**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

 

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

**For thequarterly period ended June 30, 2007**

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

**For thetransition period from                        to                        .**

**CommissionFile Number: 001-32248**

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**GRAMERCY CAPITAL CORP.**

(Exact name ofregistrant as specified in its charter)

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

 

**420 Lexington Avenue, New York,New York 10170**

(Address ofprincipal executive offices) (Zip Code)

**(212) 297-1000**

(Registrant’stelephone number, including area code)

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  YES x     NO o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer” and “non-acceleratedfiler” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

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

The number of shares outstanding of the registrant’s common stock,$0.001 par value, was 26,074,971 as of August9, 2007.

 

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**GRAMERCYCAPITAL CORP.**

**INDEX**
| **PART I.** | **FINANCIAL  INFORMATION** |
|-------------|----------------------------|
| ** **  | ** **                 |
| **ITEM 1.** | **FINANCIAL  STATEMENTS**  |

 
|                                                                                                          | ** **                                                                                      | **PAGE**   |
|----------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|------------|
|                                                                                                     | ** **                                                                                      | ** ** |
| Consolidated Balance Sheets as of June 30, 2007  (unaudited) and December 31, 2006                       |                                                                                            | 1          |
|                                                                                                     |                                                                                            |       |
| Consolidated Statements of Income for the three and  six months ended June 30, 2007 and 2006 (unaudited) |                                                                                            | 2          |
|                                                                                                     |                                                                                            |       |
| Consolidated Statement of Stockholders’ Equity for the  six months ended June 30, 2007 (unaudited)  |                                                                                            | 3          |
|                                                                                                     |                                                                                            |       |
| Consolidated Statements of Cash Flows for the six  months ended June 30, 2007 and 2006 (unaudited)       |                                                                                            | 4          |
|                                                                                                     |                                                                                            |       |
| Notes to Consolidated Financial Statements (unaudited)                                                   |                                                                                            | 5          |
|                                                                                                     |                                                                                            |       |
|                                                                                                     |                                                                                            |       |
| **ITEM 2.**                                                                                              | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** | ** ** | 29 |
|                                                                                                     |                                                                                            |       |
| ** **                                                                                               |                                                                                            |       |
| **ITEM 3.**                                                                                              | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                 |       | 50 |
| ** **                                                                                               | ** **                                                                                      |       |   |
| **ITEM 4.**                                                                                              | **CONTROLS AND  PROCEDURES**                                                                    |       | 53 |
| ** **                                                                                               | ** **                                                                                      |       |   |
| **PART II.**                                                                                             | **OTHER INFORMATION**                                                                           |       | 54 |
| ** **                                                                                               | ** **                                                                                      |       |   |
| **ITEM 1.**                                                                                              | **LEGAL PROCEEDINGS**                                                                           |       | 54 |
| ** **                                                                                               | ** **                                                                                      |       |   |
| **ITEM 1A.**                                                                                             | **RISK FACTORS**                                                                                |       | 54 |
| ** **                                                                                               | ** **                                                                                      |       |   |
| **ITEM 2.**                                                                                              | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                |       | 54 |
| ** **                                                                                               | ** **                                                                                      |       |   |
| **ITEM 3.**                                                                                              | **DEFAULTS UPON  SENIOR SECURITIES**                                                            |       | 54 |
| ** **                                                                                               | ** **                                                                                      |       |   |
| **ITEM 4.**                                                                                              | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                        |       | 54 |
| ** **                                                                                               | ** **                                                                                      |       |   |
| **ITEM 5.**                                                                                              | **OTHER INFORMATION**                                                                           |       | 54 |
| ** **                                                                                               | ** **                                                                                      |       |   |
| **ITEM  6.**                                                                                             | **EXHIBITS**                                                                                    |       | 55 |
| ** **                                                                                               | ** **                                                                                      |       |   |
| **Signatures**                                                                                           |                                                                                            | 57         |

