changes however,
because our real estate assets generate income from long-term leases, our net
income from our real estate assets will generally decrease if LIBOR increases.
The following chart shows a hypothetical 100 basis point increase in interest
rates along the entire interest rate curve:





74




Change
      in LIBOR
                    
                    Projected Increase(Decrease) in Net IncomeBase
      case+100bps
                    
                    $
                    (5,478
                    )+200bps
                    
                    $
                    (10,511
                    )+300bps
                    
                    $
                    (15,017
                    )





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.




In the
event of a rapidly rising interest rate environment, our operating cash flow
from our real estate assets may be insufficient to cover the corresponding
increase in interest expense on our variable rate borrowing secured by our real
estate assets.




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.





75




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.
            (REMOVED AND
      RESERVED)





None





ITEM
      5.
            OTHER
      INFORMATION





None





76




ITEM
6.




INDEX
TO EXHIBITS





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 $0.001 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.




77




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.Dated:
      November 5, 2010
                  By:
                  /s/
      Jon W. ClarkName:
      Jon W. ClarkTitle:
      Chief Financial Officer (duly authorized officer and
principal
                    financial
      and accounting
officer)





78