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 1934For
      the quarterly period ended March 31, 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.








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





420 Lexington Avenue, New York, New
York 10170


(Address
of principal executive offices) (Zip Code)





(212) 297-1000


(Registrant's
telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES  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 49,906,180 as of May  10, 2010.







GRAMERCY
CAPITAL CORP.




INDEX





PAGEPART
      I.
                                                                    
                                                                    FINANCIAL
      INFORMATION
                                                                    
                                                                    3ITEM
      1.
                                                                    
                                                                    FINANCIAL
      STATEMENTS
                                                                    
                                                                    3Condensed
      Consolidated Balance Sheets as of  March 31, 2010 and
      December 31, 2009 (unaudited)
                                                                    
                                                                    3Condensed
      Consolidated Statements of Operations for the three months ended 
      March 31, 2010 and 2009 (unaudited)
                                                                    
                                                                    5Condensed
      Consolidated Statement of Stockholders' Equity and Comprehensive Loss for
      the three months ended March 31, 2010 (unaudited)
                                                                    
                                                                    6Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      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
                                                                    
                                                                    45ITEM
      3.
                                                                    
                                                                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                                    
                                                                    74ITEM
      4.
                                                                    
                                                                    CONTROLS
      AND PROCEDURES
                                                                    
                                                                    76PART
      II.
                                                                    
                                                                    OTHER
      INFORMATION
                                                                    
                                                                    77ITEM
      1.
                                                                    
                                                                    LEGAL
      PROCEEDINGS
                                                                    
                                                                    77ITEM
      1A.
                                                                    
                                                                    RISK
      FACTORS
                                                                    
                                                                    77ITEM
      2.
                                                                    
                                                                    UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                                                                    
                                                                    77ITEM
      3.
                                                                    
                                                                    DEFAULTS
      UPON SENIOR SECURITIES
                                                                    
                                                                    77ITEM
      4.
                                                                    
                                                                    REMOVED
      AND RESERVED
                                                                    
                                                                    77ITEM
      5.
                                                                    
                                                                    OTHER
      INFORMATION
                                                                    
                                                                    77ITEM
      6.
                                                                    
                                                                    EXHIBITS
                                                                    
                                                                    78SIGNATURES
                                                                    
                                                                    80


2


PART
I. FINANCIAL INFORMATION


ITEM
I. FINANCIAL STATEMENTS




Gramercy
Capital Corp.


Condensed
Consolidated Balance Sheets


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





March 31,
                
                
                December 31,2010
                
                
                2009Assets:Real
      estate investments, at cost:Land
                
                $
                889,560
                
                
                $
                891,078Building
      and improvements
                
                
                2,393,584
                
                
                
                2,391,817Less:
      accumulated depreciation
                
                
                (121,132
                )
                
                
                (106,018
                )Total
      real estate investments, net
                
                
                3,162,012
                
                
                
                3,176,877Cash
      and cash equivalents
                
                
                124,332
                
                
                
                135,006Restricted
      cash
                
                
                78,258
                
                
                
                76,859Pledged
      government securities, net
                
                
                96,168
                
                
                
                97,286Investments
      in joint ventures
                
                
                86,790
                
                
                
                84,645Assets
      held for sale, net
                
                
                641
                
                
                
                841Tenant
      and other receivables, net
                
                
                69,180
                
                
                
                61,065Derivative
      instruments, at fair value
                
                
                30
                
                
                
                -Acquired
      lease assets, net of accumulated amortization of $107,706 and
      $92,958
                
                
                435,659
                
                
                
                450,436Deferred
      costs, net of accumulated amortization of $23,388 and
    $21,243
                
                
                14,567
                
                
                
                10,332Other
      assets
                
                
                19,298
                
                
                
                13,342Subtotal
                
                
                4,086,935
                
                
                
                4,106,689Assets
      of Consolidated Variable Interest Entities ("VIEs"):Real
      estate investments, at cost:Land
                
                
                52,016
                
                
                
                19,059Building
      and improvements
                
                
                48,525
                
                
                
                36,586Less: 
      accumulated depreciation
                
                
                (1,683
                )
                
                
                (1,442
                )Total
      real estate investments directly owned
                
                
                98,858
                
                
                
                54,203Cash
      and cash equivalents
                
                
                3,114
                
                
                
                3,339Restricted
      cash
                
                
                180,706
                
                
                
                130,331Loans
      and other lending investments, net
                
                
                1,235,149
                
                
                
                1,383,832Commercial
      mortgage-backed securities
                
                
                992,899
                
                
                
                984,709Investment
      in joint ventures
                
                
                22,777
                
                
                
                23,820Derivative
      instruments, at fair value
                
                
                1,526
                
                
                
                -Accrued
      interest
                
                
                33,111
                
                
                
                32,122Deferred
      costs, net of accumulated amortization of $21,191 and
    $19,478
                
                
                19,692
                
                
                
                21,709Other
      assets
                
                
                24,585
                
                
                
                24,683Subtotal
                
                
                2,612,417
                
                
                
                2,658,748Total
      assets
                
                $
                6,699,352
                
                
                $
                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,
amounts in thousands, except share and per share data)





March 31,
                
                
                December 31,2010
                
                
                2009Liabilities
      and Stockholders' Equity:Liabilities:Mortgage
      notes payable
                
                $
                1,695,988
                
                
                $
                1,702,155Mezzanine
      loans payable
                
                
                552,989
                
                
                
                553,522Junior
      subordinated notes
                
                
                52,500
                
                
                
                52,500Total
      secured and other debt
                
                
                2,301,477
                
                
                
                2,308,177Accounts
      payable and accrued expenses
                
                
                56,850
                
                
                
                58,157Dividends
      payable
                
                
                14,043
                
                
                
                11,707Accrued
      interest payable
                
                
                5,950
                
                
                
                2,793Deferred
      revenue
                
                
                172,086
                
                
                
                159,179Below-market
      lease liabilities, net of accumulated amortization of $163,938 and
      $144,253
                
                
                751,009
                
                
                
                770,781Leasehold
      interests, net of accumulated amortization of $5,727 and
      $5,030
                
                
                17,569
                
                
                
                18,254Liabilities
      related to assets held for sale
                
                
                263
                
                
                
                238Other
      liabilities
                
                
                6,869
                
                
                
                16,193Subtotal
                
                
                3,326,116
                
                
                
                3,345,479Non-Recourse
      Liabilities of Consolidated VIEs:Mortgage
      notes payable
                
                
                41,254
                
                
                
                41,513Collateralized
      debt obligations
                
                
                2,685,917
                
                
                
                2,705,534Total
      secured and other debt
                
                
                2,727,171
                
                
                
                2,747,047Accounts
      payable and accrued expenses
                
                
                9,165
                
                
                
                9,549Accrued
      interest payable
                
                
                4,677
                
                
                
                6,991Deferred
      revenue
                
                
                65
                
                
                
                67Derivative
      instruments, at fair value
                
                
                115,482
                
                
                
                88,786Subtotal
                
                
                2,856,560
                
                
                
                2,852,440Total
      liabilities
                
                
                6,182,676
                
                
                
                6,197,919Commitments
      and contingencies
                
                
                -
                
                
                
                -Stockholders'
      equity:Common
      stock, par value $0.001, 100,000,000 shares authorized, 49,896,808 and
      49,884,500 shares issued and outstanding at March 31, 2010 and December
      31, 2009, respectively.
                
                
                50
                
                
                
                50Series
      A cumulative redeemable preferred stock, par value $0.001, liquidation
      preference $115,000, 4,600,000 shares authorized, 4,600,000 shares issued
      and outstanding at March 31, 2010 and December 31, 2009,
      respectively.
                
                
                111,205
                
                
                
                111,205Additional
      paid-in-capital
                
                
                1,079,062
                
                
                
                1,078,784Accumulated
      other comprehensive loss
                
                
                (122,434
                )
                
                
                (96,038
                )Accumulated
      deficit
                
                
                (552,589
                )
                
                
                (527,821
                )Total
      Gramercy Capital Corp. stockholders' equity
                
                
                515,294
                
                
                
                566,180Non-controlling
      interest
                
                
                1,382
                
                
                
                1,338Total
      equity
                
                
                516,676
                
                
                
                567,518Total
      liabilities and stockholders' equity
                
                $
                6,699,352
                
                
                $
                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,
amounts in thousands, except share and per share data)





Three months ended March 31,2010
                
                
                2009RevenuesRental
      revenue
                
                $
                79,874
                
                
                $
                79,924Investment
      income
                
                
                44,251
                
                
                
                52,934Operating
      expense reimbursements
                
                
                28,934
                
                
                
                30,516Gain
      on sales and other income
                
                
                1,872
                
                
                
                1,270Total
      revenues
                
                
                154,931
                
                
                
                164,644ExpensesProperty
      operating expensesReal
      estate taxes
                
                
                10,614
                
                
                
                9,888Utilities
                
                
                10,321
                
                
                
                10,272Ground
      rent and leasehold obligations
                
                
                4,820
                
                
                
                4,628Property
      and leasehold impairments
                
                
                -
                
                
                
                3,104Direct
      billable expenses
                
                
                1,639
                
                
                
                2,162Other
      property operating expenses
                
                
                19,253
                
                
                
                20,771Total
      property operating expenses
                
                
                46,647
                
                
                
                50,825Interest
      expense
                
                
                51,222
                
                
                
                65,581Depreciation
      and amortization
                
                
                27,808
                
                
                
                27,346Management,
      general and administrative
                
                
                7,702
                
                
                
                8,784Management
      fees
                
                
                -
                
                
                
                5,672Impairment
      on loans held for sale and commercial mortgage backed
      securities
                
                
                12,326
                
                
                
                84,428Provision
      for loan losses
                
                
                41,160
                
                
                
                52,771Total
      expenses
                
                
                186,865
                
                
                
                295,407Loss 
      from continuing operations before equity in income
      from unconsolidated joint ventures, provisions for taxes and
      non-controlling interest
                
                
                (31,934
                )
                
                
                (130,763
                )Equity
      in net income of unconsolidated joint ventures
                
                
                1,116
                
                
                
                2,212Loss
      from continuing operations before provision for taxes, gain
      on extinguishment of debt and discontinued operations
                
                
                (30,818
                )
                
                
                (128,551
                )Gain
      on extinguishment of debt
                
                
                7,740
                
                
                
                107,229Provision
      for taxes
                
                
                (38
                )
                
                
                (2,267
                )Net
      loss from continuing operations
                
                
                (23,116
                )
                
                
                (23,589
                )Net
      loss from discontinued operations
                
                
                (313
                )
                
                
                (1,919
                )Net
      gains from disposals
                
                
                1,041
                
                
                
                573Net
      income (loss) from discontinued operations
                
                
                728
                
                
                
                (1,346
                )Net
      loss
                
                
                (22,388
                )
                
                
                (24,935
                )Net
      income attributable to non-controlling interests
                
                
                (44
                )
                
                
                (20
                )Net
      loss attributable to Gramercy Capital Corp.
                
                
                (22,432
                )
                
                
                (24,955
                )Accrued
      preferred stock dividends
                
                
                (2,336
                )
                
                
                (2,336
                )Net
      loss available to common stockholders
                
                $
                (24,768
                )
                
                $
                (27,291
                )Basic
      earnings per share:Net
      loss from continuing operations, net of non-controlling interest and
      after preferred dividends
                
                $
                (0.51
                )
                
                $
                (0.52
                )Net
      income (loss) from discontinued operations
                
                
                0.01
                
                
                
                (0.03
                )Net
      loss available to common stockholders
                
                $
                (0.50
                )
                
                $
                (0.55
                )Diluted
      earnings per share:Net
      loss from continuing operations, net of non-controlling interest and
      after preferred dividends
                
                $
                (0.51
                )
                
                $
                (0.52
                )Net
      income (loss) from discontinued operations
                
                
                0.01
                
                
                
                (0.03
                )Net
      loss available to common stockholders
                
                $
                (0.50
                )
                
                $
                (0.55
                )Basic
      weighted average common shares outstanding
                
                
                49,896,278
                
                
                
                49,859,711Diluted
      weighted average common shares and common share
      equivalents outstanding
                
                
                49,896,278
                
                
                
                49,859,711




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


5




Gramercy
Capital Corp.


Condensed
Consolidated Statement of Stockholders’ Equity


(Unaudited,
amounts in thousands)





Common
      StockShares
                    
                    
                    Par
      Value
                    
                    Series
      A
                      Preferred
      Stock
                    
                    Additional
      Paid-
                      In-Capital
                    
                    Accumulated
      Other
                      Comprehensive
      Income
                      (Loss)
                    
                    
                    Accumulated
      Deficit
                    
                    
                    Total
      Gramercy
                      Capital
      Corp
                    
                    
                    Non-controlling
                      Interest
                    
                    Total
                    
                    
                    Comprehensive
                      LossBalance
      at December 31, 2009
                    
                    
                    49,885
                    
                    
                    $
                    50
                    
                    $
                    111,205
                    
                    $
                    1,078,784
                    
                    $
                    (96,038
                    )
                    
                    $
                    (527,821
                    )
                    
                    $
                    566,180
                    
                    
                    $
                    1,338
                    
                    $
                    567,518Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (22,432
                    )
                    
                    
                    (22,432
                    )
                    
                    
                    44
                    
                    
                    (22,388
                    )
                    
                    $
                    (22,432
                    )Change
      innet
      unrealized loss on  derivativeinstruments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (27,136
                    )
                    
                    
                    
                    
                    
                    
                    (27,136
                    )
                    
                    
                    
                    
                    
                    (27,136
                    )
                    
                    
                    (27,136
                    )Reclassification
      of adjustments of net unrealized loss on securities previously available
      for sale
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    740
                    
                    
                    
                    
                    
                    
                    
                    740
                    
                    
                    
                    
                    
                    
                    740
                    
                    
                    
                    740Issuance
      of stock - stock purchase plan
                    
                    
                    4
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10
                    
                    
                    
                    
                    
                    
                    10Stock
      based compensation - fair value
                    
                    
                    8
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    268
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    268
                    
                    
                    
                    
                    
                    
                    268Dividends
      accrued on preferred stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,336
                    )
                    
                    
                    (2,336
                    )
                    
                    
                    
                    
                    
                    (2,336
                    )Balance
      at March 31, 2010
                    
                    
                    49,897
                    
                    
                    $
                    50
                    
                    $
                    111,205
                    
                    $
                    1,079,062
                    
                    $
                    (122,434
                    )
                    
                    $
                    (552,589
                    )
                    
                    $
                    515,294
                    
                    
                    $
                    1,382
                    
                    $
                    516,676
                    
                    
                    $
                    (48,828
                    )




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


6


Gramercy
Capital Corp.


Condensed
Consolidated Statements of Cash Flows


(Unaudited,
amounts in thousands)





Three months ended March 31,2010
                
                
                2009Operating
      Activities:Net
      loss
                
                $
                (22,388
                )
                
                $
                (24,935
                )Adjustments
      to net cash provided by operating activities:Depreciation
      and amortization
                
                
                29,407
                
                
                
                28,124Amortization
      of leasehold interests
                
                
                (685
                )
                
                
                (690
                )Amortization
      of acquired leases to rental revenue
                
                
                (16,851
                )
                
                
                (18,759
                )Amortization
      of deferred costs
                
                
                2,027
                
                
                
                5,858Amortization
      of discount and other fees
                
                
                (5,876
                )
                
                
                (7,441
                )Straight-line
      rent adjustment
                
                
                7,258
                
                
                
                6,524Non-cash
      impairment charges
                
                
                12,583
                
                
                
                90,203Net
      gain on sale of properties and lease terminations
                
                
                (1,041
                )
                
                
                (558
                )Equity
      in net loss of joint ventures
                
                
                (1,116
                )
                
                
                (1,905
                )Gain
      on extinguishment of debt
                
                
                (7,740
                )
                
                
                (107,229
                )Amortization
      of stock compensation
                
                
                278
                
                
                
                126Provision
      for loan losses
                
                
                41,160
                
                
                
                52,771Changes
      in operating assets and liabilities:Restricted
      cash
                
                
                1,720
                
                
                
                (896
                )Tenant
      and other receivables
                
                
                (6,372
                )
                
                
                2,010Payment
      of capitalized tenant leasing costs
                
                
                (274
                )
                
                
                (346
                )Accrued
      interest
                
                
                (3,093
                )
                
                
                -Other
      assets
                
                
                (7,066
                )
                
                
                (4,718
                )Accounts
      payable, accrued expenses and other liabilities
                
                
                (5,570
                )
                
                
                (12,413
                )Deferred
      revenue
                
                
                4,039
                
                
                
                (9,113
                )Net
      cash provided by (used in) operating activities
                
                
                20,400
                
                
                
                (3,387
                )Investing
      Activities:Capital
      expenditures and leasehold costs
                
                
                (5,312
                )
                
                
                (815
                )Deferred
      investment costs
                
                
                -
                
                
                
                (280
                )Proceeds
      from sale of real estate
                
                
                16,272
                
                
                
                13,340New
      investment originations and funded commitments
                
                
                (3,182
                )
                
                
                (12,671
                )Principal
      collections on investments
                
                
                57,404
                
                
                
                19,531Proceeds
      from loan syndications
                
                
                -
                
                
                
                17,238Investment
      in commercial mortgage-backed securities
                
                
                (16,764
                )
                
                
                (15,661
                )Investment
      in joint venture
                
                
                14
                
                
                
                (431
                )Change
      in accrued interest income
                
                
                (41
                )
                
                
                (45
                )Purchase
      of marketable investments
                
                
                -
                
                
                
                (6
                )Sale
      of marketable investments
                
                
                1,554
                
                
                
                2,054Change
      in restricted cash from investing activities
                
                
                (1,912
                )
                
                
                437Net
      cash provided by investing activities
                
                
                48,033
                
                
                
                22,691Financing
      Activities:Proceeds
      from repurchase facilities
                
                
                -
                
                
                
                9,500Repayments
      of repurchase facilities
                
                
                (85
                )
                
                
                (18,576
                )Repayment
      of unsecured credit facility
                
                
                -
                
                
                
                (45,000
                )Repayment
      of mortgage notes
                
                
                (5,880
                )
                
                
                (15,651
                )Purchase
      of interest rate caps
                
                
                (2,442
                )
                
                
                -Repurchase
      of collateralized debt obligations
                
                
                (11,260
                )
                
                
                -Deferred
      financing costs and other liabilities
                
                
                (6,330
                )
                
                
                (2,033
                )Change
      in restricted cash from financing activities
                
                
                (53,335
                )
                
                
                (1,173
                )Net
      cash used in financing activities
                
                
                (79,332
                )
                
                
                (72,933
                )Net
      decrease in cash and cash equivalents
                
                
                (10,899
                )
                
                
                (53,629
                )Cash
      and cash equivalents at beginning of period
                
                
                138,345
                
                
                
                136,828Cash
      and cash equivalents at end of period
                
                $
                127,446
                
                
                $
                83,199Non-cash
      activity:Deferred
      gain and other non-cash activity related to derivatives
                