 

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**PART I.                 FINANCIAL INFORMATION**

**ITEM 1.                  Financial Statements**

**GramercyCapital Corp.**

**Consolidated Balance Sheets**

**(Amountsin thousands, except share and per share data)**

 
| ** **                                                                                                                                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                            | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                                            | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **Assets:**                                                                                                                                                                                                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                                                                                                                                                             |       | $                 | 19,403     |                  | $          | 19,314 |   |
| Restricted cash  equivalents                                                                                                                                                                                                          |       | 148,652           |       | 354,283               |       |
| Loans and other lending  investments, net                                                                                                                                                                                             |       | 2,635,115         |       | 2,144,151             |       |
| Commercial mortgage  backed securities, available-for-sale                                                                                                                                                                            |       | 24,065            |       | —                |       |
| Investment in  unconsolidated joint ventures                                                                                                                                                                                          |       | 74,302            |       | 57,567                |       |
| Loans held for sale,  net                                                                                                                                                                                                             |       | 194,641           |       | 42,733                |       |
| Commercial real estate,  net                                                                                                                                                                                                          |       | 102,092           |       | 99,821                |       |
| Accrued interest                                                                                                                                                                                                                      |       | 15,246            |       | 12,092                |       |
| Deferred financing  costs                                                                                                                                                                                                             |       | 26,901            |       | 27,456                |       |
| Deferred costs                                                                                                                                                                                                                        |       | 1,312             |       | 1,271                 |       |
| Derivative instruments,  at fair value                                                                                                                                                                                                |       | 12,898            |       | 2,910                 |       |
| Other assets                                                                                                                                                                                                                          |       | 2,490             |       | 4,515                 |       |
| Total assets                                                                                                                                                                                                                          |       | $                 | 3,257,117  |                  | $          | 2,766,113 |   |
| ** **                                                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Liabilities and Stockholders’  Equity:**                                                                                                                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Repurchase agreements                                                                                                                                                                                                                 |       | $                 | 556,659    |                  | $          | 277,412 |   |
| Credit facilities                                                                                                                                                                                                                     |       | 90,000            |       | 15,000                |       |
| Collateralized debt  obligations                                                                                                                                                                                                      |       | 1,714,250         |       | 1,714,250             |       |
| Mortgage note payable                                                                                                                                                                                                                 |       | 94,525            |       | 94,525                |       |
| Management fees payable                                                                                                                                                                                                               |       | 2,301             |       | 2,093                 |       |
| Incentive fee payable                                                                                                                                                                                                                 |       | 3,784             |       | 1,195                 |       |
| Dividends payable                                                                                                                                                                                                                     |       | 18,225            |       | 14,419                |       |
| Accounts payable and  accrued expenses                                                                                                                                                                                                |       | 25,414            |       | 24,750                |       |
| Other liabilities                                                                                                                                                                                                                     |       | 10,041            |       | 11,809                |       |
| Junior subordinated  deferrable interest debentures held by trusts that issued trust preferred  securities                                                                                                                            |       | 150,000           |       | 150,000               |       |
| Total liabilities                                                                                                                                                                                                                     |       | 2,665,199         |       | 2,305,453             |       |
|                                                                                                                                                                                                                                  |       |              |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                                        |       | —            |       | —                |       |
| ** **                                                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Stockholders’ Equity:**                                                                                                                                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| Common stock, par value  $0.001, 100,000,000 shares authorized, 26,072,471and 25,878,391 shares issued and outstanding at June 30, 2007  and December 31, 2006, respectively                                                          |       | 26                |       | 26                    |       |
| Series A cumulative  redeemable preferred stock, par value $0.001, liquidation preference  $115,000, 4,600,000 shares authorized, 4,600,000 and 0 shares issued and  outstanding at June 30, 2007 and December 31, 2006, respectively |       | 111,205           |       | —                |       |
| Additional  paid-in-capital                                                                                                                                                                                                           |       | 457,956           |       | 453,766               |       |
| Accumulated other  comprehensive income                                                                                                                                                                                               |       | 12,517            |       | 2,890                 |       |
| Retained earnings                                                                                                                                                                                                                     |       | 10,214            |       | 3,978                 |       |
| Total  stockholders’ equity                                                                                                                                                                                                      |       | 591,918           |       | 460,660               |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                       |       | $                 | 3,257,117  |                  | $          | 2,766,113 |   |

 

The accompanying notes are an integral part of these financialstatements.

1

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**GramercyCapital Corp.**

**Consolidated Statements of Income**

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

 
| ** **                                                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                          | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenues**                                                                                        | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment income                                                                                   |       | $                                | 72,828     |                           | $          | 39,134 |   | $ | 132,797 |   | $ | 71,013 |   |
| Rental revenue, net                                                                                 |       | 1,850                            |       | —                         |       | 3,586 |   | 914 |   |
| Gain on sales and other income                                                                      |       | 3,625                            |       | 4,371                          |       | 10,054 |   | 8,568 |   |
| Total revenues                                                                                      |       | 78,303                           |       | 43,505                         |       | 146,437 |   | 80,495 |   |
| ** **                                                                                          | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Expenses**                                                                                        | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                                                                    |       | 39,209                           |       | 20,777                         |       | 75,670 |   | 38,499 |   |
| Management fees                                                                                     |       | 5,414                            |       | 3,861                          |       | 10,253 |   | 7,384 |   |
| Incentive fee                                                                                       |       | 3,784                            |       | 1,578                          |       | 6,601 |   | 2,771 |   |
| Depreciation and amortization                                                                       |       | 1,088                            |       | 228                            |       | 1,759 |   | 683 |   |
| Marketing, general and administrative                                                               |       | 4,103                            |       | 2,779                          |       | 7,923 |   | 5,549 |   |
| Provision for loan loss                                                                             |       | 2,900                            |       | 500                            |       | 4,148 |   | 500 |   |
| Total expenses                                                                                      |       | 56,498                           |       | 29,723                         |       | 106,354 |   | 55,386 |   |
| Income before equity in net income (loss) of  unconsolidated joint ventures and provision for taxes |       | 21,805                           |       | 13,782                         |       | 40,083 |   | 25,109 |   |
| Equity in net income (loss) of unconsolidated joint  ventures                                       |       | 484                              |       | (630                           | )          | (211 | ) | (1,357 | ) |
| Income before provision for taxes                                                                   |       | 22,289                           |       | 13,152                         |       | 39,872 |   | 23,752 |   |
| Provision for taxes                                                                                 |       | (429                             | )          | (335                           | )          | (963 | ) | (382 | ) |
| Net Income                                                                                          |       | 21,860                           |       | 12,817                         |       | 38,909 |   | 23,370 |   |
| Preferred stock dividends                                                                           |       | (1,895                           | )          | —                         |       | (1,895 | ) | — |   |
| Net income available to common stockholders                                                         |       | $                                | 19,965     |                           | $          | 12,817 |   | $ | 37,014 |   | $ | 23,370 |   |
|                                                                                                |       |                             |       |                           |       |   |   |   |   |
| **Basic  earnings per share:**                                                                      | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income available to common stockholders                                                         |       | $                                | 0.77       |                           | $          | 0.53 |   | $ | 1.42 |   | $ | 0.99 |   |
| **Diluted  earnings per share:**                                                                    | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income available to common stockholders                                                         |       | $                                | 0.73       |                           | $          | 0.50 |   | $ | 1.35 |   | $ | 0.94 |   |
| Dividends per common share                                                                          |       | $                                | 0.63       |                           | $          | 0.51 |   | $ | 1.19 |   | $ | 1.01 |   |
| Basic weighted average common shares outstanding                                                    |       | 26,049                           |       | 24,334                         |       | 26,037 |   | 23,575 |   |
| Diluted weighted  average common shares and common share equivalents outstanding                    |       | 27,462                           |       | 25,530                         |       | 27,467 |   | 24,767 |   |

 

Theaccompanying notes are an integral part of these financial statements.