                $
                -
                
                
                $
                48,925Debt
      assumed by purchaser in sale of real estate
                
                $
                -
                
                
                $
                103,621Supplemental
      cash flow disclosures:Interest
      paid
                
                $
                58,458
                
                
                $
                70,130Income
      taxes paid
                
                $
                123
                
                
                $
                182




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


7


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
  1.
Business and Organization
  Gramercy
Capital Corp. (the “Company” or “Gramercy”) is a self-managed, integrated,
commercial real estate finance and property investment company. The Company was
formed in April 2004 and commenced operations upon the completion of its initial
public offering in August 2004. On April 1, 2008, the Company completed the
acquisition of American Financial Realty Trust (NYSE: AFR) (“American
Financial”) in a transaction with a total value of approximately $3,300,000,
including the assumption of approximately $1,300,000 of American Financial’s
secured debt. From its inception until April 2009, the Company was externally
managed and advised by GKK Manager LLC, or the Manager, a wholly-owned
subsidiary of SL Green Realty Corp., or SL Green. On April 24, 2009, the Company
completed the internalization of its management through the direct acquisition
of the Manager from SL Green. Beginning in May 2009, management and incentive
fees payable by the Company to the Manager ceased and the Company added 77
former employees of the Manager to its own staff. At March 31, 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
March 31, 2010, Gramercy Finance held loans and other lending investments and
CMBS of $2,228,048, net of unamortized fees, discounts, asset sales, unfunded
commitments, reserves for loan losses and other adjustments, with an average
spread of 30-day LIBOR plus 373 basis points for its floating rate investments,
and an average yield of approximately 7.99% for its fixed rate investments. As
of March 31, 2010, Gramercy Finance also held interests in two credit tenant net
lease investments, or CTL investments, two interests in joint ventures holding
fee positions on properties subject to long-term ground leases, seven interests
in real estate acquired through foreclosures including a joint venture, and a
100% fee interest in a property subject to a long-term ground
lease.
  As of
March 31, 2010, Gramercy Realty’s portfolio consisted of 633 bank branches, 325
office buildings and three land parcels, of which 54 bank branches were
partially owned through unconsolidated joint ventures. Gramercy Realty’s
consolidated properties aggregated approximately 25,556 rentable square feet and
its unconsolidated properties aggregated approximately 251 rentable square feet.
As of March 31, 2010, the occupancy of Gramercy Realty’s consolidated properties
was 85.3% 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 March 31, 2010, they represented approximately 40.4% and 15.4%,
respectively, of the rental income of the Company’s portfolio and occupied
approximately 43.8% and 17.7%, respectively, of Gramercy Realty’s total rentable
square feet.
  8
 Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
 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 March 31, 2010, the weighted average remaining term of Gramercy
Realty’s leases was 9.2 years and approximately 74.4% 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 and renewing expiring leases.
  In March
2010, the Company amended its $241,324 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 $552,989 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 196 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.  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 satisfy any
shortfall 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 in such
circumstances would trigger a substantial book loss and would likely result in
the Company having negative book value.  The Company has begun negotiations
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 and the potential
restructure of such debt.
 
 The
Company relies on the credit and equity markets to finance and grow its
business.  Despite signs of moderate 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.  As a result, the Company has reduced new
investment activity until the capital markets become more stable and market
liquidity increases. 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, extending debt maturities, reducing capital expenditures and
renewing expiring leases.
 
 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.  For purposes of comparability, certain prior-year amounts have
been reclassified to conform to the current-year presentation.
  2.
Significant Accounting Policies
  Accounting
Standards Codification
  In June
2009, the Financial Accounting Standards Board, or the FASB, issued guidance
regarding the Accounting Codification and the Hierarchy of Generally Accepted
Accounting Principles. This guidance establishes the FASB Accounting Standards
Codification, or the Codification, as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with GAAP, and states that
all guidance contained in the Codification carries equal level of authority.
Rules and interpretive releases of the Securities and Exchange Commission, or
SEC, under federal securities laws are also sources of authoritative GAAP for
SEC registrants. The Codification does not change GAAP, however it does change
the way in which it is to be researched and referenced. This guidance is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.
  9
 Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
 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 (“VIE”) 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 under the equity method or as investments in
CMBS.
  Variable
Interest Entities
  The
following is a summary of the Company’s involvement with VIEs as of March 31,
2010:
 
 Company
                      carrying
                      value-assets
                    
                    
                    Company
                      carrying
                      value-
                      liabilities
                    
                    
                    Facevalueof
                      assetsheldby
                      theVIE
                    
                    
                    Facevalueof
                      liabilities
                      issuedbythe
                      VIEConsolidated
      VIEsReal
      estate investments, net
                    
                    $
                    43,001
                    
                    
                    $
                    41,513
                    
                    
                    $
                    43,001
                    
                    
                    $
                    41,513Collateralized
      debt obligations
                    
                    
                    2,569,416
                    
                    
                    
                    2,815,047
                    
                    
                    
                    3,031,601
                    
                    
                    
                    3,100,780$
                    2,612,417
                    
                    
                    $
                    2,856,560
                    
                    
                    $
                    3,074,602
                    
                    
                    $
                    3,142,293Unconsolidated
      VIEsInvestment
      in joint ventures
                    
                    $
                    102,903
                    
                    
                    $
                    -
                    
                    
                    $
                    431,014
                    
                    
                    $
                    206,506CMBS-controlling
      class
                    
                    
                    17,565
                    (1)
                    
                    
                    -
                    
                    
                    
                    921,654
                    
                    
                    
                    921,654$
                    120,468
                    
                    
                    $
                    -
                    
                    
                    $
                    1,352,668
                    
                    
                    $
                    1,128,160
 
 (1) CMBS are assets held by the
collateralized debt obligations classified on the Condensed Consolidated Balance
Sheet as an Asset of Consolidated Variable Interest Entities.
  Consolidated
VIEs
  As of
March 31, 2010, the Condensed Consolidated Balance Sheet includes $2,612,417 of
assets and $2,856,560 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
$1,488.
  Real
Estate Investments, Net
  The
Company, through its acquisition of 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.  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 $374,
and the cash flows from the real estate investment is insignificant compared to
the cash flow 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.
  10
 Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
 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
March 31, 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 Commercial Mortgage-Backed Securities
 
 The
Company has investments in CMBS, which are considered to be VIE’s.  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.
  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 $1,214,415, 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 March 31, 2010, the Company owned
securities of three controlling class CMBS trusts, including a non-investment
grade CMBS investment, GS Mortgage Securities Trust 2007-GKK1, or the Trust,
with a carrying value of $17,565. The total par amounts of CMBS issued by the
three CMBS trusts was $921,654.
  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 have any on-going financial obligations,
including advancing, funding or purchasing collateral in the Trust.
  At March
31, 2010, the Company’s maximum exposure to loss as a result of its investment
in these CMBS trusts totaled $17,565, which equals the book value of these
investments as of March 31, 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 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 March 31, 2010 and December 31, 2009, the investment had a
carrying value of $32,909 and $31,567, respectively. The Company is required to
make additional capital contributions to the entity to supplement the entities
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.
  11
  Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 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 ten-year fixed-rate
mortgage loan. The property is subject to a 70-year leasehold ground lease with
an unaffiliated third party. As of March 31, 2010 and December 31, 2009, the
investment had a carrying value of $47,217 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.
  In April
2008, the Company acquired via a deed-in-lieu of foreclosure, a 40% interest in
the Whiteface Lodge, a hotel and condominium located in Lake Placid, New
York.  As of March 31, 2010 and December 31, 2009, the investment had a
carrying value of $22,777 and $23,820, respectively.   The Company is
required to make additional capital contributions to the entity to supplement
the entity’s operational cash flow needs.  While the Company is the
managing member of this entity, the Company’s joint venture partner has
significant participating rights surrounding the establishment and execution of
the entity’s business plan.  As a result the Company has concluded that it
is not the primary beneficiary of this entity.
  Unless
otherwise noted, the Company is not obligated to provide, nor has the Company
provided, 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 March 31, 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.
  Real
Estate and CTL Investments
  The
Company records acquired real estate and CTL investments at cost. Costs directly
related to the acquisition of such investments are capitalized. Certain
improvements are capitalized when they are determined to increase the useful
life of the building. Depreciation is computed using the straight-line method
over the shorter of the estimated useful life of the capitalized item or 40
years for buildings, five to ten years for building equipment and fixtures, and
the lesser of the useful life or the remaining lease term for tenant
improvements and leasehold interests. Maintenance and repair expenditures are
charged to expense as incurred.
  In leasing office space, the Company
may provide funding to the lessee through a tenant allowance. In accounting for
tenant allowances, the Company determines whether the allowance represents
funding for the construction of leasehold improvements and evaluates the
ownership, for accounting purposes, of such improvements. If the Company is
considered the owner of the leasehold improvements for accounting purposes, the
Company capitalizes the amount of the tenant allowance and depreciates it over
the shorter of the useful life of the leasehold improvements or the lease term.
If the tenant allowance represents a payment for a purpose other than funding
leasehold improvements, or in the event the Company is not considered the owner
of the improvements for accounting purposes, the allowance is considered to be a
lease incentive and is recognized over the lease term as a reduction of rental
revenue. Factors considered during this evaluation usually include (i) who holds
legal title to the improvements, (ii) evidentiary requirements concerning the
spending of the tenant allowance, and (iii) other controlling rights provided by
the lease agreement(e.g. unilateral control of the tenant
space during the build-out process). Determination of the accounting for a
tenant allowance is made on a case-by-case basis, considering the facts and
circumstances of the individual tenant lease.
  The
Company also reviews the recoverability of the property’s carrying value when
circumstances indicate a possible impairment of the value of a property. The
review of recoverability is based on an estimate of the future undiscounted cash
flows, excluding interest charges, expected to result from the property’s use
and eventual disposition. These estimates consider factors such as expected
future operating income, market and other applicable trends and residual value,
as well as the effects of leasing demand, competition and other factors. If
management determines impairment exists due to the inability to recover the
carrying value of a property, an impairment is recorded to the extent that the
carrying value exceeds the estimated fair value of the property for properties
to be held and used and for assets held for sale, an impairment is recorded to
the extent that the carrying value exceeds the fair value less estimated cost to
dispose for assets held for sale. These assessments are recorded as an
impairment in the consolidated statement of income in the period the
determination is made.  The Company allocates the purchase price of real
estate to land, building, improvements and intangibles, such as the value of
above- and below-market leases and origination costs associated with the leases
in-place at the acquisition date.The Company depreciates
the amount allocated to building and other intangible assets over their
estimated useful lives, which generally range from one to 40 years. The values
of the above- and below-market leases are amortized and recorded as either an
increase (in the case of below-market leases) or a decrease (in the case of
above-market leases) to rental income over the remaining term of the associated
lease. The value associated with in-place leases is amortized over the expected
term of the respective lease. If a tenant vacates its space prior to the
contractual termination of the lease and no rental payments are being made on
the lease, any unamortized balance of the related intangible will be written
off. The tenant improvements and origination costs are amortized as an expense
over the remaining life of the lease (or charged against earnings if the lease
is terminated prior to its contractual expiration date). The Company assesses
fair value of the leases based on estimated cash flow projections that utilize
appropriate discount and capitalization rates and available market information.
Estimates of future cash flows are based on a number of factors including the
historical operating results, known trends, and market/economic conditions that
may affect the property.
  12
 Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
 Leasehold
Interests
  Leasehold
interest liabilities are recorded based on the difference between the fair value
of management’s estimate of the net present value of cash flows expected to be
paid and earned from the subleases over the non-cancelable lease terms and any
payments received in consideration for assuming the leasehold interests. Factors
used in determining the net present value of cash flows include contractual
rental amounts, costs of tenant improvements, costs of capital expenditures and
amounts due under the corresponding operating lease assumed. Amounts allocated
to leasehold interests, based on their respective fair values, are amortized on
a straight-line basis over the remaining lease term.
  Investments
in Unconsolidated Joint Ventures
  The
Company accounts for its investments in unconsolidated joint ventures under the
equity method of accounting since it exercises significant influence, but does
not unilaterally control the entities, and is not considered to be the primary
beneficiary. In the joint ventures, the rights of the other investors are 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 March 31, 2010 and
December 31, 2009, the Company had investments of $109,567 and $108,465 in
unconsolidated joint ventures, respectively.
  Cash
and Cash Equivalents
  The
Company considers all highly liquid investments with maturities of three months
or less when purchased to be cash equivalents.
  Restricted
Cash
  Restricted
cash at March 31, 2010 consists of $113,990 on deposit with the trustee of the
Company’s CDOs. The remaining balance consists of $67,990 held as collateral for
letters of credit, $2,532 of interest reserves held on behalf of borrowers and
$74,452 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 March 31, 2010, and December 31, 2009, the Company had real estate
investments held for sale of $641 and $841, respectively.
  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 March 31, 2010 and December 31, 2009, the Company had no
loans and other lending investments designated as held for
sale.
  13
 Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 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
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 March 31, 2010 and December 31,
2009, the amortization of unrealized loss on the redesignated CMBS investments
included in other comprehensive income (loss) was $3,167 and $3,906,
respectively.
  On a
quarterly basis, 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
months ended March 31, 2010, the Company recognized an other-than-temporary
impairment of $12,326 due to an adverse change in expected cash flows related to
credit losses for six CMBS investments which are recorded in impairment on loans
held for sale and CMBS in the Company’s Condensed Consolidated Statement of
Operations. No other-than-temporary impairments were recognized during the three
months ended March 31, 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 $96,168 and $97,286, a fair value of $98,276
and $98,832 and unrealized gains of $2,108 and $1,545 at March 31, 2010 and
December 31, 2009, respectively, and have maturities that extend through
November 2013.
  Tenant
and Other Receivables
  Tenant
and other receivables are primarily derived from the rental income that each
tenant pays in accordance with the terms of its lease, which is recorded on a
straight-line basis over the initial term of the lease. Since many leases
provide for rental increases at specified intervals, straight-line basis
accounting requires the Company to record a receivable, and include in revenues,
unbilled rent receivables that will only be received if the tenant makes all
rent payments required through the expiration of the initial term of the lease.
Tenant and other receivables also include receivables related to tenant
reimbursements for common area maintenance expenses and certain other
recoverable expenses that are recognized as revenue in the period in which the
related expenses are incurred.
  Tenant
and other receivables are recorded net of the allowances for doubtful accounts,
which as of March 31, 2010 and December 31, 2009, were $7,832 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.
  14
  Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
  Intangible
Assets
  The
Company follows the purchase method of accounting for business combinations. The
Company allocates the purchase price of acquired properties to tangible and
identifiable intangible assets acquired based on their respective fair values.
Tangible assets include land, buildings and improvements on an as-if vacant
basis. The Company utilizes various estimates, processes and information to
determine the as-if vacant property value. Estimates of value are made using
customary methods, including data from appraisals, comparable sales, discounted
cash flow analyses and other methods. Identifiable intangible assets include
amounts allocated to acquired leases for above- and below-market lease rates and
the value of in-place leases.
  Above-market,
below-market and in-place lease values for properties acquired are recorded
based on the present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between the contractual
amount to be paid pursuant to each in-place lease and management’s estimate of
the fair market lease rate for each such in-place lease, measured over a period
equal to the remaining non-cancelable term of the lease. The capitalized
above-market lease values are amortized as a reduction of rental income over the
remaining non-cancelable terms of the respective leases. The capitalized
below-market lease values are amortized as an increase to rental income over the
initial term and any fixed-rate renewal periods in the respective leases. If a
tenant vacates its space prior to the contractual termination of the lease and
no rental payments are being made on the lease, any unamortized balance of the
related intangible will be written off.
  The
aggregate value of intangible assets related to in-place leases is primarily the
difference between the property valued with existing in-place leases adjusted to
market rental rates and the property valued as-if vacant. Factors considered by
management in its analysis of the in-place lease intangibles include an estimate
of carrying costs during the expected lease-up period for each property taking
into account current market conditions and costs to execute similar leases. In
estimating carrying costs, management includes real estate taxes, insurance and
other operating expenses and estimates of lost rentals at market rates during
the anticipated lease-up period, which is expected to average six months.
Management also estimates costs to execute similar leases including leasing
commissions, legal and other related expenses.
  The value
of in-place leases is amortized to expense over the initial term of the
respective leases, which range primarily from one to 20 years. In no event does
the amortization period for intangible assets exceed the remaining depreciable
life of the building. If a tenant terminates its lease, the unamortized portion
of the in-place lease value is charged to expense.
  In making
estimates of fair values for purposes of allocating purchase price, management
utilizes a number of sources, including independent appraisals that may be
obtained in connection with the acquisition or financing of the respective
property and other market data. Management also considers information obtained
about each property as a result of its pre-acquisition due diligence, as well as
subsequent marketing and leasing activities, in estimating the fair value of the
tangible and intangible assets acquired and intangible liabilities
assumed.
  Intangible
assets and acquired lease obligations consist of the following:
  15
 Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
 March31,
                      2010
                    
                    
                    December31,
                      2009Intangible
      assets:In-place
      leases, net of accumulated amortization of $82,260 and
    $70,363
                    
                    $
                    351,729
                    
                    
                    $
                    363,655Above-market
      leases, net of accumulated amortization of $25,453 and
    $22,601
                    
                    
                    83,971
                    
                    
                    
                    86,823Amounts
      related to assets held for sale, net of accumulated amortization of $7 and
      $6
                    
                    
                    (41
                    )
                    
                    
                    (42
                    )Total
      intangible assets
                    
                    $
                    435,659
                    
                    
                    $
                    450,436Intangible
      liabilities:Below-market
      leases, net of accumulated amortization of $163,948 and
      $144,261
                    
                    $
                    751,066
                    
                    
                    $
                    770,839Amounts
      related to assets held for sale, net of accumulated amortization of $10
      and $8
                    
                    
                    (57
                    )
                    