2

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**GramercyCapital Corp.**

**Consolidated Statement of Stockholders’ Equity**

**(Unaudited, amounts in thousands, except sharedata)**
| ** **                                              | ** ** | **Common** | ** ** | **Series A Preferred  Stock** | ** ** | **Additional  Paid-  In-Capital** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** | **Comprehensive  Income** | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|------------------------|------------|-----------|------------|---------------------------|------------|
| **Stock**                                               |
| ** **                                              | ** ** | **Par**    |
| **Shares**                                              | ** ** | **Value**  |
| **Balance  at December 31, 2006**                       |       | 25,878     |       | $                                       | 26         |                              | $          | —                                        |       | $                      | 453,766    |      | $          | 2,890                     |       | $ | 3,978 |   | $ | 460,660 |   |   |   |
| Net income                                              |       |       |       |                                    |       |                              |       |                                          |       |                   |       | 38,909    |       | 38,909                    |       | $ | 38,909 |   |
| Net unrealized  gain on derivative instruments          |       |       |       |                                    |       |                              |       |                                          |       | 10,864                 |       |      |       | 10,864                    |       | 10,864 |   |
| Net unrealized  loss on securities available-for-sale   |       |       |       |                                    |       |                              |       |                                          |       | (1,237                 | )          |      |       | (1,237                    | )          | (1,237 | ) |
| Stock-based  compensation — fair value             |       |       |       |                                    |       |                              |       | 2,374                                         |       |                   |       |      |       | 2,374                     |       |   |   |
| Proceeds from  stock option exercises                   |       | 57         |       |                                    |       |                              |       | 1,050                                         |       |                   |       |      |       | 1,050                     |       |   |   |
| Deferred  compensation plan, net                        |       | 137        |       |                                    |       |                              |       | 766                                           |       |                   |       |      |       | 766                       |       |   |   |
| Issuance of  shares of preferred stock, net of expenses |       |       |       |                                    |       | $                                 | 111,205    |                                          |       |                   |       |      |       |                      | 111,205    |   |   |   |
| Dividends  declared on preferred stock                  |       |       |       |                                    |       |                              |       |                                          |       |                   |       | (1,895    | )          | (1,895                    | )          |   |   |
| Dividends  declared on common stock                     |       |       |       |                                    |       |                              |       |                                          |       |                   |       | (30,778   | )          | (30,778                   | )          |   |   |
| **Balance at June 30, 2007**                            |       | 26,072     |       | $                                       | 26         |                              | $          | 111,205                                       |       | $                      | 457,956    |      | $          | 12,517                    |       | $ | 10,214 |   | $ | 591,918 |   | $ | 48,536 |   |

 