                    
                    (58
                    )Total
      intangible liabilities
                    
                    $
                    751,009
                    
                    
                    $
                    770,781
  Deferred
Costs
  Deferred
costs include deferred financing costs that represent commitment and extension
fees, legal and other third party costs associated with obtaining or extending
commitments for financing which result in a closing of such financing. These
costs are amortized over the terms of the respective agreements and the
amortization is reflected as interest expense. Unamortized deferred financing
costs are expensed when the associated debt is refinanced or repaid before
maturity. Costs incurred in seeking financing transactions that do not close are
expensed in the period in which it is determined that the financing will not
close. Deferred costs also consist of fees and direct costs incurred to
originate new investments and are amortized using the effective yield method
over the related term of the investment.
  The
Company has deferred certain expenditures related to the leasing of certain
properties. Direct costs of leasing, including external broker commissions and
internally capitalized payroll costs associated with leasing activities, are
deferred and amortized over the terms of the underlying leases.
  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. Impacted by a number of factors, pricing observability is
generally affected by such items as the type of financial instrument, whether
the financial instrument is new to the market and not yet established, the
characteristics specific to the transaction and overall market
conditions.
  The three
broad levels defined are as follows:
  16
 Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
 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
13, “Fair Value of Financial Instruments.”
  Revenue
Recognition
  Real
Estate and CTL Investments
  Rental
income from leases is recognized on a straight-line basis regardless of when
payments are contractually due. Certain lease agreements also contain provisions
that require tenants to reimburse the Company for real estate taxes, common area
maintenance costs and the amortized cost of capital expenditures with interest.
Such amounts are included in both revenues and operating expenses when the
Company is the primary obligor for these expenses and assumes the risks and
rewards of a principal under these arrangements. Under leases where the tenant
pays these expenses directly, such amounts are not included in revenues or
expenses.
  Deferred
revenue represents rental revenue and management fees received prior to the date
earned. Deferred revenue also includes rental payments received in excess of
rental revenues recognized as a result of straight-line basis
accounting.
  Other
income includes fees paid by tenants to terminate their leases, which are
recognized when fees due are determinable, no further actions or services are
required to be performed by the Company, and collectability is reasonably
assured. In the event of early termination, the unrecoverable net book values of
the assets or liabilities related to the terminated lease are recognized as
depreciation and amortization expense in the period of termination.
  The
Company recognizes sales of real estate properties only upon closing. Payments
received from purchasers prior to closing are recorded as deposits. Profit on
real estate sold is recognized using the full accrual method upon closing when
the collectability of the sale price is reasonably assured and the Company is
not obligated to perform significant activities after the sale. Profit may be
deferred in whole or part until the sale meets the requirements of profit
recognition on sale of real estate.
  Finance
Investments
  Interest
income on debt investments, 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.
  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 March 31, 2010, the Company had one second lien loan, one third
lien loan and one mezzanine loan with an aggregate carrying value of $0, which
were classified as non-performing. At December 31, 2009, the Company had three
first mortgage loans with an aggregate carrying value of $55,122, four mezzanine
loans with a carrying value of $319, one second lien loan with the carrying
value of $0 and one third lien loan with a carrying value of $0, which were
classified as non-performing loans.
  17
 Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
 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 March 31, 2010, the Company had four first mortgage loans with an
aggregate carrying value of $94,817 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 three months ended March 31,
2010, the Company incurred charge-offs totaling $54,310 relating to realized
losses on four 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 $405,052 against 22 separate
investments with a carrying value of $538,332 as of March 31, 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.
  Rent
Expense
  Rent
expense is recognized on a straight-line basis regardless of when payments are
due. Accounts payable and accrued expenses in the accompanying consolidated
balance sheet as of March 31, 2010 and December 31, 2009 includes an accrual for
rental expense recognized in excess of amounts due at that time. Rent expense
related to leasehold interests is included in property operating expenses, and
rent expense related to office rentals is included in management, general and
administrative expense.
  Stock
Based Compensation Plans
  The
Company has a stock-based compensation plan, described more fully in Note 14. The
Company uses the Black-Scholes option-pricing model to estimate the fair value
of a stock option award.  This model requires inputs such as expected
term, expected volatility, and risk-free interest
rate.   Further, the forfeiture rate also impacts the amount of
aggregate compensation cost.  These inputs are highly subjective and
generally require significant analysis and judgment to develop.
  Prior to
the termination of the management agreement in April 2009, the Company
determined fair value of the stock options granted to employees of the Manager
who provided services to the Company, using a mark-to-market
model.  In April 2009, the Company completed the internalization of
management through the direct acquisition of the Manager. Stock option awards
were re-valued at the date of the internalization and such value will be
amortized over the remaining vesting period of the award for employees that
remained with the Manager.
  Compensation
cost for stock options, if any, is recognized ratably over the vesting period of
the award. The Company’s policy is to grant options with an exercise price equal
to the quoted closing market price of its stock on the business day preceding
the grant date. Awards of stock or restricted stock are expensed as compensation
over the benefit period.
  The fair
value of each stock option granted is estimated on the date of grant for options
issued to employees, and quarterly awards to non-employees, using the
Black-Scholes option pricing model with the following weighted average
assumptions for grants in 2010 and 2009:
  18
 Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
 2010
                    
                    
                    2009Dividend
      yield
                    
                    
                    5.7
                    %
                    
                    
                    14.0
                    %Expected
      life of option
                    
                    5.0
      years
                    
                    
                    5.0
      yearsRisk
      free interest rate
                    
                    
                    2.65
                    %
                    
                    
                    1.72
                    %Expected
      stock price volatility
                    
                    
                    75.0
                    %
                    
                    
                    90.0
                    %
  Incentive
Distribution (Class B Limited Partner Interest)
  Prior to
the internalization, the Class B limited partner interests were entitled to
receive an incentive return equal to 25% of the amount by which funds from
operations, or FFO, plus certain accounting gains (as defined in the partnership
agreement of the Operating Partnership) exceed the product of the Company’s
weighted average stockholders equity (as defined in the partnership agreement of
the Operating Partnership) multiplied by 9.5% (divided by four to adjust for
quarterly calculations). The Company recorded any distributions on the Class B
limited partner interests as an incentive distribution expense in the period
when earned and when payment of such amounts became probable and reasonably
estimable in accordance with the partnership agreement. These cash distributions
reduced the amount of cash available for distribution to the common unit holders
in the Operating Partnership and to the Company’s common stockholders. In
October 2008, the Company entered into a letter agreement with the Class B
limited partners to 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 months ended
March 31, 2010 and 2009.
  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 17.
  19
 Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010
 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.
  For the
three months ended March 31, 2010, and 2009, the Company recorded $38 and $2,267
of income tax expense, respectively. Included in tax expense for the three
months ended March 31, 2010 and 2009 is $0 and $2,100 of state income taxes on
the gain of extinguishment of debt of $7,740 and $107,299,
respectively.  Under federal tax law, the Company is allowed to defer
this gain until 2014; however, not all states follow this federal
rule.
  Earnings
Per Share
  The
Company presents both basic and diluted earnings per share, or EPS. Basic EPS
excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, as long as their inclusion would not be
anti-dilutive.
  Use
of Estimates
  The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
  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 March 31, 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. Six investments accounted
for approximately 17.3% of the revenue earned on the Company’s debt investments
for the three months ended March 31, 2010, compared to six investments which
accounted for approximately 20.5% of the revenue earned on the Company’s debt
investments for the three months ended March 31, 2009. The largest sponsor
accounted for approximately 10.6% and 9.5% of the total carrying value of the
Company’s debt investments as of March 31, 2010 and December 31, 2009,
respectively. The largest sponsor accounted for approximately 5.0% of the
revenue earned on the Company’s debt investments for the quarter ended March 31,
2010, compared to approximately 5.1% of the revenue earned on the Company’s debt
investments for the three months ended March 31, 2009.
  Additionally,
two tenants, Bank of America and Wells Fargo, accounted for approximately 40.4%
and 15.4% of the Company’s rental income for the three months ended March 31,
2010, respectively.
  Recently
Issued Accounting Pronouncements
  In April
2009, the FASB issued guidance on other-than-temporary-impairments that amends
the impairment guidance relating to certain debt securities and required a
company to assess the likelihood of selling the security prior to recovering its
cost basis. Additionally, when a company meets the criteria for impairment, the
impairment charges related to credit losses would be recognized in earnings,
while non-credit losses would be reflected in other comprehensive income. The
Company adopted this standard effective April 1, 2009. Adoption of the new
guidance did not have a material impact on the Company’s Condensed Consolidated
Financial Statements.
  In April
2009, the FASB issued clarifying guidance on determining when the trading volume
and activity for an asset or liability has significantly decreased, which may
indicate an inactive market, and on measuring the fair value of an asset or
liability in inactive markets. The Company adopted this new accounting standard
effective April 1, 2009. Adoption of the new guidance did not have a material
impact on the Company’s Condensed Consolidated Financial
Statements.
  20


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


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




In May
2009, the FASB issued new guidance that incorporates into authoritative
accounting literature certain guidance that already existed within generally
accepted auditing standards relative to the reporting of subsequent events, with
the requirements concerning recognition and disclosure of subsequent events
remaining essentially unchanged. This guidance addresses events which occur
after the balance sheet date but before the issuance of financial statements.
Under the new guidance, as under previous practice, an entity must record the
effects of subsequent events that provide evidence about conditions that existed
at the balance sheet date and must disclose but not record the effects of
subsequent events which provide evidence about conditions that did not exist at
the balance sheet date. This standard added an additional required disclosure
relative to the date through which subsequent events have been evaluated and
whether that is the date on which the financial statements were issued. The
Company adopted this standard effective beginning in April 1, 2009. In February
2010, the FASB issued an Accounting Standards Update (ASU) clarifying the
application of this guidance to entities, specifying that if an entity is an SEC
filer then it should evaluate subsequent events through the date the financial
statements are available to be issued. Additionally the ASU incorporates a
definition of an SEC filer and states that an SEC filer is not required to
disclose the date through which subsequent events have been evaluated. The
Company has applied this update to its financial statements for the period ended
March 31, 2010.




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.




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.




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 March 31, 2010 and December 31, 2009, were as follows:


21




Gramercy
Capital Corp.




Notes
To Condensed Consolidated Financial Statements


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


March
31, 2010




Allocation by
                                        
                                        
                                        Fixed Rate:
                                        
                                        
                                        Floating Rate:
                                          Average Spread overCarrying Value (1)
                                        
                                        Investment Type
                                        
                                        
                                        Average Yield
                                        
                                        
                                        LIBOR (2)2010
                                        
                                        2009
                                        
                                        2010
                                        
                                        
                                        2009
                                        
                                        
                                        2010
                                        
                                        
                                        2009
                                        
                                        
                                        2010
                                        
                                        2009Whole
      loans floating rate
                                        
                                        $
                                        721,406
                                        
                                        $
                                        830,617
                                        
                                        58.4
                                        %
                                        
                                        60.2
                                        %
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        
                                        358
      bps
                                        
                                        454
      bpsWhole
      loans, fixed rate
                                        
                                        
                                        122,756
                                        
                                        
                                        122,846
                                        
                                        9.9
                                        %
                                        
                                        8.9
                                        %
                                        
                                        6.56
                                        %
                                        
                                        6.89
                                        %
                                        
                                        —
                                        
                                        —Subordinate
      interests in whole loans, floating rate
                                        
                                        
                                        76,035
                                        
                                        
                                        76,331
                                        
                                        6.2
                                        %
                                        
                                        5.5
                                        %
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        
                                        293
      bps
                                        
                                        246
      bpsSubordinate
      interests in whole loans, fixed rate
                                        
                                        
                                        41,519
                                        
                                        
                                        44,988
                                        
                                        3.4
                                        %
                                        
                                        3.2
                                        %
                                        
                                        6.12
                                        %
                                        
                                        7.46
                                        %
                                        
                                        —
                                        
                                        —Mezzanine
      loans, floating rate
                                        
                                        
                                        154,374
                                        
                                        
                                        190,668
                                        
                                        12.5
                                        %
                                        
                                        13.7
                                        %
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        
                                        540
      bps
                                        
                                        577
      bpsMezzanine
      loans, fixed rate
                                        
                                        
                                        86,539
                                        
                                        
                                        85,898
                                        
                                        7.0
                                        %
                                        
                                        6.2
                                        %
                                        
                                        10.69
                                        %
                                        
                                        8.08
                                        %
                                        
                                        —
                                        
                                        —Preferred
      equity, floating rate
                                        
                                        
                                        28,259
                                        
                                        
                                        28,228
                                        
                                        2.3
                                        %
                                        
                                        2.0
                                        %
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        
                                        326
      bps
                                        
                                        1,064
      bpsPreferred
      equity, fixed rate
                                        
                                        
                                        4,261
                                        
                                        
                                        4,256
                                        
                                        0.3
                                        %
                                        
                                        0.3
                                        %
                                        
                                        7.21
                                        %
                                        
                                        7.23
                                        %
                                        
                                        —
                                        
                                        —Subtotal/
      Weighted average
                                        
                                        
                                        1,235,149
                                        
                                        
                                        1,383,832
                                        
                                        100.0
                                        %
                                        
                                        100.0
                                        %
                                        
                                        7.90
                                        %
                                        
                                        7.39
                                        %
                                        
                                        381
      bps
                                        
                                        476
      bpsCMBS,
      floating rate
                                        
                                        
                                        56,392
                                        
                                        
                                        67,876
                                        
                                        5.7
                                        %
                                        
                                        6.9
                                        %
                                        
                                        —
                                        
                                        
                                        —
                                        
                                        
                                        243
      bps
                                        
                                        254
      bpsCMBS,
      fixed rate
                                        
                                        
                                        936,507
                                        
                                        
                                        916,833
                                        
                                        94.3
                                        %
                                        
                                        93.1
                                        %
                                        
                                        8.02
                                        %
                                        
                                        7.84
                                        %
                                        
                                        —
                                        
                                        —Subtotal/
      Weighted average
                                        
                                        
                                        992,899
                                        
                                        
                                        984,709
                                        
                                        100.0
                                        %
                                        
                                        100.0
                                        %
                                        
                                        8.02
                                        %
                                        
                                        7.84
                                        %
                                        
                                        243
      bps
                                        
                                        254
      bpsTotal
                                        
                                        $
                                        2,228,048
                                        
                                        $
                                        2,368,541
                                        
                                        100.0
                                        %
                                        
                                        100.0
                                        %
                                        
                                        7.99
                                        %
                                        
                                        7.74
                                        %
                                        
                                        373
      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 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.




As of
March 31, 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
      (April 1 - December 31)
                    
                    
                    15
                    (1)
                    
                    $
                    364,516
                    
                    
                    
                    29.5
                    %2011
                    
                    
                    22
                    
                    
                    
                    475,316
                    
                    
                    
                    38.5
                    %2012
                    
                    
                    6
                    
                    
                    
                    165,401
                    
                    
                    
                    13.4
                    %2013
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    %2014
                    
                    
                    2
                    
                    
                    
                    58,116
                    
                    
                    
                    4.7
                    %Thereafter
                    
                    
                    9
                    
                    
                    
                    171,800
                    
                    
                    
                    13.9
                    %Total
                    
                    
                    54
                    
                    
                    $
                    1,235,149
                    
                    
                    
                    100.0
                    %Weighted
      average maturity
                    
                    
                    
                    
                    
                    1.9
      years
                    (2)
  22


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


(1)
            Of the loans maturing in 2010, 13
      investments with a carrying value of $290,705 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 months ended March 31, 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
                      March 31, 2010
                    
                    
                    Three months ended
                      March 31, 2009Investment
                      Income
                    
                    
                    % of
                      Total
                    
                    
                    Investment
                      Income
                    
                    
                    % of
                      TotalWhole
      loans
                    
                    $
                    16,856
                    
                    
                    
                    38.1
                    %
                    
                    $
                    23,026
                    
                    
                    
                    43.5
                    %Subordinate
      interests in whole loans
                    
                    
                    693
                    
                    
                    
                    1.6
                    %
                    
                    
                    941
                    
                    
                    
                    1.8
                    %Mezzanine
      loans
                    
                    
                    7,061
                    
                    
                    
                    16.0
                    %
                    
                    
                    13,858
                    
                    
                    
                    26.2
                    %Preferred
      equity
                    
                    
                    671
                    
                    
                    
                    1.5
                    %
                    
                    
                    332
                    
                    
                    
                    0.6
                    %CMBS
                    
                    
                    18,970
                    
                    
                    
                    42.8
                    %
                    
                    
                    14,777
                    
                    
                    
                    27.9
                    %Total
                    
                    $
                    44,251
                    
                    
                    
                    100.0
                    %
                    
                    $
                    52,934
                    
                    
                    
                    100.0
                    %




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




March 31, 2010
                    
                    
                    December 31, 2009Region
                    
                    Carrying
                      Value
                    
                    
                    % ofTotal
                    
                    
                    Carrying
                      Value
                    
                    
                    % ofTotalNortheast
                    
                    $
                    565,031
                    
                    
                    
                    45.7
                    %
                    
                    $
                    638,937
                    
                    
                    
                    46.2
                    %West
                    
                    
                    311,637
                    
                    
                    
                    25.2
                    %
                    
                    
                    347,531
                    
                    
                    
                    25.1
                    %South
                    
                    
                    123,747
                    
                    
                    
                    10.0
                    %
                    
                    
                    132,961
                    
                    
                    
                    9.6
                    %Mid-Atlantic
                    
                    
                    127,913
                    
                    
                    
                    10.4
                    %
                    
                    
                    127,872
                    
                    
                    
                    9.2
                    %Southwest
                    
                    
                    45,820
                    
                    
                    
                    3.7
                    %
                    
                    
                    71,960
                    
                    
                    
                    5.2
                    %Various
      (1)
                    
                    
                    38,941
                    
                    
                    
                    3.2
                    %
                    
                    
                    42,406
                    
                    
                    
                    3.1
                    %Midwest
                    
                    
                    22,060
                    
                    
                    
                    1.8
                    %
                    
                    
                    22,165
                    
                    
                    
                    1.6
                    %Total
                    
                    $
                    1,235,149
                    
                    
                    
                    100.0
                    %
                    
                    $
                    1,383,832
                    
                    
                    
                    100.0
                    %




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




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




March 31, 2010
                    
                    
                    December 31, 2009Property Type
                    
                    Carrying
                      Value
                    
                    
                    % ofTotal
                    
                    
                    Carrying
                      Value
                    
                    
                    % ofTotalOffice
                    
                    $
                    616,031
                    
                    
                    
                    49.9
                    %
                    
                    $
                    644,720
                    
                    
                    
                    46.6
                    %Hotel
                    
                    
                    190,474
                    
                    
                    
                    15.4
                    %
                    
                    
                    220,385
                    
                    
                    
                    15.9
                    %Land
      - Commercial
                    
                    
                    77,133
                    
                    
                    
                    6.2
                    %
                    
                    
                    88,975
                    
                    
                    
                    6.4
                    %Multifamily
                    
                    
                    148,575
                    
                    
                    
                    12.0
                    %
                    
                    
                    167,300
                    
                    
                    
                    12.1
                    %Retail
                    
                    
                    107,211
                    
                    
                    
                    8.7
                    %
                    
                    
                    107,115
                    
                    
                    
                    7.7
                    %Condo
                    
                    
                    17,295
                    
                    
                    
                    1.4
                    %
                    
                    
                    53,475
                    
                    
                    
                    3.9
                    %Industrial
                    
                    
                    24,223
                    
                    
                    
                    2.0
                    %
                    
                    
                    24,203
                    
                    
                    
                    1.8
                    %Land
      - Residential
                    
                    
                    -
                    
                    
                    
                    0.0
                    %
                    
                    
                    17,196
                    
                    
                    
                    1.2
                    %Mixed-Use
                    
                    
                    48,082
                    
                    
                    
                    3.9
                    %
                    
                    
                    50,842
                    
                    
                    
                    3.7
                    %Other
      (1)
                    
                    
                    6,125
                    
                    
                    
                    0.5
                    %
                    
                    
                    9,621
                    
                    
                    
                    0.7
                    %Total
                    
                    $
                    1,235,149
                    
                    
                    
                    100.0
                    %
                    
                    $
                    1,383,832
                    
                    
                    
                    100.0
                    %


23


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


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




The
Company recorded provisions for loan losses of $41,160 and $52,771 for the three
months ended March 31, 2010 and 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 investment and collateral quality by individual asset or category
of asset.