Theaccompanying notes are an integral part of these financial statements

3

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**Gramercy Capital Corp.**

**ConsolidatedStatements of Cash Flows**

**(Unaudited,amounts in thousands)**
| ** **                                                                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **Operating Activities**                                                                        | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income                                                                                      |       | $                                                 | 38,909     |   | $ | 23,370 |   |
| Adjustments to  reconcile net income to net cash provided by / (used in) operating  activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                                   |       | 6,220                                             |       | 2,743 |   |
| Amortization of discount, premium and other fees on  investments                                |       | (15,588                                           | )          | (4,663 | ) |
| Deferred rents receivable                                                                       |       | (3,586                                            | )          | — |   |
| Equity in net loss of unconsolidated joint ventures                                             |       | 211                                               |       | 1,357 |   |
| Gain on sale of security interests in operating real  estate                                    |       | —                                            |       | (4,350 | ) |
| Amortization of stock compensation                                                              |       | 3,140                                             |       | 1,589 |   |
| Provision for loan loss                                                                         |       | 4,148                                             |       | 500 |   |
| Unrealized loss on derivative instruments                                                       |       | 33                                                |       | — |   |
| Net realized gain on loans held for sale and loan  commitments                                  |       | (4,354                                            | )          | (753 | ) |
| Changes in  operating assets and liabilities:                                                   |       |                                              |       |   |   |
| New investments in loans held for sale                                                          |       | (151,638                                          | )          | (62,213 | ) |
| Proceeds from sale of loans held for sale and loan  commitments                                 |       | 177,414                                           |       | 41,665 |   |
| Accrued interest                                                                                |       | (3,154                                            | )          | (3,850 | ) |
| Other assets                                                                                    |       | 2,021                                             |       | (1,496 | ) |
| Management fees payable                                                                         |       | 208                                               |       | 355 |   |
| Incentive fee payable                                                                           |       | 2,589                                             |       | 1,534 |   |
| Settlement of derivative instruments                                                            |       | (460                                              | )          | 843 |   |
| Accounts payable, accrued expenses and other  liabilities                                       |       | (2,051                                            | )          | 22,456 |   |
| Net cash  provided by operating activities                                                      |       | 54,062                                            |       | 19,087 |   |
| **Investing Activities**                                                                        |       |                                              |       |   |   |
| New investment originations and funded commitments                                              |       | (1,218,083                                        | )          | (715,095 | ) |
| Principal collections on investments                                                            |       | 550,909                                           |       | 288,106 |   |
| Proceeds from loan syndications                                                                 |       | 15,139                                            |       | — |   |
| Investment in commercial real estate                                                            |       | 151                                               |       | (98,925 | ) |
| Proceeds from the sale of security interests in  operating real estate                          |       | —                                            |       | 12,800 |   |
| Investment in securities available for sale                                                     |       | (25,160                                           | )          | — |   |
| Investment in joint venture                                                                     |       | (16,946                                           | )          | — |   |
| Change in restricted cash from investing activities                                             |       | 7,283                                             |       | (20,985 | ) |
| Deferred investment costs                                                                       |       | (1,257                                            | )          | (1,299 | ) |
| Net cash used in investing activities                                                           |       | (687,964                                          | )          | (535,398 | ) |
| **Financing Activities**                                                                        |       |                                              |       |   |   |
| Proceeds from repurchase facilities                                                             |       | 1,067,114                                         |       | 743,124 |   |
| Repayments of repurchase facilities                                                             |       | (787,867                                          | )          | (467,321 | ) |
| Proceeds from unsecured revolving credit facility                                               |       | 75,000                                            |       | — |   |
| Proceeds from mortgage note payable                                                             |       | —                                            |       | 94,525 |   |
| Change in restricted cash from financing activities                                             |       | 198,374                                           |       | — |   |
| Settlement of derivative instruments                                                            |       | —                                            |       | 770 |   |
| Proceeds from stock options exercised                                                           |       | 1,050                                             |       | 45 |   |
| Net proceeds from sale of common stock                                                          |       | —                                            |       | 79,955 |   |
| Net proceeds from sale of preferred stock                                                       |       | 111,205                                           |       | — |   |
| Issuance of trust preferred securities                                                          |       | —                                            |       | 50,000 |   |
| Deferred financing costs and other liabilities                                                  |       | (2,017                                            | )          | 4,711 |   |
| Dividends paid                                                                                  |       | (28,868                                           | )          | (22,019 | ) |
| Net cash provided by financing activities                                                       |       | 633,991                                           |       | 483,790 |   |
| Net increase (decrease) in cash and cash equivalents                                            |       | 89                                                |       | (32,521 | ) |
| Cash and cash equivalents at beginning of period                                                |       | 19,314                                            |       | 70,576 |   |
| Cash and cash equivalents at end of period                                                      |       | $                                                 | 19,403     |   | $ | 38,055 |   |
| **Non-cash activity**                                                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Change in investment in unconsolidated joint  ventures                                          |       | —                                            |       | $ | 2,545 |   |
| Change in fair value of other assets                                                            |       | —                                            |       | $ | (700 | ) |
| **Supplemental cash flow disclosures**                                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Interest paid                                                                                   |       | $                                                 | 71,539     |   | $ | 34,571 |   |
| Income taxes  paid                                                                              |       | $                                                 | 850        |   | $ | 259 |   |

 

Theaccompanying notes are an integral part of these financial statements.

4

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**Gramercy CapitalCorp.**

**Notes To Consolidated Financial Statements**

**(Unaudited, amountsin thousands, except share and per share data)**

**June 30,2007**

**1.   Organization**

Gramercy CapitalCorp. (the “Company” or “Gramercy”) is a commercial real estate specialty financecompany that focuses on the direct origination and acquisition of whole loans,subordinate interests in whole loans, mezzanine loans, preferred equity, andnet lease investments involving commercial properties throughout the UnitedStates.  We have also established a CMBSbusiness that focuses on the acquisition, trading and financing of commercialmortgage backed securities, or CMBS, and other real estate relatedsecurities.  When evaluatingtransactions, we assess our risk-adjusted return and target transactions withyields that seek to provide excess returns for the risks being taken.

Substantially allof our operations are conducted through GKK Capital LP, a Delaware limitedpartnership, or our Operating Partnership. We, as the sole general partner of, and currently the holder of 100% ofthe common units of, our Operating Partnership, have responsibility anddiscretion in the management and control of our Operating Partnership, and thelimited partners of our Operating Partnership, in such capacity, have noauthority to transact business for, or participate in the management activitiesof, our Operating Partnership. Accordingly, we consolidate the accounts of our Operating Partnership.

We are externallymanaged and advised by GKK Manager LLC, or our Manager, a majority-ownedsubsidiary of SL Green Realty Corp., or SL Green.  At June 30, 2007, SL Green ownedapproximately 25% of the outstanding shares of our common stock. We qualifiedas a real estate investment trust, or REIT, under the Internal Revenue Codecommencing with our taxable year ended December 31, 2004 and expect to qualifyfor the current fiscal year.  To maintainour tax status as a REIT, we plan to distribute at least 90% of our taxableincome.  Unless the context requiresotherwise, all references to “we,” “our,” and “us” means Gramercy Capital Corp.

As of June 30, 2007, we held loans, otherlending investments and CMBS of $2,853,821 net of fees, discounts, and unfundedcommitments with an average spread to LIBOR of 393 basis points for ourfloating rate investments, and an average yield of 8.68% for our fixed rateinvestments.  As of June 30, 2007, wealso held interests in four credit tenant lease, or CTL, investments andthe fee interest in a property subject to a long-term ground lease.

**Basis of Quarterly Presentation**

The accompanying financial statements have been preparedin accordance with accounting principles generally accepted in the UnitedStates for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, it does not include all of the information and footnotesrequired by accounting principles generally accepted in the United States, orGAAP, for complete financial statements. In management’s opinion, all adjustments (consisting of normal recurringaccruals) considered necessary for fair presentation have been included.  The 2007 operating results for theperiod presented are not necessarily indicative of the results that may beexpected for the year ending December 31, 2007.  These financialstatements should be read in conjunction with the financial statements andaccompanying notes included in the Company’s annual report on Form 10-K/A forthe year ended December 31, 2006.

The balance sheet at December 31, 2006 has beenderived from the audited financial statement at that date, but does not includeall the information and footnotes required by GAAP for complete financialstatements.