For the
three months ended March 31, 2010, the Company incurred charge-offs of $54,310
related to realized losses on four loan investments. During the year ended
December 31, 2009, the Company incurred charge-offs totaling $188,574 related to
16 loan investments.




The interest income recognized from impaired loans during the
time within the financial statement period that they were impaired was $12,568
and $9,691 for the three months ended March 31, 2010 and 2009,
respectively.




Changes
in the reserve for loan losses were as follows:




Reserve
      for loan losses, December 31, 2008
                    
                    $
                    88,992Additional
      provision for loan losses
                    
                    
                    517,784Charge-offs
                    
                    
                    (188,574
                    )Reserve
      for loan losses, December 31, 2009
                    
                    
                    418,202Additional
      provision for loan losses
                    
                    
                    41,160Charge-offs
                    
                    
                    (54,310
                    )Reserve
      for loan losses, March 31, 2010
                    
                    $
                    405,052




The
following is a summary of the Company’s CMBS investments at March 31,
2010:




Description
                  
                  Number of
                    Securities
                  
                  
                  Face Value
                  
                  
                  Book Value
                  
                  
                  Gross
                    Unrealized
                    Gain
                  
                  
                  Gross
                    Unrealized
                    Loss
                  
                  
                  Fair ValueHeld
      to maturity:Floating
      rate CMBS
                  
                  
                  9
                  
                  
                  $
                  81,664
                  
                  
                  $
                  56,392
                  
                  
                  $
                  164
                  
                  
                  $
                  (10,488
                  )
                  
                  $
                  46,067Fixed
      rate CMBS
                  
                  
                  95
                  
                  
                  
                  1,132,751
                  
                  
                  
                  936,507
                  
                  
                  
                  44,227
                  
                  
                  
                  (376,375
                  )
                  
                  
                  604,359Total
                  
                  
                  104
                  
                  
                  $
                  1,214,415
                  
                  
                  $
                  992,899
                  
                  
                  $
                  44,391
                  
                  
                  $
                  (386,863
                  )
                  
                  $
                  650,426




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




As of March 31,
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
                      Fair
      ValueLess
      than 1 year
                    
                    
                    1
                    
                    
                    $
                    13,800
                    
                    
                    
                    1.4
                    %
                    
                    $
                    13,300
                    
                    
                    
                    2.0
                    %1 -
      5 years
                    
                    
                    6
                    
                    
                    
                    81,384
                    
                    
                    
                    8.2
                    %
                    
                    
                    60,971
                    
                    
                    
                    9.4
                    %6 -
      10 years
                    
                    
                    95
                    
                    
                    
                    891,814
                    
                    
                    
                    89.8
                    %
                    
                    
                    575,939
                    
                    
                    
                    88.6
                    %Thereafter
                    
                    
                    2
                    
                    
                    
                    5,901
                    
                    
                    
                    0.6
                    %
                    
                    
                    216
                    
                    
                    
                    —
                    %Total
                    
                    
                    104
                    
                    
                    $
                    992,899
                    
                    
                    
                    100.0
                    %
                    
                    $
                    650,426
                    
                    
                    
                    100.0
                    %




24




Gramercy
Capital Corp.




Notes
To Condensed Consolidated Financial Statements


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


March
31, 2010




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




March 31, 2010
                    
                    
                    December 31, 2009Book Value
                    
                    
                    Percentage
                    
                    
                    Book Value
                    
                    
                    PercentageAAA
                    
                    $
                    73,852
                    
                    
                    
                    7.4
                    %
                    
                    $
                    111,902
                    
                    
                    
                    11.4
                    %AA+
                    
                    
                    13,800
                    
                    
                    
                    1.4
                    %
                    
                    
                    13,701
                    
                    
                    
                    1.4
                    %AA
                    
                    
                    139,855
                    
                    
                    
                    14.1
                    %
                    
                    
                    139,449
                    
                    
                    
                    14.2
                    %AA-
                    
                    
                    26,363
                    
                    
                    
                    2.7
                    %
                    
                    
                    25,967
                    
                    
                    
                    2.6
                    %A+
                    
                    
                    104,352
                    
                    
                    
                    10.5
                    %
                    
                    
                    84,214
                    
                    
                    
                    8.6
                    %A
                    
                    
                    180,620
                    
                    
                    
                    18.2
                    %
                    
                    
                    219,563
                    
                    
                    
                    22.4
                    %A-
                    
                    
                    29,457
                    
                    
                    
                    3.0
                    %
                    
                    
                    29,441
                    
                    
                    
                    3.0
                    %BBB
                    
                    
                    146,469
                    
                    
                    
                    14.7
                    %
                    
                    
                    79,231
                    
                    
                    
                    8.0
                    %BBB-
                    
                    
                    135,235
                    
                    
                    
                    13.6
                    %
                    
                    
                    93,626
                    
                    
                    
                    9.5
                    %BB+
                    
                    
                    55,599
                    
                    
                    
                    5.6
                    %
                    
                    
                    55,606
                    
                    
                    
                    5.6
                    %BB
                    
                    
                    65,224
                    
                    
                    
                    6.5
                    %
                    
                    
                    100,631
                    
                    
                    
                    10.2
                    %B
                    
                    
                    3,690
                    
                    
                    
                    0.4
                    %
                    
                    
                    1,477
                    
                    
                    
                    0.1
                    %B-
                    
                    
                    818
                    
                    
                    
                    0.1
                    %
                    
                    
                    932
                    
                    
                    
                    0.1
                    %CCC
                    
                    
                    1,207
                    
                    
                    
                    0.1
                    %
                    
                    
                    12,164
                    
                    
                    
                    1.2
                    %CCC-
                    
                    
                    10,457
                    
                    
                    
                    1.1
                    %
                    
                    
                    6,374
                    
                    
                    
                    0.6
                    %C
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,644
                    
                    
                    
                    0.5
                    %D
                    
                    
                    5,901
                    
                    
                    
                    0.6
                    %
                    
                    
                    5,787
                    
                    
                    
                    0.6
                    %Not
      rated
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    992,899
                    
                    
                    
                    100.0
                    %
                    
                    $
                    984,709
                    
                    
                    
                    100.0
                    %




The
Company evaluates CMBS investments to determine if there has been an
other-than-temporary impairment.  As of March 31, 2010 and December
31, 2009, all of the Company’s CMBS investments with an unrealized loss (the
carrying value is in excess of the market value) have been in a continuous loss
position for 12 months or longer. 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 six CMBS investments. Therefore, the Company
recognized an other-than-temporary impairment of $12,326 during the three months
ended March 31, 2010 that was recorded as an impairment in the Company’s
Condensed Consolidated Statement of Operations.  No
other-than-temporary impairments were recognized during the three months ended
March 31, 2009. 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 theCompany 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 six bonds noted above, it believes that the book
value of its CMBS investments is recoverable at March 31, 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 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.


25


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 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 $1,381 as of March 31, 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




GKK
Manager LLC




On April
24, 2009, in connection with the Company’s internalization of the Manager, the
Company and the Operating Partnership entered into a securities transfer
agreement with SL Green OP, GKK Manager Member Corp., or 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 contained standard
representations, warranties, covenants and indemnities.




5. Dispositions and Assets
Held for Sale




During
the three months ended March 31, 2010, the Company sold seven properties and one
sub-parcel, for net sales proceeds of $16,272. The Company sold 25 properties,
for net sale proceeds of $39,707 during the three months ended March 31, 2009.
The sales transactions resulted in gains totaling $1,041 and $573 for the three
months ended March 31, 2010 and 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.




The
Company classified two properties as held for sale as of both March 31, 2010 and
December 31, 2009.  The following table summarizes information for
these properties:




March 31,
                      2010
                    
                    
                    December 31,
                      2009Assets
      held for sale:Real
      estate investments, at cost:Land
                    
                    $
                    292
                    
                    
                    $
                    279Building
      and improvement
                    
                    
                    306
                    
                    
                    
                    565Total
      real estate investments, at cost
                    
                    
                    598
                    
                    
                    
                    844Less:  accumulated
      depreciation
                    
                    
                    (6
                    )
                    
                    
                    (6
                    )Real
      estate investments held for sale, net
                    
                    
                    592
                    
                    
                    
                    838Accrued
      interest and receivables
                    
                    
                    1
                    
                    
                    
                    (35
                    )Acquired
      lease asets, net of accumulated amortization
                    
                    
                    41
                    
                    
                    
                    42Other
      Assets
                    
                    
                    7
                    
                    
                    
                    (4
                    )Total
      assets held for sale
                    
                    
                    641
                    
                    
                    
                    841Liabilities
      related to assets held for sale:Accrued
      expenses
                    
                    
                    36
                    
                    
                    
                    55Deferred
      revenue
                    
                    
                    170
                    
                    
                    
                    125Below
      market lease liabilities, net of accumulated amortization
                    
                    
                    57
                    
                    
                    
                    58Total
      liabilities related to assets held for sale:
                    
                    
                    263
                    
                    
                    
                    238Net
      assets held for sale
                    
                    $
                    378
                    
                    
                    $
                    603




26


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


The following operating
results of the assets held for sale as of March 31, 2010, and the assets sold
during the three months ended March 31, 2010, and 2009 are included in
discontinued operations for all periods presented:




Three months ended March 31,2010
                    
                    
                    2009Operating
      Results:Revenues
                    
                    $
                    191
                    
                    
                    $
                    5,997Operating
      expenses
                    
                    
                    (494
                    )
                    
                    
                    (6,160
                    )Interest
      expense
                    
                    
                    -
                    
                    
                    
                    (639
                    )Depreciation
      and amortization
                    
                    
                    (10
                    )
                    
                    
                    (753
                    )Equity
      in net income from unconsolidated joint venture
                    
                    
                    -
                    
                    
                    
                    (364
                    )Net loss
      from operations
                    
                    
                    (313
                    )
                    
                    
                    (1,919
                    )Net
      gains from disposals
                    
                    
                    1,041
                    
                    
                    
                    573Net
      income (loss) from discontinued operations
                    
                    $
                    728
                    
                    
                    $
                    (1,346
                    )





Subsequent
to March 31, 2010, the Company entered into agreements of sale on two properties
totaling approximately $1,730 on properties with a total carrying value of
$1,531 as of March 31, 2010, and net income of $21 for the three months ended
March 31, 2010.




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




6.
Investments in Unconsolidated Joint Ventures




200
Franklin Square Drive, Somerset, New Jersey




The
Company owns a 25% interest in an equity owner and a fee interest in 200
Franklin Square Drive, a 200,000 square foot building located in Somerset, New
Jersey which is 100% net leased to Philips Holdings, USA Inc, a wholly-owned
subsidiary of Royal Phillips Electronics through December 2021. The acquisition
was financed with a $41,000 ten-year fixed rate mortgage loan. As of March 31,
2010 and December 31, 2009, the investment has a carrying value of $935 and
$997, respectively. The Company recorded its pro rata share of net income of the
joint venture of $30 and $30 for the three months ended March 31, 2010, and
2009, respectively.




101
S. Marengo Avenue, Pasadena, California




In
November 2005, the Company closed on the purchase of a 50% interest in an office
building in Pasadena, CA. The Company also acquired an interest in certain
related assets as part of the transaction. The 345,000 square foot office
property, which was net leased to Bank of America through September 2015,
assuming the exercise of options, and related collateral were acquired for
$52,000 plus closing costs, using a non-recourse, $50,000, ten-year fixed-rate
first mortgage loan. The Company sold its 50% interest in April 2009 for a gain
of $6,317. For the three months ended March 31, 2009, the Company recorded its
pro rata share of net losses of the joint ventures of $364, within discontinued
operations.




2
Herald Square, New York, New York




In April
2007, the Company purchased for $103,200 a 45% Tenant-In-Common, or TIC,
interest to acquire the fee interest in a parcel of land located at 2 Herald
Square, located along 34th Street in New York, New York. The acquisition was
financed with a $86,063 ten-year fixed rate mortgage loan. The property is
subject to a long-term ground lease with an unaffiliated third party for a term
of 70 years. The remaining TIC interest is owned by a wholly-owned
subsidiary of SL Green. The TIC interests are pari-passu. As of March 31, 2010
and December 31, 2009, the investment had a carrying value of $32,909 and
$31,567, respectively. For the three months ended March 31, 2010 and 2009, the
Company recorded its pro rata share of net income of $1,263 and $1,263,
respectively.







885 Third Avenue, New York, New York




In July
2007, the Company purchased for $144,240 an investment in a 45% TIC interest to
acquire a 79% fee interest and 21% leasehold interest in the fee position in a
parcel of land located at 885 Third Avenue, on which the Lipstick Building is
situated. The transaction was financed with a $120,443 ten-year fixed-rate
mortgage loan. The property is subject to a 70-year leasehold ground lease with
an unaffiliated third party. The remaining TIC interest is owned by a
wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. As of
March 31, 2010 and December 31, 2009, the investment had a carrying value of
$47,217  and $45,659, respectively. The Company recorded its pro rata
share of net income of $1,523 and $1,519 for the three months ended March 31,
2010 and 2009, respectively.


27




Gramercy
Capital Corp.




Notes
To Condensed Consolidated Financial Statements


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


March
31, 2010




Citizens
Portfolio




The
Company, through its acquisition of American Financial on April 1, 2008,
obtained an interest in a joint venture with UBS. The joint venture, as of March
31, 2010, owns and manages 54 bank branches totaling approximately 251,000
square feet. These properties are subject to a mortgage note with a balance of
$67,078 as of March 31, 2010.   These branches are fully
occupied, on a triple-net basis, by Citizens Bank, N.A. and Charter One Bank,
N.A., two bank subsidiaries of Citizens Financial. As of March 31, 2010 and
December 31, 2009, the investment had a carrying value of $5,729 and $6,386
respectively. The Company recorded its pro rata share of net loss of $657 and
$641 for the three months ended March 31, 2010 and 2009,
respectively.




Whiteface,
Lake Placid, New York




In April
2008, the Company acquired via a deed-in-lieu of foreclosure, a 40% interest in
the Whiteface Lodge, a hotel and condominium located in Lake Placid, New
York.  As of March 31, 2010 and December 31, 2009, the investment had
a carrying value of $22,777 and $23,820, respectively.  The Company
recorded its pro rata share of net loss of $1,043 and net income of $41 for the
three months ended March 31, 2010 and 2009, respectively.




7.
Collateralized Debt Obligations




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




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


28


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


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. 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 over collateralization 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 the April 2010
distribution date, the Company’s 2006 CDO was in compliance with its interest
coverage and asset over collateralization 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 April 2010 distribution date
and its 2007 CDO failed its overcollaterization test at the November 2009 and
February 2010 distribution dates.




During
the three months ended March 31, 2010, the Company repurchased, at a discount,
$19,000 of notes previously issued by one of the Company’s three CDOs. The
Company recorded a net gain on the early extinguishment of debt of $7,740 for
the three months ended March 31, 2010.




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.


29


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


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 repurchase agreement and the amended
guaranty were eliminated and certain other provisions of the amended and
restated repurchase agreement and the amended guaranty were amended or deleted,
including, among other things, the elimination of the existing recourse
liability and a relaxation of certain affirmative and negative covenants. On
October 27, 2009, the Company repaid the borrowings in full and terminated the
Goldman repurchase facility.




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




Unsecured Credit Facility




In May
2006, the Company closed on a $100,000 senior unsecured revolving credit
facility with KeyBank National Association, or KeyBank, with an initial term of
three years and a one-year extension option. In June 2007, the facility was
increased to $175,000. The facility was supported by a negative pledge of an
identified asset base. In March 2009, the Company entered into an amendment and
compromise agreement with KeyBank to settle and satisfy the loan obligations at
a discount for a current cash payment of $45,000, and a future cash payment in a
maximum amount of up to $15,000 from 50% of all payments from distributions
after May 2009 from certain junior tranches and preferred classes of securities
in the Company’s CDOs. The remaining balance of $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 net gain on extinguishment of debt of $107,229 as a result of
to this agreement.




Mortgage
and Mezzanine Loans




Certain
real estate assets are subject to mortgage and mezzanine liens. As of March 31,
2010, 962 (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 $2,290,231. The
Company’s mortgage notes payable typically require that specified loan-to-value
and debt service coverage ratios be maintained with respect to the financed
properties before the Company can exercise certain rights under the loan
agreements relating to such properties. The Company was in compliance with these
ratios as of March 31, 2010 and December 31, 2009. If the specified criteria are
not satisfied, in addition to other conditions that the Company may have to
observe, the Company’s ability to release properties from the financing may be
restricted and the lender may be able to “trap” portfolio cash flow until the
required ratios are met on an ongoing basis.




Certain
of the Company’s mortgage notes payable related to assets held for sale contain
provisions that require the Company to compensate the lender for the early
repayment of the loan. 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 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 $253 and $253 and borrowings of $241,324 and
$241,324 as of March 31, 2010 and December 31, 2009,
respectively.


30


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 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.




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 $380 and $418
and borrowings of $234,851 and $234,851 as of March 31, 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 March 31, 2010 and December 31, 2009, 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
$1,453 and $1,455 and borrowings of $552,989 and $553,522 as of March 31, 2010
and December 31, 2009, respectively.




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 SLG of a comprehensive long-term
business plan and restructuring proposal addressing repayment of the Junior
Mezzanine Loan.


31


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


The
following is a summary of first mortgage loans as of March 31,
2010:





Encumbered
                                    Properties
                                  
                                  
                                  Balance
                                  
                                  Interest
      Rate
                                  
                                  Maturity
      DateFixed-rate
      mortgages
                                  
                                  
                                  474
                                  
                                  
                                  $
                                  1,246,211
                                  (1)
                                  5.06%
      to 8.29%
                                  
                                  August
      2010 to September 2023Variable-rate
      mortgages
                                  
                                  
                                  239
                                  
                                  
                                  
                                  476,175
                                  
                                  1.88%
      to 6.23%
                                  
                                  March
      2011 to April 2013Total
      mortgage notes payable
                                  
                                  
                                  713
                                  
                                  
                                  
                                  1,722,386Above-/below-market
      interest
                                  
                                  
                                  
                                  
                                  
                                  
                                  14,856Balance,
      March 31, 2010
                                  
                                  
                                  713
                                  
                                  
                                  $
                                  1,737,242





(1)
              Includes $87,477 of debt that is
      collateralized by $96,168 of pledged treasury securities, net of discounts
      and premiums and $4,379 of debt that relates to the proportionate share of
      the 11% minority interest holder in Holdings as of March 31,
      2010.




Combined
aggregate principal maturities of the Company’s consolidated CDOs, junior
subordinated notes and mortgage loans (including the Goldman Mortgage, Senior
Mezzanine Loan and Junior Mezzanine Loan) as of March 31, 2010 are as
follows:




CDOs
                  
                  
                  Junior
                    Subordinated
                    Notes
                  
                  
                  Mortgage
      and
                    Mezzanine
                    Loans
                  
                  
                  Interest
                    Payments
                  
                  
                  Total2010
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  32,126
                  
                  
                  $
                  139,425
                  
                  
                  $
                  171,5512011
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  819,533
                  
                  
                  
                  181,650
                  
                  
                  
                  1,001,1832012
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  80,425
                  
                  
                  
                  170,510
                  
                  
                  
                  250,9352013
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  617,943
                  
                  
                  
                  149,671
                  
                  
                  
                  767,6142014
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,566
                  
                  
                  
                  119,674
                  
                  
                  
                  132,240Thereafter
                  
                  
                  2,685,917
                  
                  
                  
                  52,500
                  
                  
                  
                  712,782
                  
                  
                  
                  381,475
                  
                  
                  
                  3,832,674Above-
      / Below-Market Interest
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  14,856
                  
                  
                  
                  -
                  
                  
                  
                  14,856Total
                  
                  $
                  2,685,917
                  
                  
                  $
                  52,500
                  
                  
                  $
                  2,290,231
                  
                  
                  $
                  1,142,405
                  
                  
                  $
                  6,171,053





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.


32




Gramercy
Capital Corp.




Notes
To Condensed Consolidated Financial Statements


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


March
31, 2010




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 onJanuary 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. On
October 15, 2009, a subsidiary of the Operating Partnership exchanged $97,500 of
the Junior Notes for $97,533 face amount of bonds issued by the Company’s CDOs
that the Company had repurchased in the open market. Certain indenture covenants
which restrict the Company from declaring or paying dividends and certain other
corporate activities during the 2009 calendar year have been eliminated for the
remaining $52,500 of the Junior Notes.




9.
Leasing Agreements




The
Company’s properties are leased and subleased to tenants under operating leases
with expiration dates extending through the year 2027. These leases generally
contain rent increases and renewal options.




Future
minimum rental payments under non-cancelable leases, excluding reimbursements
for operating expenses, as of March 31, 2010 are as follows:




Operating
      Leases2010 
      (April 1 - December 31)
                    
                    $
                    202,4522011
                    
                    
                    208,8122012
                    
                    
                    193,8562013
                    
                    
                    181,9422014
                    
                    
                    173,201Thereafter
                    
                    
                    1,126,072Total
      minimum lease payments
                    
                    $
                    2,086,335




10.
Operating Partnership Agreement/Manager




At March
31, 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.




11.
Related Party Transactions




On April
24, 2009, in connection with the internalization, the Company and the Operating
Partnership entered into a securities transfer agreement with SL Green OP,
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.


33


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


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.




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 $5,672 for the three months ended March 31, 2009.




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 months ended March 31, 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 months
ended March 31, 2010 and 2009, the Company incurred expense of $25 and $0,
pursuant to the special servicing arrangement.


34


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 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 7,300 square feet and
carries a term of 10 years with rents of approximately $249 per annum for year
one rising to $315 per annum in year ten. In May and June 2009, the Company
amended its lease with SLG Graybar Sublease LLC to increase the leased premises
by approximately 2,260 square feet. The additional premises is leased on a
co-terminus basis with the remainder of 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 months ended March 31, 2010 and 2009, the
Company paid $76 and $100 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 March 31,
2010 and December 31, 2009, the loan has a book value of $39,207 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 670,000 square feet
which was 100% net leased to an entity whose obligations were guaranteed by
Sanofi-Aventis Group through April 2023. The transaction was valued at $236,000
and was financed with a $190,000, 10-year, fixed-rate first mortgage loan. In
January 2009, the Company and SL Green sold 100% of the respective interests in
55 Corporate.




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 March 31,
2010 and December 31, 2009, the Company’s interest in the whole loan had a
carrying value of $62,740 and $63,894, respectively. The investment in the
mezzanine loan was repaid in full in September 2007.




In April
2007, the Company purchased for $103,200 a 45% TIC interest to acquire the fee
interest in a parcel of land located at 2 Herald Square, located along 34 th 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 March 31, 2010 and December 31, 2009, the investment had a
carrying value of $32,909 and $31,557, respectively. The Company recorded its
pro rata share of net income of $1,263 for the three months ended March 31, 2010
and 2009 respectively.




In July
2007, the Company purchased for $144,240 an investment in a 45% TIC interest to
acquire a 79% fee interest and 21% leasehold interest in the fee position in a
parcel of land located at 885 Third Avenue, on which is situated The Lipstick
Building. The transaction was financed with a $120,443 10-year fixed rate
mortgage loan. The property is subject to a 70-year leasehold ground lease with
an unaffiliated third party. The remaining TIC interest is owned by a
wholly-owned subsidiary of SL Green. The TIC interests are pari passu. As of
March 31, 2010 and December 31, 2009, the investment had a carrying value of
$47,217 and $45,695, respectively. The Company recorded its pro rata share of
net income of $1,523 and $1,519 for the three months ended March 31, 2010 and
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 a buy-sell
provision that can be triggered by the Company in the event it and SL Green are
unable to agree upon a major decision that would materially impair the value of
the assets. Such major decisions involve the sale or refinancing of the assets,
any extensions or modifications to the leases with the tenant therein or any
material capital expenditures.


35




Gramercy
Capital Corp.




Notes
To Condensed Consolidated Financial Statements


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


March
31, 2010




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 March 31, 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 March 31, 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 March 31,
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 March 31, 2010 and December
31, 2009, the loan has a book value of $28,259 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 $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 March 31, 2010 and 2009 the loan
has a book value of $9,889 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 March 31, 2010 and 2009, the loan has a book value of $30,381 and $29,925,
respectively.




12.
Deferred Costs




Deferred
costs at March 31, 2010 and December 31, 2009 consisted of the
following:





2010
                  
                  
                  2009Deferred
      Financing Costs
                  
                  $
                  75,471
                  
                  
                  $
                  69,235Deferred
      Acquisition Costs
                  
                  
                  555
                  
                  
                  
                  853Deferred
      Leasing Costs
                  
                  
                  2,812
                  
                  
                  
                  2,67478,838
                  
                  
                  
                  72,762Accumulated
      Amortization
                  
                  
                  (44,579
                  )
                  
                  
                  (40,721
                  )$
                  34,259
                  
                  
                  $
                  32,041




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




Deferred
acquisition costs consist of fees and direct costs incurred to originate the
Company’s investments and are amortized using the effective yield method over
the related term of the investment. Straight-line expense approximates the
effective interest method.




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




36


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


13.
Fair Value of Financial Instruments




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




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




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 March 31, 2010 and
December 31, 2009:




March
      31, 2010
                  
                  
                  December
      31, 2009Carrying
      Value
                  
                  
                  Fair
      Value
                  
                  
                  Carrying
      Value
                  
                  
                  Fair
      ValueFinancial
      assets:Government
      securities
                  
                  $
                  96,168
                  
                  
                  $
                  98,276
                  
                  
                  $
                  97,286
                  
                  
                  $
                  98,832Lending
      investments
                  
                  $
                  1,235,149
                  
                  
                  $
                  1,182,300
                  
                  
                  $
                  1,383,832
                  
                  
                  $
                  1,313,127CMBS
                  
                  $
                  992,899
                  
                  
                  $
                  650,426
                  
                  
                  $
                  984,709
                  
                  
                  $
                  556,395Financial
      liabilities:Mortgage
      note payable and senior and junior mezzanine loans
                  
                  $
                  2,290,231
                  
                  
                  $
                  1,991,865
                  
                  
                  $
                  2,297,190
                  
                  
                  $
                  2,099,450Collateralized
      debt obligations
                  
                  $
                  2,685,917
                  
                  
                  $
                  1,093,819
                  
                  
                  $
                  2,705,534
                  
                  
                  $
                  1,097,485Junior
      subordinated debentures
                  
                  $
                  52,500
                  
                  
                  $
                  9,537
                  
                  
                  $
                  52,500
                  
                  
                  $
                  9,533




Disclosure
about fair value of financial instruments is based on pertinent information
available to the Company at March 31, 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 March 31, 2010 and
December 31, 2009 and current estimates of fair value may differ significantly
from the amounts presented herein.


37


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


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 March 31, 2010
                  
                  Total
                  
                  
                  Level
      I
                  
                  
                  Level
      II
                  
                  
                  Level
      IIIFinancial
      Assets:Derivative
      instruments
                  
                  $
                  1,556
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,556Financial
      Liabilities:Derivative
      instruments
                  
                  $
                  115,482
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  115,482





At December 31, 2009
                  
                  Total
                  
                  
                  Level
      I
                  
                  
                  Level
      II
                  
                  
                  Level
      IIIFinancial
      Liabilities:Derivative
      instruments
                  
                  $
                  88,786
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  88,786




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




Total
gains and losses from derivatives for the three months ended March 31, 2010 are
$132 and ($27,365), respectively and are included in Accumulated Other
Comprehensive Loss.  During the three months ended March 31, 2010, the
Company entered into four interest rate caps for a total purchase price of
$2,442.




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 three months ended March 31, 2010:




At March 31, 2010
                  
                  Total
                  
                  
                  Level
      I
                  
                  
                  Level
      II
                  
                  
                  Level
      IIIFinancial
      Assets:Lending
      investments
                  
                  $
                  538,322
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  538,322CMBS
                  
                  $
                  1,603
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,603





At December 31, 2009
                  
                  Total
                  
                  
                  Level
      I
                  
                  
                  Level
      II
                  
                  
                  Level
      IIIFinancial
      Assets:Lending
      investments
                  
                  $
                  536,445
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  536,445CMBS
                  
                  $
                  1,324
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,324




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.


38




Gramercy
Capital Corp.




Notes
To Condensed Consolidated Financial Statements


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


March
31, 2010




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




14.
Stockholders’ Equity




The
Company’s authorized capital stock consists of 125,000,000 shares, $0.001 par
value, of which the Company has authorized the issuance of up to 100,000,000
shares of common stock, $0.001 par value per share, and 25,000,000 shares of
preferred stock, par value $0.001 per share. As of March 31, 2010, 49,896,808
shares of common stock and 4,600,000 shares of preferred stock were issued and
outstanding.




Preferred
Stock




In April
2007, the Company issued 4,600,000 shares of its 8.125% Series A cumulative
redeemable preferred stock (including the underwriters’ over-allotment option of
600,000 shares) with a mandatory liquidation preference of $25.00 per share.
Holders of the Series A cumulative redeemable preferred shares are entitled to
annual dividends of $2.03125 per share on a quarterly basis and dividends are
cumulative, subject to certain provisions. On or after April 18, 2012, the
Company may at its option redeem the Series A cumulative redeemable preferred
stock at par for cash. Net proceeds (after deducting underwriting fees and
expenses) from the offering were approximately $111,205.  Beginning with
the fourth quarter of 2008, the Company’s board of directors elected not to pay
the quarterly Series A preferred stock dividends of $0.50781 per share.  As
of March 31, 2010 and December 31, 2009, the Company accrued Series A preferred
stock dividends of $14,043 and $11,707, respectively.




Equity
Incentive Plan




As part
of the Company’s initial public offering, the Company instituted its Equity
Incentive Plan. The Equity Incentive Plan, as amended, authorizes (i) the grant
of stock options that qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended, or ISOs, (ii) the grant of stock
options that do not qualify, or NQSOs, (iii) the grant of stock options in lieu
of cash directors’ fees and (iv) grants of shares of restricted and unrestricted
common stock. The exercise price of stock options will be determined by the
compensation committee, but may not be less than 100% of the fair market value
of the shares of common stock on the date of grant. At March 31, 2010, 1,132,970
shares of common stock were available for issuance under the Equity Incentive
Plan.




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




39


Gramercy
Capital Corp.
  Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


A summary
of the status of the Company’s stock options as of March 31, 2010 and December
31, 2009 are presented below:





March
      31, 2010
                    
                    
                    December
      31, 2009Options
                      Outstanding
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Options
                      Outstanding
                    
                    
                    Weighted
                      Average
                      Exercise
                      PriceBalance
      at beginning of period
                    
                    $
                    1,516,394
                    
                    
                    $
                    16.70
                    
                    
                    $
                    1,691,336
                    
                    
                    $
                    17.61Granted
                    
                    
                    25,000
                    
                    
                    
                    2.73
                    
                    
                    
                    30,000
                    
                    
                    
                    1.25Lapsed
      or cancelled
                    
                    
                    (72,761
                    )
                    
                    
                    22.93
                    
                    
                    
                    (204,942
                    )
                    
                    
                    21.92Balance
      at end of period
                    
                    $
                    1,468,633
                    
                    
                    $
                    16.15
                    
                    
                    $
                    1,516,394
                    
                    
                    $
                    16.70




For the
three months ended March 31, 2010, all options were granted with an exercise
price of $2.73. The remaining weighted average contractual life of the options
was approximately 6.5 years. Compensation expense of $21 and $14 was recorded
for the three months ended March 31, 2010 and 2009, respectively, related to the
issuance of stock options.




Through
March 31, 2010, 1,192,988 restricted shares had been issued under the Equity
Incentive Plan, of which 60% have vested. The vested and unvested shares are
currently entitled to receive distributions on common stock if declared by the
Company. Holders of restricted shares are prohibited from selling such shares
until they vest but are provided the ability to vote such shares beginning on
the date of grant. Compensation expense of $93 and $45 was recorded for the
three months ended March 31, 2010 and 2009, respectively, related to the
issuance of restricted shares.




Employee
Stock Purchase Plan




In
November 2007, the Company’s board of directors adopted, and the stockholders
subsequently approved in June 2008, the 2008 Employee Stock Purchase Plan, or
ESPP, to provide equity-based incentives to eligible employees. The ESPP is
intended to qualify as an “employee stock purchase plan” under Section 423 of
the Internal Revenue Code of 1986, as amended, and has been adopted by the board
to enable the Company’s eligible employees to purchase its shares of common
stock through payroll deductions. The ESPP became effective on January 1, 2008
with a maximum of 250,000 shares of the common stock available for issuance,
subject to adjustment upon a merger, reorganization, stock split or other
similar corporate change. The Company filed a registration statement on Form S-8
with the Securities and Exchange Commission with respect to the ESPP. The common
stock is offered for purchase through a series of successive offering periods.
Each offering period will be three months in duration and will begin on the
first day of each calendar quarter, with the first offering period having
commenced on January 1, 2008. The ESPP provides for eligible employees to
purchase the common stock at a purchase price equal to 85% of the lesser of (1)
the market value of the common stock on the first day of the offering period or
(2) the market value of the common stock on the last day of the offering
period.




Deferred Stock Compensation Plan for
Directors




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




As of
March 31, 2010, there were approximately 301,818 phantom stock units
outstanding, of which 289,818 units are vested.


40




Gramercy
Capital Corp.




Notes
To Condensed Consolidated Financial Statements


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


March
31, 2010




Earnings per Share




Earnings
per share for the three months ended March 31, 2010 and 2009 are computed as
follows:




For the three months ended
                                        March 31,2010
                                      
                                      
                                      2009Numerator – Income
      (loss)Net
      loss from continuing operations
                                      
                                      $
                                      (23,160
                                      )
                                      
                                      $
                                      (23,609
                                      )Net
      income (loss) from discontinued operations
                                      
                                      
                                      728
                                      
                                      
                                      
                                      (1,346
                                      )Net
      loss
                                      
                                      
                                      (22,432
                                      )
                                      
                                      
                                      (24,955
                                      )Preferred
      stock dividends
                                      
                                      
                                      (2,336
                                      )
                                      
                                      
                                      (2,336
                                      )Numerator
      for basic income per share – Net lossavailable
      to common stockholders:
                                      
                                      
                                      (24,768
                                      )
                                      
                                      
                                      (27,291
                                      )Effect
      of dilutive securities
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Diluted
      Earnings:Net
      loss available to common stockholders
                                      
                                      $
                                      (24,768
                                      )
                                      
                                      $
                                      (27,291
                                      )Denominator – Weighted
      Average shares:Denominator
      for basic income per share – weightedaverage
      shares
                                      
                                      
                                      49,896,278
                                      
                                      
                                      
                                      49,859,711Effect
      of dilutive securitiesStock
      based compensation plans
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Phantom
      stock units
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Diluted
      shares
                                      
                                      
                                      49,896,278
                                      
                                      
                                      
                                      49,859,711




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 months ended March 31, 2010 and
2009,  approximately 264,013 and 57,625 share options and 301,818 and
112,756 phantom share units, both computed under the treasury share method,
respectively, were excluded from the diluted loss per share computation as their
effect would have been anti-dilutive for both periods.




Accumulated
Other Comprehensive Income (Loss)




Accumulated
other comprehensive income (loss) for the three months ended March 31, 2010 and
year ended December 31, 2009 is comprised of the following:




March 31,2010
                        
                        
                        March 31,
                          2009Net unrealized
      (loss) gain on held-to-maturity securities
                        
                        $
                        (3,167
                        )
                        
                        $
                        (4,843
                        )Net
      realized and unrealized losses on interest rate swap and cap agreements
      accounted for as cash flow hedges
                        
                        
                        (119,267
                        )
                        
                        
                        (204,679
                        )Total
      accumulted and other comprehensive loss
                        
                        $
                        (122,434
                        )
                        
                        $
                        (209,522
                        )





15.
Benefit Plans




In June
2009, the Company implemented a 401(k) Savings/Retirement Plan, or the 401(k)
Plan, to cover eligible employees of the Company and any designated affiliate.
The 401(k) Plan permits eligible employees to defer up to 15% of their annual
compensation, subject to certain limitations imposed by the Internal Revenue
Code. The employees’ elective deferrals are immediately vested and
non-forfeitable. The 401(k) Plan provides for discretionary matching
contributions by the Company. Prior to the implementation of the 401(k) Plan, as
an affiliate of SL Green, the Company’s employees were eligible to participate
in a 401(k) Savings/Retirement Plan implemented by SL Green. Except for the
401(k) Plan, at March 31, 2010, the Company did not maintain a defined benefit
pension plan, post-retirement health and welfare plan or other benefit plans.




16.
Commitments and Contingencies




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




41




Gramercy
Capital Corp.
 
 Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


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 settlement amount was fully accrued for as of March 31,
2010.




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




As of
March 31, 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 March 31,
2010 are as follows:





OperatingLeases2010
      (April 1 - December 31)
                          
                          $
                          14,1422011
                          
                          
                          18,5212012
                          
                          
                          18,1522013
                          
                          
                          17,6822014
                          
                          
                          17,260Thereafter
                          
                          
                          140,537Total
      minimum lease payments
                          
                          $
                          226,294





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




Certain
real estate assets are pledged as collateral for two mortgage loans and one
mezzanine loan held by two of its CDOs. One borrowing of $64,172 is secured by
these pledges and is guaranteed by the Company.




17.
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.




42


Gramercy
Capital Corp.
 
 Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


The
following table summarizes the notional and fair value of the Company’s
derivative financial instruments at March 31, 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
                                              
                                              
                                              Strike
                                                Rate
                                              
                                              
                                              EffectiveDate
                                              
                                              ExpirationDate
                                              
                                              FairValueInterest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              $
                                              12,000
                                              
                                              
                                              
                                              3.06
                                              %
                                              
                                              Jan-08
                                              
                                              Jul-10
                                              
                                              $
                                              (103
                                              )Interest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              
                                              2,000
                                              
                                              
                                              
                                              3.07
                                              %
                                              
                                              Jan-08
                                              
                                              Jul-10
                                              
                                              
                                              (14
                                              )Interest
      Rate Cap
                                              
                                              1
      month LIBOR
                                              
                                              
                                              91,698
                                              
                                              
                                              
                                              2.00
                                              %
                                              
                                              Mar-10
                                              
                                              Mar-11
                                              
                                              
                                              4Interest
      Rate Cap
                                              
                                              1
      month LIBOR
                                              
                                              
                                              461,573
                                              
                                              
                                              
                                              2.00
                                              %
                                              
                                              Mar-10
                                              
                                              Mar-11
                                              
                                              
                                              26Interest
      Rate Cap
                                              
                                              1
      month LIBOR
                                              
                                              
                                              241,324
                                              
                                              
                                              
                                              6.00
                                              %
                                              
                                              Mar-10
                                              
                                              Mar-11
                                              
                                              
                                              —Interest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              
                                              12,000
                                              
                                              
                                              
                                              9.85
                                              %
                                              
                                              Aug-06
                                              
                                              Aug-11
                                              
                                              
                                              (692
                                              )Interest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              
                                              4,700
                                              
                                              
                                              
                                              3.17
                                              %
                                              
                                              Apr-08
                                              
                                              Apr-12
                                              
                                              
                                              (176
                                              )Interest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              
                                              10,000
                                              
                                              
                                              
                                              3.92
                                              %
                                              
                                              Oct-08
                                              
                                              Oct-13
                                              
                                              
                                              (578
                                              )Interest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              
                                              17,500
                                              
                                              
                                              
                                              3.92
                                              %
                                              
                                              Oct-08
                                              
                                              Oct-13
                                              
                                              
                                              (1,010
                                              )Interest
      Rate Swap
                                              
                                              1
      month LIBOR
                                              
                                              
                                              9,120
                                              
                                              
                                              
                                              4.26
                                              %
                                              
                                              Aug-08
                                              
                                              Jan-15
                                              
                                              
                                              (615
                                              )Interest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              
                                              14,650
                                              
                                              
                                              
                                              4.43
                                              %
                                              
                                              Nov-07
                                              
                                              Jul-15
                                              
                                              
                                              (1,024
                                              )Interest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              
                                              24,143
                                              
                                              
                                              
                                              5.11
                                              %
                                              
                                              Feb-08
                                              
                                              Jan-17
                                              
                                              
                                              (2,343
                                              )Interest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              
                                              282,592
                                              
                                              
                                              
                                              5.41
                                              %
                                              
                                              Aug-07
                                              
                                              May-17
                                              
                                              
                                              (30,135
                                              )Interest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              
                                              16,412
                                              
                                              
                                              
                                              5.20
                                              %
                                              
                                              Feb-08
                                              
                                              May-17
                                              
                                              
                                              (1,653
                                              )Interest
      Rate Cap
                                              
                                              1
      month LIBOR
                                              
                                              
                                              48,945
                                              
                                              
                                              
                                              4.80
                                              %
                                              
                                              Mar-10
                                              
                                              Jul-17
                                              
                                              
                                              1,526Interest
      Rate Swap
                                              
                                              3
      month LIBOR
                                              
                                              
                                              699,441
                                              
                                              
                                              
                                              5.33
                                              %
                                              
                                              Aug-07
                                              
                                              Jan-18
                                              
                                              
                                              (77,139
                                              )Total
                                              
                                              
                                              
                                              $
                                              1,948,098
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              (113,926
                                              )




The Company is hedging exposure to variability in
future interest payments on its debt facilities. At March 31, 2010, derivative
instruments were reported at their fair value as a net liability of
$113,926.  Offsetting adjustments are represented as deferred gains in
Accumulated Other Comprehensive Loss of $27,136, which includes the amortization
of gain or (loss) on terminated hedges of $97 for the three months ended March
31, 2010. The Company anticipates recognizing approximately $1,105 in
amortization over the next 12 months.  For the three months ended
March 31, 2010, the Company recognized a decrease to interest expense of $51
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.




18.
Income Taxes




The
Company has elected to be taxed as a REIT, under Sections 856 through 860 of the
Internal Revenue Code beginning with its taxable year ended December 31, 2004.
To qualify as a REIT, the Company must meet certain organizational and
operational requirements, including a requirement to distribute at least 90% of
its ordinary taxable income 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 may, however, be subject to certain state and local
taxes.




Beginning
with the third quarter of 2008, the Company’s board of directors elected to not
pay 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 months ended March 31, 2010 and 2009, the Company recorded $38 and $2,267
of income tax expense, respectively.  Included in tax expense for the
three months ended March 31, 2010 and 2009 is $0 and $2,100 of state income
taxes on the gain of extinguishment of debt of $7,740 and $107,299,
respectively.  Under federal tax law, the Company is allowed to defer
this gain until 2014; however not all states follow this federal
rule.




43


Gramercy
Capital Corp.
 
 Notes
To Condensed Consolidated Financial Statements
 (Unaudited,
amounts in thousands, except share and per share data)
 March
31, 2010


19.
Segment Reporting




The
Company has determined that it has two reportable operating segments: Real
Estate 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.




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




Real
      Estate
                                  
                                  
                                  Finance
                                  
                                  
                                  Corporate/Other(1)
                                  
                                  
                                  Total
      CompanyThree
      months ended March 31, 2010Total
      revenues(2)
                                  
                                  $
                                  108,196
                                  
                                  
                                  $
                                  46,735
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  154,931Earnings
      (loss) from unconsolidated joint ventures
                                  
                                  
                                  (657
                                  )
                                  
                                  
                                  1,773
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,116Total
      operating and interest expense(3)
                                  
                                  
                                  (103,361
                                  )
                                  
                                  
                                  (68,098
                                  )
                                  
                                  
                                  (7,702
                                  )
                                  
                                  
                                  (179,161
                                  )Net
      income (loss) from continuing operations
                                  
                                  $
                                  4,178
                                  
                                  
                                  $
                                  (19,590
                                  )
                                  
                                  $
                                  (7,702
                                  )
                                  
                                  $
                                  (23,114
                                  )Three
      months ended March 31, 2009Total
      revenues(2)
                                  
                                  $
                                  109,471
                                  
                                  
                                  $
                                  55,173
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  164,644Earnings
      (loss) from unconsolidated joint ventures
                                  
                                  
                                  (641
                                  )
                                  
                                  
                                  2,853
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,212Total
      operating and interest expense(3)
                                  
                                  
                                  (110,640
                                  )
                                  
                                  
                                  (65,349
                                  )
                                  
                                  
                                  (14,456
                                  )
                                  
                                  
                                  (190,445
                                  )Net
      income (loss) from continuing operations
                                  
                                  $
                                  (1,810
                                  )
                                  
                                  $
                                  (7,323
                                  )
                                  
                                  $
                                  (14,456
                                  )
                                  
                                  $
                                  (23,589
                                  )Total
      Assets:March
      31, 2010
                                  
                                  $
                                  3,864,544
                                  
                                  
                                  $
                                  3,736,986
                                  
                                  
                                  $
                                  (902,178
                                  )
                                  
                                  $
                                  6,699,352December
      31, 2009
                                  
                                  $
                                  3,883,279
                                  
                                  
                                  $
                                  3,787,371
                                  
                                  
                                  $
                                  (905,213
                                  )
                                  
                                  $
                                  6,765,437




(1)
            Corporate
      and Other represents all corporate level items, including general and
      administrative expenses and any intercompany elimination necessary to
      reconcile to the consolidated Company
totals.




(2)
            Total
      revenue represents all revenue earned during the period from the assets in
      each segment. Revenue from the Finance business primarily represents
      interest income and revenue from the Real Estate business primarily
      represents operating lease income.




(3)
            Total
      operating and interest expense includes provision for loan losses for the
      Structured Finance business and operating costs on commercial property
      assets for the Real Estate 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 $27,808 and $27,346 for the
      three months ended March 31, 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.




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




The
following table represents non-cash activities recognized in other comprehensive
income for the three months ended March 31, 2010 and 2009:





2010
                            
                            
                            2009Deferred
      losses and other non-cash activity related to derivatives
                            
                            $
                            (27,136
                            )
                            
                            $
                            (48,925
                            )Deferred
      gains related to securities available-for -sale
                            
                            $
                            740
                            
                            
                            $
                            142




44




ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except for
share, per share and square footage data)




Overview




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




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
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 March 31, 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.




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




During
2009 and to date in 2010, the global capital markets continued to experience
tremendous volatility and a wide-ranging lack of liquidity. The impact of the
global credit crisis on our sector has been acute. Transaction volume has
declined significantly, credit spreads for forms of mortgage debt investments
have increased substantially, and other forms of financing from the debt markets
have been dramatically curtailed. Despite signs of moderate improvement, we
believe that the continuing dislocation in the debt capital markets, coupled
with a measured recovery from a recession in the U.S., has reduced property
valuations and has adversely impacted commercial real estate fundamentals. These
developments can impact and have impacted the performance of our existing
portfolio of financial and real property assets. 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 CDO
covenants, depressed the price of our common stock and has effectively removed
our ability to raise public 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, the volatility in the capital markets has caused
stress to all financial institutions and, our business is dependent upon these
counterparties for, among other things, financing, rental payments on the
majority of our owned properties and interest rate derivatives.




45





In March
2010, we amended our $241,324 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 $552,989 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 196 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.  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 satisfy any shortfall
will 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 in such circumstances
would trigger a substantial book loss and would likely result in our company
having negative book value.  We have begun negotiations 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.




We rely
on the credit and equity markets to finance and grow our
business.  Despite signs of moderate 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.   As a result, we have reduced
new investment activity until the capital markets become more stable and market
liquidity increases. In this environment, we are focused on reducing leverage,
extending or restructuring the Goldman Mortgage Loan and the Goldman
Mezzanine Loans, actively managing portfolio credit, generating liquidity from
existing assets, extending debt maturities, reducing capital
expenditures and renewing expiring leases.




In
addition, beginning with the third quarter of 2008, our board of directors
elected to not pay the 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. The unpaid preferred stock dividend
has been accrued. As a result, we have accrued dividends for six 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.




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.




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




46




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 March 31, 2010 and December 31, 2009, were as
follows:




Allocation by
                            
                            
                            Fixed Rate:
                            
                            
                            Floating Rate:
                              Average Spread overCarrying Value (1)
                            
                            
                            Investment Type
                            
                            
                            Average Yield
                            
                            
                            LIBOR (2)2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Whole
      loans floating rate
                            
                            $
                            721,406
                            
                            
                            $
                            830,617
                            
                            
                            
                            58.4
                            %
                            
                            
                            60.2
                            %
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            358
      bps
                            
                            
                            454
      bpsWhole
      loans, fixed rate
                            
                            
                            122,756
                            
                            
                            
                            122,846
                            
                            
                            
                            9.9
                            %
                            
                            
                            8.9
                            %
                            
                            
                            6.56
                            %
                            
                            
                            6.89
                            %
                            
                            
                            —
                            
                            
                            
                            —Subordinate
      interests in whole loans, floating rate
                            
                            
                            76,035
                            
                            
                            
                            76,331
                            
                            
                            
                            6.2
                            %
                            
                            
                            5.5
                            %
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            293
      bps
                            
                            
                            246
      bpsSubordinate
      interests in whole loans, fixed rate
                            
                            
                            41,519
                            
                            
                            
                            44,988
                            
                            
                            
                            3.4
                            %
                            
                            
                            3.2
                            %
                            
                            
                            6.12
                            %
                            
                            
                            7.46
                            %Mezzanine
      loans, floating rate
                            
                            
                            154,374
                            
                            
                            
                            190,668
                            
                            
                            
                            12.5
                            %
                            
                            
                            13.7
                            %
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            540
      bps
                            
                            
                            577
      bpsMezzanine
      loans, fixed rate
                            
                            
                            86,539
                            
                            
                            
                            85,898
                            
                            
                            
                            7.0
                            %
                            
                            
                            6.2
                            %
                            
                            
                            10.69
                            %
                            
                            
                            8.08
                            %Preferred
      equity, floating rate
                            
                            
                            28,259
                            
                            
                            
                            28,228
                            
                            
                            
                            2.3
                            %
                            
                            
                            2.0
                            %
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            326
      bps
                            
                            
                            1,064
      bpsPreferred
      equity, fixed rate
                            
                            
                            4,261
                            
                            
                            
                            4,256
                            
                            
                            
                            0.3
                            %
                            
                            
                            0.3
                            %
                            
                            
                            7.21
                            %
                            
                            
                            7.23
                            %Subtotal/
      Weighted average
                            
                            
                            1,235,149
                            
                            
                            
                            1,383,832
                            
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %
                            
                            
                            7.90
                            %
                            
                            
                            7.39
                            %
                            
                            381
      bps
                            
                            
                            476
      bpsCMBS,
      floating rate
                            
                            
                            56,392
                            
                            
                            
                            67,876
                            
                            
                            
                            5.7
                            %
                            
                            
                            6.9
                            %
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            243
      bps
                            
                            
                            254
      bpsCMBS,
      fixed rate
                            
                            
                            936,507
                            
                            
                            
                            916,833
                            
                            
                            
                            94.3
                            %
                            
                            
                            93.1
                            %
                            
                            
                            8.02
                            %
                            
                            
                            7.84
                            %
                            
                            
                            
                            
                            
                            
                            —Subtotal/
      Weighted average
                            
                            
                            992,899
                            
                            
                            
                            984,709
                            
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %
                            
                            
                            8.02
                            %
                            
                            
                            7.84
                            %
                            
                            243
      bps
                            
                            
                            254
      bpsTotal
                            
                            $
                            2,228,048
                            
                            
                            $
                            2,368,541
                            
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %
                            
                            
                            7.99
                            %
                            
                            
                            7.74
                            %
                            
                            373
      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 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.




All of
our term collateralized debt obligation, or CDO, liabilities are in their
reinvestment periods, which means when the underlying assets repay we are able
to reinvest the proceeds in new assets without having to repay the liabilities.
Because credit spreads are generally wider than when we issued these
liabilities, we currently expect to earn a higher return on equity on capital
redeployed in this market. Approximately $364,516, or 29.5%, of our loans have
maturity dates in 2010. However, many of these loans contain extension options
of at least six months (many subject to performance criteria) and we expect that
substantially all loans that qualify will be extended, so it is difficult to
estimate how much capital from initial maturities or early pre-payments may be
recycled into higher earning investments.




The
period during which we are permitted to reinvest principal payments on the
underlying assets into qualifying replacement collateral for our 2005 CDO will
expire 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 over-collateralization 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
March 31, 2010, Gramercy Finance also held interests in two credit tenant net
lease investments, or CTL investments, two interests in joint ventures holding
fee positions on properties subject to long-term ground leases, seven interests
in real estate acquired through foreclosure including a joint venture, and a
100% fee interest in a property subject to a long-term ground
lease.




As of
March 31, 2010, Gramercy Realty owned a portfolio comprised of 633 bank
branches, 325 office buildings and three land parcels, of which 54 bank branches
were owned through an unconsolidated joint venture. Gramercy Realty’s
consolidated properties aggregated approximately 25.6 million rentable square
feet and its unconsolidated properties aggregated approximately 0.3 million
rentable square feet. As of March 31, 2010, the occupancy of Gramercy Realty’s
consolidated properties was 85.3% 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 March 31, 2010, they
represented approximately 40.4% and 15.4%, respectively, of the rental income of
Gramercy Realty’s portfolio and occupied approximately 43.8% and 17.7%,
respectively, of its total rentable square feet.




47




Summarized
in the table below are our key property portfolio statistics as of March 31,
2010:




Number of Properties
                                
                                
                                RentableSquare feet
                                
                                
                                OccupancyProperties (1)
                                
                                March 31,2010
                                
                                
                                December 31,2009
                                
                                
                                March 31,2010
                                
                                
                                December 31,2009
                                
                                
                                March 31,2010
                                
                                
                                December 31,2009Branches
                                
                                
                                579
                                
                                
                                
                                583
                                
                                
                                
                                3,712,087
                                
                                
                                
                                3,726,399
                                
                                
                                
                                84.9
                                %
                                
                                
                                85.5
                                %Office
      Builidngs (2)
                                
                                
                                325
                                
                                
                                
                                324
                                
                                
                                
                                21,843,531
                                
                                
                                
                                21,847,249
                                
                                
                                
                                85.3
                                %
                                
                                
                                85.9
                                %Land
                                
                                
                                3
                                
                                
                                
                                6
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Total
                                
                                
                                907
                                
                                
                                
                                913
                                
                                
                                
                                25,555,618
                                
                                
                                
                                25,573,648
                                
                                
                                
                                85.3
                                %
                                
                                
                                85.9
                                %





(1)
            Excludes
      investments in unconsolidated joint
ventures





(2)
            As
      of March 31, 210, includes 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 March 31, 2010,
the weighted average remaining term of our leases was 9.2 years and
approximately 74.4% 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 and renewing
expiring leases.




As of
March 31, 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 196 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 570,000
square feet will decline 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 satisfy any
shortfall 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 in such
circumstances would trigger a substantial book loss and would likely result in
our having negative book value.  We have begun negotiations 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.  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 to continue
as a going concern.




48




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 the April 2010 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 April 2010 distribution date and our 2007 CDO failed its
overcollateralization test at the November 2009 and February 2010 distribution
dates. The chart below is a summary of our CDO compliance tests as of the most
recent distribution date (April 25, 2010 for our 2005 and 2006 CDO and February
15, 2010 for our 2007 CDO):




Cash
      Flow Triggers
                                  
                                  CDO 2005-1
                                  
                                  
                                  CDO 2006-1
                                  
                                  
                                  CDO 2007-1Overcollateralization
      (1)Current
                                  
                                  
                                  113.33
                                  %
                                  
                                  
                                  106.61
                                  %
                                  
                                  
                                  100.33
                                  %Limit
                                  
                                  
                                  117.85
                                  %
                                  
                                  
                                  105.15
                                  %
                                  
                                  
                                  102.05
                                  %Compliance
      margin
                                  
                                  
                                  -4.52
                                  %
                                  
                                  
                                  1.46
                                  %
                                  
                                  
                                  -1.72
                                  %Pass/Fail
                                  
                                  Fail
                                  
                                  
                                  Pass
                                  
                                  
                                  FailInterest
      Coverage (2)Current
                                  
                                  
                                  763.17
                                  %
                                  
                                  
                                  813.45
                                  %
                                  
                                  
                                  N/ALimit
                                  
                                  
                                  132.85
                                  %
                                  
                                  
                                  105.15
                                  %
                                  
                                  
                                  N/ACompliance
      margin
                                  
                                  
                                  630.32
                                  %
                                  
                                  
                                  708.30
                                  %
                                  
                                  
                                  N/APass/Fail
                                  
                                  Pass
                                  
                                  
                                  Pass
                                  
                                  
                                  
                                  N/A





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





(2)
            The interest coverage ratio
      divides interest income by interest expense for the classes senior to
      those retained by us.




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




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 made based upon information
available to us at that time. We evaluate these decisions and assessments on an
ongoing basis. Actual results may differ from these estimates under different
assumptions or conditions. We have identified our most critical accounting
policies to be the following:




49




Variable
Interest Entities




Consolidated
VIEs




As of
March 31, 2010, the Condensed Consolidated Balance Sheet includes $2,612,417 of
assets and $2,856,560 of liabilities related to four consolidated 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
$1,488.




Real
Estate Investments, Net




We,
through our acquisition of 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 $374, 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 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 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 March 31,
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.




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 comprise primarily of
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 $1,214,415, 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 March 31, 2010, we owned securities of
three controlling class CMBS Trusts, including a non-investment grade CMBS
investment, GS Mortgage Securities Trust 2007-GKK1, or the Trust, with a
carrying value of $17,565. The total par amounts of CMBS issued by the three
CMBS trusts was $921,654.




50




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 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.  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.




At March
31, 2010, our maximum exposure to loss as a result of its investment in these
CMBS trusts totaled $17,565, which equals the book value of these investments as
of March 31, 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 March 31, 2010 and December 31, 2009, the investment had a carrying value
of $32,909 and $31,567, respectively. We are required to make additional capital
contributions to the entity to supplement the entities 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. 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 March 31, 2010
and December 31, 2009, the investment had a carrying value of $47,217 and
$45,659, respectively. We are required to make additional capital contributions
to the entity to supplement the entities 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 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.  As of March 31, 2010 and December 31, 2009, the investment had
a carrying value of $22,777 and $23,820, respectively.   We are
required to make additional capital contributions to the entity to supplement
the entities operational cash flow needs.  While we are the managing
member of this entity, our joint venture partner has significant participating
rights surrounding the establishment and execution of the entity’s business
plan.  As a result we have concluded that we are not the primary
beneficiary of this entity.




Unless
otherwise noted, we are not obligated to provide, nor have we provided, 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 March 31, 2010 and any further contributions required to
enable the VIEs to meet operating cash flow needs.




Real
Estate and CTL Investments




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




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




51




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




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




Leasehold
Interests




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




Investments
in Unconsolidated Joint Ventures




We
account for our investments in unconsolidated joint ventures under the equity
method of accounting since we exercise significant influence, but do not
unilaterally control the entities, and we are not considered to be the primary
beneficiary. In the joint ventures, the rights of the other investors are
protective and participating. Unless we are determined to be the primary
beneficiary, these rights preclude us from consolidating the investments. The
investments are recorded initially at cost as an investment in unconsolidated
joint ventures, and subsequently are adjusted for equity in net income (loss)
and cash contributions and distributions. Any difference between the carrying
amount of the investments on our balance sheet and the underlying equity in net
assets is evaluated for impairment at each reporting period. None of the joint
venture debt is recourse to us. As of March 31, 2010 and December 31, 2009, we
had investments of $109,567 and $108,465 in unconsolidated joint ventures,
respectively.




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 March 31, 2010 and December 31, 2009, we had real estate investments held for
sale of $641 and $841, respectively.




52




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 March 31, 2010 and December 31, 2009, we had no loans and
other lending investments designated as held for sale.




Commercial
Mortgage-Backed Securities




We
designate our CMBS investments on the date of acquisition of the investment.
Held to maturity investments are stated at cost plus any premiums or discounts
which are amortized through the consolidated statements of income using the
level yield method. CMBS securities that we do not hold for the purpose of
selling in the near-term but may dispose of prior to maturity, are designated as
available-for-sale and are carried at estimated fair value with the net
unrealized gains or losses recorded as a component of accumulated other
comprehensive income (loss) in stockholder’s equity. 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 Statement of Operations. The portion of the other-than-temporary
impairment related to all other factors is recognized as a component of other
comprehensive loss on the Consolidated Balance Sheet. The determination of an
other-than-temporary impairment is a subjective process, and different judgments
and assumptions could affect the timing of loss realization. In November 2007,
subsequent to financing our CMBS investments in our CDOs, we redesignated all of
our available-for-sale CMBS investments with a book value of approximately
$43,600 to held-to-maturity. As of March 31, 2010 and December 31, 2009, the
unrealized loss on the redesignated CMBS investments included in other
comprehensive income was $3,167 and $3,906, respectively.




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




Pledged
Government Securities




We
maintain a portfolio of treasury securities that are pledged to provide
principal and interest payments for mortgage debt previously collateralized by
properties in our real estate portfolio. We do not intend to sell the securities
and believe it is more likely than not that we will realize the full amortized
cost basis of the security over their remaining life. These securities had a
carrying value of $96,168, a fair value of $98,276 and unrealized gains of
$2,108 at March 31, 2010, and have maturities that extend through November
2013.




Tenant
and Other Receivables




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




Tenant and other receivables are recorded net of the allowances
for doubtful accounts, which as of March 31, 2010 and December 31, 2009 were
$7,832 and $8,172, respectively. We continually review receivables related to
rent, tenant reimbursements and unbilled rent receivables and determine
collectability by taking into consideration the tenant’s payment history, the
financial condition of the tenant, business conditions in the industry in which
the tenant operates and economic conditions in the area in which the property is
located. In the event that the collectability of a receivable is in doubt, we
increase the allowance for uncollectible accounts or record a direct write-off
of the receivable in the Condensed Consolidated Statements of
Operations.




53




Intangible
Assets




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




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




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




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




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




Deferred
Costs




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




We have deferred certain expenditures related to the leasing of
certain properties. Direct costs of leasing, including external broker
commissions and internally capitalized payroll costs associated with leasing
activities, are deferred and amortized over the terms of the underlying
leases.




Revenue
Recognition




Real
Estate and CTL Investments




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




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




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




54




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




Finance
Investments




Interest
income on debt investments, 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 us, in the form of a guarantee are
recognized over the term of that guarantee using the straight-line
method.




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




We
designate loans as non-performing at such time as: (1) the loan becomes 90 days
delinquent or (2) the loan has a maturity default. All non-performing loans are
placed on non-accrual status and income is recognized only upon actual cash
receipt. At March 31, 2010, we had one second lien loan, one third lien loan and
one mezzanine loan with an aggregate carrying value of $0, which were classified
as non-performing. At December 31, 2009, we had three first mortgage loans with
an aggregate carrying value of $55,122, four mezzanine loans with a carrying
value of $319, one second lien loan with the carrying value of $0 and one third
lien loan with a carrying value of $0, which were classified as non-performing
loans. At December 31, 2008, we had three first mortgage loans with an aggregate
carrying value of $164,809, one second lien loan with a carrying value of $0,
and one third lien loan with a carrying value of $0, which were classified as
non-performing loans.




We
classify loans as sub-performing if they are 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 we consider to be 90 days from the measurement date. At March 31,
2010, four first mortgage loans with a total carrying value of $94,817 were
classified as sub-performing. At December 31, 2008, four first mortgage loans
with a 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 we 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 our 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.




We
consider 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 compare it to the carrying value
of the loan. The determination of the estimated fair value is based on the key
characteristics including the collateral type, collateral location, quality and
prospects of the sponsor, the amount and status of any senior debt, and other
factors. We also include the evaluation of operating cash flow from the property
during the projected holding period, and the estimated sales value of the
collateral computed by applying an expected capitalization rate to the
stabilized net operating income of the specific property, less selling costs,
all of which are discounted at market discount rates. We also consider 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 we believe is
adequate to absorb losses. During the three months ended March 31, 2010, we
incurred charge-offs totaling $54,310 relating to realized losses on four loans.
During the year ended December 31, 2009, we incurred a charge-off totaling
$188,574 relating to realized losses on 16 loans. We maintained a reserve for
loan losses of $405,052 against 22 separate investments with a carrying value of
$538,332 as of March 31, 2010 and a reserve for loan losses of $418,202 against
23 investments with a carrying value of $536,445 as of December 31,
2009.




55




Rent
Expense




Rent
expense is recognized on a straight-line basis regardless of when payments are
due. Accrued expenses and other liabilities in the accompanying consolidated
balance sheets As of March 31, 2010 and December 31, 2009 includes an accrual
for rental expense recognized in excess of amounts due at that time. Rent
expense related to leasehold interests is included in property operating
expenses, and rent expense related to office rentals is included in management,
general and administrative expense.




Stock
Based Compensation Plans




We have a
stock-based compensation plan and we account for this plan using the fair value
recognition provisions.  We use the Black-Scholes option-pricing model
to estimate the fair value of a stock option award.  This model
requires inputs such as expected term, expected volatility, and risk-free
interest rate.   Further, the forfeiture rate also impacts the
amount of aggregate compensation cost.  These inputs are highly
subjective and generally require significant analysis and judgment to
develop.




Prior to
the termination of the management agreement in April 2009, we determined fair
value of the stock options granted to employees of the Manager who provided
services to us, using a mark-to-market model.  In April 2009, we
completed the internalization of management through the direct acquisition of
the Manager. Stock option awards were re-valued at the date of the
internalization and such value will be amortized over the remaining vesting
period of the award for employees that remained with the Manager.




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


The fair
value of each stock option granted is estimated on the date of grant for options
issued to employees, and quarterly for options issued to non-employees, using
the Black-Scholes option pricing model with the following weighted average
assumptions for grants in 2010 and 2009:




2010
                      
                      
                      2009Dividend
      yield
                      
                      
                      5.7
                      %
                      
                      
                      14.0
                      %Expected
      life of option
                      
                      5.0
      years
                      
                      
                      5.0
      yearsRisk
      free interest rate
                      
                      
                      2.65
                      %
                      
                      
                      1.72
                      %Expected
      stock price volatility
                      
                      
                      75.0
                      %
                      
                      
                      90.0
                      %





Incentive Distribution (Class B Limited Partner
Interest)





Prior to
our internalization, the Class B limited partner interests were entitled to
receive an incentive return equal to 25% of the amount by which funds from
operations, or FFO, plus certain accounting gains (as defined in the partnership
agreement of our Operating Partnership) exceed the product of our weighted
average stockholders equity (as defined in the partnership agreement of our
Operating Partnership) multiplied by 9.5% (divided by four to adjust for
quarterly calculations). We recorded any distributions on the Class B limited
partner interests as an incentive distribution expense in the period when earned
and when payment of such amounts became probable and reasonably estimable in
accordance with our partnership agreement. These cash distributions reduced the
amount of cash available for distribution to the common unit holders in our
Operating Partnership and to our common stockholders. In October 2008, we
entered into a letter agreement with the Class B limited partners to provide
that the starting January 1, 2009, the incentive distribution could be paid, at
our option, in cash or shares of common stock. In April 2009,
we completed the internalization of our management through the direct
acquisition of the Manager from SL Green. Accordingly, beginning in May 2009,
management and incentive fees payable by us to the Manager ceased and the Class
B limited partner interests have been cancelled. No incentive distribution was
earned for the three months ended March 31, 2009.




Derivative
Instruments




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




56




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




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




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




All
hedges held by us are deemed effective based upon the hedging objectives
established by our corporate policy governing interest rate risk management. The
effect of our derivative instruments on our financial statements is discussed
more fully in Note 18 to the Condensed Consolidated Financial
Statements.




Income
Taxes




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




For the three months ended March 31, 2010 and 2009, we recorded
$38, and $2,267 of income tax expense, respectively.  Included in tax
expense for the three months ended March 31, 2010 and 2009 is $0 and $2,100 of
state income taxes on the gain of extinguishment of debt of $7,740 and $107,299,
respectively. Under federal law, we are allowed to defer this gain until 2014;
however, not all states follow this federal rule.




57




Results
of Operations




Comparison of
the three months ended March 31, 2010 to the three months ended March 31,
2009




Revenues


2010
                            
                            
                            2009
                            
                            
                            $
      ChangeRental
      revenue
                            
                            $
                            79,874
                            
                            
                            $
                            79,924
                            
                            
                            $
                            (50
                            )Investment
      income
                            
                            
                            44,251
                            
                            
                            
                            52,934
                            
                            
                            
                            (8,683
                            )Operating
      expense reimbursement
                            
                            
                            28,934
                            
                            
                            
                            30,516
                            
                            
                            
                            (1,582
                            )Gain
      on sales and other income
                            
                            
                            1,872
                            
                            
                            
                            1,270
                            
                            
                            
                            602Total
      revenues
                            
                            $
                            154,931
                            
                            
                            $
                            164,644
                            
                            
                            $
                            (9,713
                            )Equity
      in net income of joint ventures
                            
                            $
                            1,116
                            
                            
                            $
                            2,212
                            
                            
                            $
                            (1,096
                            )Gain
      on extinguishment of debt
                            
                            $
                            7,740
                            
                            
                            $
                            107,229
                            
                            
                            $
                            (99,489
                            )




Rental
revenue for the three months ended March 31, 2010 is primarily comprised of
revenue earned on our portfolio of 907 properties owned by our Gramercy Realty
division. The decrease in rental revenue of $50 is primarily due to reduced
rental income resulting from lease terminations within our Bank of America and
Wells Fargo portfolios and offset by $2,422 of additional rental income on our
Bank of American Dana portfolio due to the assumption of third party tenants as
part of the required space reduction by Bank of America.




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
March 31, 2010, $24,134 was earned on fixed rate investments while the remaining
$20,117 was earned on floating rate investments. The decrease of $8,683 over the
prior period is primarily due to an increase in non-performing loans, the
suspension of interest income accruals on certain payment-in-kind loans, a
decrease in the size of our portfolio of loans and other lending instruments,
and a decline in LIBOR interest rates in 2010 compared to 2009.




Operating
expense reimbursement were $28,934 for the three months ended March 31, 2010 and
$30,516 for the three months ended March 31, 2009, a decrease of
$1,582.  The decrease is due to $807 reduction in reimbursements by
Bank of America related to space reductions or lease terminations, $397 decrease
related to an increase in the base year amount prescribed by Bank of America’s
101 Independence lease and a decrease in reimbursements due to changes in
occupancy by tenants and reductions in billable property operating expenses,
which is partially offset by $423 of reimbursements from our Bank of American
Dana portfolio due to the assumption of third party tenants as part of the
required space reduction by Bank of America.




Gains on
sales and other income of $1,872 for the three months ended March 31, 2010 is
primarily composed of lease termination fees of $783 and interest on restricted
cash balances and other cash balances held by us.  For the three
months ended March 31, 2009, gains on sales and other income is primarily
composed of lease termination fees of $138 and interest on restricted cash
balances. The income on investments in unconsolidated joint ventures of $1,116
for the three months ended March 31, 2010 represents our proportionate share of
the income generated by our joint venture interests including $1,080 of real
estate-related depreciation and amortization, which when added back, results in
a contribution to Funds from Operations, or FFO, of $2,196. The income on
investments in unconsolidated joint ventures of $2,212 for the three months
ended March 31, 2009 represents our proportionate share of income generated by
our joint venture interests including $1,173 of real estate-related depreciation
and amortization, which when added back, results in a contribution to FFO of
$3,385. Our use of FFO as an important non-GAAP financial measure is discussed
in more detail below.




During
the three months ended March 31, 2010, we repurchased at a discount, notes
issued by one of our three CDOs, generating net gains on early extinguishment of
debt of $7,740. 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 these debt
extinguishments, we recorded a gain on extinguishment of debt of
$107,229.




58




Expenses




2010
                        
                        
                        2009
                        
                        
                        $ ChangeProperty
      operating expenses
                        
                        $
                        46,647
                        
                        
                        $
                        50,825
                        
                        
                        $
                        (4,178
                        )Interest
      expense
                        
                        
                        51,222
                        
                        
                        
                        65,581
                        
                        
                        
                        (14,359
                        )Depreciation
      and amortization
                        
                        
                        27,808
                        
                        
                        
                        27,346
                        
                        
                        
                        462Management,
      general and administrative
                        
                        
                        7,702
                        
                        
                        
                        8,784
                        
                        
                        
                        (1,082
                        )Management
      fees
                        
                        
                        -
                        
                        
                        
                        5,672
                        
                        
                        
                        (5,672
                        )Impairment
      on loans held for sale and CMBS
                        
                        
                        12,326
                        
                        
                        
                        84,428
                        
                        
                        
                        (72,102
                        )Provision
      for loan loss
                        
                        
                        41,160
                        
                        
                        
                        52,771
                        
                        
                        
                        (11,611
                        )Provision
      for taxes
                        
                        
                        38
                        
                        
                        
                        2,267
                        
                        
                        
                        (2,229
                        )Total
      expenses
                        
                        $
                        186,903
                        
                        
                        $
                        297,674
                        
                        
                        $
                        (110,771
                        )




Property
operating expenses for the three months ended March 31, 2010 is comprised of
expenses incurred on our portfolio of 907 properties owned by our Gramercy
Realty division, which decreased $4,178 from the $50,825 recorded in the three
months ended March 31, 2009 to $46,647 recorded in the three months ended March
31, 2010. The decrease is primarily attributable to a decrease of non-cash
impairment charges related to the removal of properties from held-for-sale
classification during the last quarter of 2009 of $3,105, and cost savings
initiatives related to the operations of our real estate.




Interest
expense was $51,222 for the three months ended March 31, 2010 compared to
$65,581 for the three months ended March 31, 2009. The decrease of $14,359 is
primarily attributed to reductions in the interest rate indexes, primarily
LIBOR-based, charged on our variable rate debt over the three months ended March
31, 2010 compared to the three months ended March 31, 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 $27,808 for the three months
ended March 31, 2010, compared to $27,346 for the three months ended March 31,
2009. The increase of $462 is primarily due to depreciation on capital additions
and amortization of in-place lease intangible assets related to lease
terminations.




Management,
general and administrative expenses were $7,702 for the three months ended March
31, 2010, compared to $8,784 for the same period in 2009. The decrease of $1,082
includes $2,826 of costs related to the internalization and acquisition
of the Manager from SL Green, lower legal and professional fees related to
loan enforcement and restructurings completed during 2009, and is partially
offset by additional costs incurred in 2010 for the salaries, benefits and other
administrative costs previously borne by SL Green prior to the internalization
of our management.




Management
fees of $5,672 were expensed for the three months ended March 31,
2009.  We did not record any management fees for the three months
ended March 31, 2010. The decrease is due to the internalization of the Manager,
which took place on April 24, 2009. The internalization was completed through a
direct acquisition of the Manager, which was previously a wholly-owned
subsidiary of SL Green. Upon completion of the internalization, all management
fees and incentive management fees payable by us to the Manager were
eliminated.




During
the three months ended March 31, 2010, we recorded impairment charges of $12,326
on an other-than-temporary impairment due to an adverse change in expected cash
flows related to credit losses for six CMBS investments.




Provision
for loan losses was $41,160 for the three months ended March 31, 2010, compared
to $52,771 for the three months ended March 31, 2009, a decrease of $11,611. The
provision was based upon periodic credit reviews of our loan portfolio, and
reflects the challenging economic conditions, severe illiquidity in the capital
markets and a difficult operating environment.




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 satisfy any
shortfall 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 in such
circumstances would trigger a substantial book loss and would likely result in
our having negative book value.  We have begun negotiations 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.  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 March 31, 2010 and December 31, 2009, we
accrued $14,043 and $11,707, respectively, for the Series A preferred stock
dividends.  As a result, we have accrued dividends for six 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.




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. We were in compliance with all
such covenants as of March 31, 2010. 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 amaterial 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 360,000 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 570,000 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 will be significantly
lower, and is anticipated to turn negative.




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 the April 2010 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 April 2010 distribution date and our 2007 CDO
failed the overcollateralization test at the November 2009 distribution date and
February 2010 distribution date.




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 $25,957 to $20,400 for the three
months ended March 31, 2010 compared to cash used of $3,387 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 three
months ended March 31, 2010 compared to the same period in 2009 was primarily
due to a decrease in operating assets and liabilities of $13,577, The decreased
net loss of $2,548 is primarily attributable to the decrease of non-cash
impairment charges of $77,620, a gain on extinguishment of debt of $99,489 and
provision for loan loss of $11,611.




Net cash
provided by investing activities for the three months ended March 31, 2010 was
$48,033 compared to net cash provided by investing activities of $22,691 during
the same period in 2009.




Net cash
used by financing activities for the three months ended March 31, 2010 was
$79,332 as compared to net cash used by financing activities of $72,933 during
the same period in 2009. For the three months ended 2010, we repaid $5,880 on
our mortgage notes.




Capitalization




Our
authorized capital stock consists of 125,000,000 shares, $0.001 par value, of
which we have authorized the issuance of up to 100,000,000 shares of common
stock, $0.001 par value per share, and 25,000,000 shares of preferred stock, par
value $0.001 per share. As of March 31, 2010, 49,896,808 shares of common stock
and 4,600,000 shares of preferred stock were issued and
outstanding.




Preferred
Stock




In April
2007, we issued 4,600,000 shares of our 8.125% Series A cumulative redeemable
preferred stock (including the underwriters’ over-allotment option of 600,000
shares) with a mandatory liquidation preference of $25.00 per share. Holders of
the Series A cumulative redeemable preferred shares are entitled to annual
dividends of $2.03125 per share on a quarterly basis and dividends are
cumulative, subject to certain provisions. On or after April 18, 2012, we may at
our option redeem the Series A cumulative redeemable preferred stock at par for
cash. Net proceeds (after deducting underwriting fees and expenses) from the
offering were approximately $111,205.




Deferred
Stock Compensation Plan for Directors




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


61




As of
March 31, 2010, there were approximately 301,818 phantom stock units
outstanding, of which 289,818 units are vested.




Market
Capitalization




At March
31, 2010, our CDOs and borrowings under our junior subordinated notes, and
mortgage loans (including the Goldman Mortgage Loan and the Goldman Mezzanine
Loans) represented 95% of our consolidated market capitalization of $5,282,860
(based on a common stock price of $2.79 per share, the closing price of our
common stock on the New York Stock Exchange on March 31, 2010). Market
capitalization includes our consolidated debt and common and preferred
stock.




Indebtedness




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





March 31, 2010
                    
                    
                    December 31, 2009Mortgage
      notes payable
                    
                    $
                    1,737,242
                    
                    
                    $
                    1,743,668Mezzanine
      notes payable
                    
                    
                    552,989
                    
                    
                    
                    553,522Collateralized
      debt obligations
                    
                    
                    2,685,917
                    
                    
                    
                    2,705,534Junior
      subordinated notes
                    
                    
                    52,500
                    
                    
                    
                    52,500Total
                    
                    $
                    5,028,648
                    
                    
                    $
                    5,055,224Cost
      of debt
                    
                    LIBOR+2.49
                    %
                    
                    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 alsoagreed 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.


62




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




Unsecured
Credit Facility




In May
2006, we closed on a $100,000 senior unsecured revolving credit facility with
KeyBank, with an initial term of three years and a one-year extension option. In
June 2007, the facility was increased to $175,000. The facility was supported by
a negative pledge of an identified asset base. In March 2009, we entered into an
amendment and compromise agreement with KeyBank to settle and satisfy the loan
obligations at a discount for a cash payment of $45,000 and a maximum amount of
up to $15,000 from 50% of all payments from distributions after May 2009 from
certain junior tranches and preferred classes of securities under our CDOs. The
remaining balance of $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 March 31,
2010, 962 (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 $2,290,231. 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. We were in
compliance with these ratios as of March 31, 2010 and December 31, 2009. 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.




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
$253 and borrowings of $241,324 as of both March 31, 2010 and December 31,
2009.




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.


63




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 $380 and $418 and borrowings of $234,851 and $234,851 as of
March 31, 2010 and December 31, 2009, respectively.




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 March 31, 2010 and December 31, 2009, 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 Loan 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 $1,453 and
$1,455 and borrowings of $552,989 and $553,552 as of March 31, 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, (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 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, (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 SLG of a comprehensive long-term
business plan and restructuring proposal addressing repayment of the Junior
Mezzanine Loan.




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.


64




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.




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 over collateralization covenants that must be satisfied in order for us to
receive cash flow on the interests retained by us in our CDOs and to receive the
subordinate collateral management fee earned. If 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 the April 2010
distribution date, our 2006 CDO was in compliance with its interest coverage and
asset over collateralization 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 April 2010 distribution date and our 2007 CDO
failed its overcollateralization test at the November 2009 and February 2010
distribution dates.


65




During
the three months ended March 31, 2010, we repurchased, at a discount, $19,000 of
notes previously issued by one of our three CDOs. We recorded a net gain on the
early extinguishment of debt of $7,740 for the three months ended March 31,
2010.




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. Certain indenture covenants restricting us from
declaring or paying dividends and taking certain other corporate actions during
the 2009 calendar year have been eliminated for the remaining $52,500 of our
Junior Notes.




Contractual
Obligations




Combined
aggregate principal maturities of our CDOs, junior subordinated notes, mortgage
loans (including the Goldman Mortgage and Senior and Junior Mezzanine Loans),
unfunded loan commitments and operating leases as of March 31, 2010 are as
follows:




CDOs
                  
                  
                  Junior
                    Subordinated
                    Notes
                  
                  
                  Mortgage and
                    Mezzanine
                    Loans(1)
                  
                  
                  Interest
                    Payments
                  
                  
                  Unfunded loan
                    commitments(2)
                  
                  
                  Operating
                    Leases
                  
                  
                  Total2010
      (April 1 - December 31)
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  32,126
                  
                  
                  $
                  139,425
                  
                  
                  $
                  13,523
                  
                  
                  $
                  14,142
                  
                  
                  $
                  199,4212011
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  819,533
                  
                  
                  
                  181,650
                  
                  
                  
                  6,868
                  
                  
                  
                  18,521
                  
                  
                  
                  1,027,0832012
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  80,425
                  
                  
                  
                  170,510
                  
                  
                  
                  -
                  
                  
                  
                  18,152
                  
                  
                  
                  269,7182013
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  617,943
                  
                  
                  
                  149,671
                  
                  
                  
                  -
                  
                  
                  
                  17,682
                  
                  
                  
                  785,7872014
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,566
                  
                  
                  
                  119,674
                  
                  
                  
                  -
                  
                  
                  
                  17,260
                  
                  
                  
                  149,927Thereafter
                  
                  
                  2,685,917
                  
                  
                  
                  52,500
                  
                  
                  
                  712,782
                  
                  
                  
                  381,475
                  
                  
                  
                  -
                  
                  
                  
                  140,537
                  
                  
                  
                  3,974,425Above-
      / Below- Market Interest
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  14,856
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  14,856Total
                  
                  $
                  2,685,917
                  
                  
                  $
                  52,500
                  
                  
                  $
                  2,290,231
                  
                  
                  $
                  1,142,405
                  
                  
                  $
                  20,391
                  
                  
                  $
                  226,294
                  
                  
                  $
                  6,421,217


66





(1)
            Certain of our real estate assets
      are subject to mortgage liens. As of March 31, 2010, 713 real estate
      assets were encumbered with 28 mortgages with a cumulative outstanding
      balance of approximately $1,722,386. As of March 31, 2010, the mortgages’
      balance ranged in amount from approximately $407 to $461,338 and had
      maturity dates ranging from approximately 4 months to 13 years. As of
      March 31, 2010, 24 of the loans had fixed interest rates ranging 5.06% to
      8.29% and four variable rate loans had interest rates ranging from 1.88%
      to 6.23%.





(2)
            Based on loan budgets and
      estimates.




Leasing
Agreements




Our
properties are leased and subleased to tenants under operating leases with
expiration dates extending through the year 2031. These leases generally contain
rent increases and renewal options. As of March 31, 2010, we also leased bank
branches and office buildings from third parties with expiration dates extending
to the year 2085 and have various ground leases with expiration dates extending
through 2087. These lease obligations generally contain rent increases and
renewal options.




Future
minimum rental payments under non-cancelable leases, excluding reimbursements
for operating expenses, as of March 31, 2010 are as follows:





Operating
                    Leases2010 
      (April 1 - December 31)
                  
                  $
                  202,4522011
                  
                  
                  208,8122012
                  
                  
                  193,8562013
                  
                  
                  181,9422014
                  
                  
                  173,201Thereafter
                  
                  
                  1,126,072Total
      minimum lease payments
                  
                  $
                  2,086,335




Off-Balance-Sheet
Arrangements




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




Dividends




To
maintain our qualification as a REIT, we must pay annual dividends to our
stockholders of at least 90% of our REIT taxable income, if any, determined
before taking into consideration the dividends paid deduction and net capital
gains. Before we pay any dividend, whether for U.S. federal income tax purposes
or otherwise, which would only be paid out of available cash, 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. As a result, we have
accrued dividends for six 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. 
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 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. The unpaid preferred stock dividend has been accrued
for.




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.


67




Further,
our financial statements are prepared in accordance with GAAP and our
distributions are determined by our board of directors based primarily on our
net income as calculated for tax purposes, in each case, our activities and
balance sheet are measured with reference to historical costs or fair market
value without considering inflation.




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 $5,672
for the three months ended March 31, 2009.




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 months ended March 31,
2009.




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 months ended March 31, 2010, we
incurred expense of $25 and $0, pursuant to the special servicing
arrangement.


68




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 7,300 square feet and carries a
term of 10 years with rents of approximately $249 per annum for year one rising
to $315 per annum in year ten. In May and June 2009, we amended our lease with
SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260
square feet. The additional premises is leased on a co-terminus basis with the
remainder of our leased premises and carries rents of approximately $103 per
annum during the initial year and $123 per annum during the final lease year.
For the three months ended March 31, 2010 and 2009 we paid $76 and $100 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 March 31,
2010 and December 31, 2009, the loan has a book value of $39,207 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 670,000 square feet which was 100% net
leased to an entity whose obligations were guaranteed by Sanofi-Aventis Group
through April 2023. The transaction was valued at $236,000 and was financed with
a $190,000, 10-year, fixed-rate first mortgage loan. In January 2009, we and SL
Green sold 100% of the respective interests in 55 Corporate.




In
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 March 31, 2010 and
December 31, 2009, our interest in the whole loan had a carrying value of
$62,740 and $63,894, respectively. The investment in the mezzanine loan was
repaid in full in September 2007.




In April
2007, we purchased for $103,200 a 45% TIC interest to acquire the fee interest
in a parcel of land located at 2 Herald Square, located along 34 th 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 March 31, 2010 and December 31, 2009, the investment had a
carrying value of $32,909 and $31,557, respectively. We recorded our pro rata
share of net income of $1,263 for the three months ended March 31, 2010 and
2009, respectively.


69




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 March 31, 2010 and December
31, 2009, the investment had a carrying value of $47,217 and $45,695,
respectively. We recorded our pro rata share of net income of $1,523 and $1,519
for the three months ended March 31, 2010 and 2009, respectively.




Our
agreements with SL Green in connection with our commercial property investments
in 885 Third Avenue and 2 Herald Square contain a buy-sell provision 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.




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 March 31, 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 March 31, 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 March 31, 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 March 31, 2010 and December 31, 2009, the loan has a book value of
$28,259 and $28,228, respectively.




In August
2008, we closed on the purchase from an SL Green affiliate of a $9,375
pari-passu participation interest in $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 March 31, 2010 and 2009 the loan
has a book value of $9,889 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 March 31, 2010 and 2009, the loan has a book value of $30,381 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.


70




FFO for
the three months ended March 31, 2010 and 2009 are as follows:





For the Three Months EndedMarch 31, 2010
                  
                  
                  March 31, 2009Net
      income (loss) available to common shareholders
                  
                  $
                  (24,768
                  )
                  
                  $
                  (27,291
                  )Add:Depreciation
      and amortization
                  
                  
                  29,565
                  
                  
                  
                  30,698FFO
      adjustments for unconsolidated joint ventures
                  
                  
                  1,080
                  
                  
                  
                  1,173Less:Non
      real estate depreciation and amortization
                  
                  
                  (2,185
                  )
                  
                  
                  (2,989
                  )Gain
      on sale
                  
                  
                  (1,041
                  )
                  
                  
                  (358
                  )Funds
      from operations
                  
                  $
                  2,651
                  
                  
                  $
                  1,233Funds
      from operations per share - basis
                  
                  $
                  0.05
                  
                  
                  $
                  0.02Funds
      from operations per share - diluted
                  
                  $
                  0.05
                  
                  
                  $
                  0.02




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;





•
            the
      ability of our Gramercy Realty division to extend or restructure the terms
      of our 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;





•
            maintenance
      of our liquidity needs, including balloon debt
  payments;




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


•
            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;


71





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





•
            our
      ability to maintain compliance with over-collateralization and interest
      coverage tests in our CDOs;





•
            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;





•
            changes
      to our management;





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





•
            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;





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





•
            risks
      of structured finance investments;





•
            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 taxable REIT
      subsidiaries 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.


72




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




Recently
Issued Accounting Pronouncements




In April
2009, the FASB issued guidance on other-than-temporary-impairments that amends
the impairment guidance relating to certain debt securities and required a
company to assess the likelihood of selling the security prior to recovering its
cost basis. Additionally, when a company meets the criteria for impairment, the
impairment charges related to credit losses would be recognized in earnings,
while non-credit losses would be reflected in other comprehensive income. We
have adopted this standard effective April 1, 2009. Adoption of the new guidance
did not have a material impact on our Condensed Consolidated Financial
Statements.




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




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




In May
2009, the FASB issued new guidance that incorporates into authoritative
accounting literature certain guidance that already existed within generally
accepted auditing standards relative to the reporting of subsequent events, with
the requirements concerning recognition and disclosure of subsequent events
remaining essentially unchanged. This guidance addresses events which occur
after the balance sheet date but before the issuance of financial statements.
Under the new guidance, as under previous practice, an entity must record the
effects of subsequent events that provide evidence about conditions that existed
at the balance sheet date and must disclose but not record the effects of
subsequent events which provide evidence about conditions that did not exist at
the balance sheet date. This standard added an additional required disclosure
relative to the date through which subsequent events have been evaluated and
whether that is the date on which the financial statements were issued. We
adopted this standard effective April 1, 2009. In February 2010, the FASB issued
an Accounting Standards Update (ASU) clarifying the application of this guidance
to entities, specifying that if an entity is an SEC filer then it should
evaluate subsequent events through the date the financial statements are
available to be issued. Additionally the ASU incorporates a definition of an SEC
filer and states that an SEC filer is not required to disclose the date through
which subsequent events have been evaluated. We have applied this update to our
financial statements for the period ended March 31, 2010.




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 will not have a material impact on ourCondensed 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
will not have a material impact on our Condensed Consolidated Financial
Statements.





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 the 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.  We have determined the adoption of this guidance did not
have a material impact on our Condensed Consolidated Financial
Statements.


73




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK




Market
Risk




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




We rely
on the credit and equity markets to finance and grow our business.  Despite
signs of moderate 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.  As a
result we have reduced new investment activity until the capital markets become
more stable and market liquidity increases. In this environment, we are 
focused on reducing leverage, extending or restructuring Gramercy Realty’s
$241,324 mortgage loan and $552,989 of senior and junior mezzanine loans,
actively managing portfolio credit, generating liquidity from existing assets,
extending debt maturities, reducing capital expenditures and renewing
expiring leases.




Real
Estate Risk




Commercial
and multi-family property values and net operating income derived from such
properties are subject to volatility and may be affected adversely by a number
of factors, including, but not limited to, national, regional and local economic
conditions, 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:





Change in LIBOR
                  
                  Projected Increase
                    (Decrease) in Net IncomeBase
      case+100bps
                  
                  $
                  (2,668
                  )+200bps
                  
                  $
                  (5,337
                  )+300bps
                  
                  $
                  (8,005
                  )




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


74




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.


75




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.


76




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


77




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).10.1
                  
                  Second
      Amendment to Loan Agreement, dated as of March 9, 2010, by and among
      Goldman Sachs Mortgage Company, Citicorp North America, Inc.. SL Green
      Realty Corp., collectively as lender, and certain subsidiaries of Gramercy
      Capital Corp., as borrowers (incorporated by reference to Exhibit 10.1 of
      the Company's Current Report on Form 8-K which was filed with the
      Commission on March 15, 2010).10.2
                  
                  Amendment
      to Amended and Restated Senior Mezzanine Loan Agreement, dated as of March
      9, 2010, by and among KBS Debt Holdings, LLC, as lender, and the required
      equity pledgors named therein and American Financial Realty Trust, GKK
      Stars Acquisition LLC, First States Group, L.P., First States Group, LLC,
      collectively as borrowers (incorporated by reference to Exhibit 10.2 of
      the Company's Current Report on Form 8-K which was filed with the
      Commission on March 15, 2010).10.3
                  
                  Amendment
      to Junior Mezzanine Loan Agreement, dated as of March 9, 2010, by and
      among Goldman Sachs Mortgage Company, Citicorp North America, Inc., SL
      Green Realty Corp., collectively as lender, and GKK Stars Junior Mezz 2
      LLC, as borrower (incorporated by reference to Exhibit 10.3 of the
      Company's Current Report on Form 8-K which was filed with the Commission
      on March 15, 2010).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.


78





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.


79


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:
      May 10, 2010
              By:
              /s/
      Jon W. ClarkName:
      Jon W. ClarkTitle:
      Chief Financial Officer


80