**2.   Significant Accounting Policies**

**Principles of Consolidation**

The consolidated financialstatements include our accounts and those of our subsidiaries which arewholly-owned or controlled by us, or entities which are variable interestentities in which we are the primary beneficiaries under FASB InterpretationNo. 46R, or FIN 46R, “Consolidation of Variable Interest Entities.”  FIN 46R requires a variable interestentity, or VIE, to be consolidated by its primary beneficiary.  The primary beneficiary is the party thatabsorbs a majority of the VIE’s anticipated losses and/or a majority of theexpected returns.  We have evaluated ourinvestments for potential classification as variable interests by evaluatingthe sufficiency of the entities’ equity investment at risk to absorb losses,and determined that we are not the primary beneficiary for any of ourinvestments.  Entities which we do notcontrol and entities which are VIE’s, but where we are not the primarybeneficiary, are accounted for under the equity method.  All significant intercompany balances andtransactions have been eliminated.

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**Variable Interest Entities**

Our ownership ofthe subordinated classes of CMBS from a single issuer may provide us with theright to control the foreclosure/workout process on the underlying loans.  There are certain exceptions to the scope ofFIN 46R, one of which provides that an investor that holds a variableinterest in a qualifying special-purpose entity (“QSPE”) does not consolidatethat entity unless the investor has the unilateral ability to cause the entityto liquidate. FASB Statement No. 140,or SFAS 140, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,”provides the requirements for an entityto qualify as a QSPE. To maintain the QSPE exception, the special-purposeentity must initially meet the QSPE criteria and must continue to satisfy suchcriteria in subsequent periods. A special-purpose entity’s QSPE status can beaffected in future periods by activities by its transferors or other involvedparties, including the manner in which certain servicing activities areperformed. To the extent that our CMBS investments were issued by aspecial-purpose entity that meets the QSPE requirements, we record thoseinvestments at the purchase price paid. To the extent the underlyingspecial-purpose entities do not satisfy the QSPE requirements, we follow theguidance set forth in FIN 46R as the special-purpose entities would bedetermined to be VIEs.

Wehave analyzed the pooling and servicing agreements governing each of ourcontrolling class CMBS investments and we believe that the terms of thoseagreements conform to industry standards and are consistent with the QSPEcriteria. However, there is uncertainty with respect to QSPE treatment due toongoing review by accounting standard setters, potential actions by variousparties involved with the QSPE (discussed in the paragraph above), as well asvarying and evolving interpretations of the QSPE criteria under SFAS No.140.  Additionally, the standard setterscontinue to review the FIN 46R provisions related to the computations used todetermine the primary beneficiary of a VIE.

AtJune 30, 2007, we owned securities of two CMBS trusts with a par value of$34,451.  The total par amounts of CMBSissued by the two CMBS trusts was $904,654.  Using the fair valueapproach to calculate expected losses or residual returns, we have concludedthat we would not be the primary beneficiary of any of the underlyingspecial-purpose entities.   At June 30,2007, our maximum exposure to loss as a result of our investment in these QSPEstotaled $25,302, which equals the book value of these investments as ofJune 30, 2007.

Thefinancing structures that we offer to the borrowers on certain of our realestate loans involve the creation of entities that could be deemed VIEs and therefore,could be subject to FIN 46R.  Ourmanagement has evaluated these entities and has concluded that none of suchentities are VIEs that are subject to the consolidation rules of FIN 46R.

**Cashand Cash Equivalents**

We consider all highly liquid investments with maturities of threemonths or less when purchased to be cash equivalents.

**RestrictedCash**

**Restricted cash at June 30, 2007consists primarily of $123,819**on deposit with the trustee of our collateralizeddebt obligations, or CDOs, representing the proceeds of repayments from loansserving as collateral in our CDOs, which will be used to fund investments toreplace those trust assets which are repaid or sold by the trust, interestpayments received by the trustee on investments that serve as collateral forour CDOs, which are remitted to us on a quarterly basis in the month followingthe end of our fiscal quarter, and future funding obligations on certaininvestments.  The remaining balance of$24,833 consists of interest reserves held on behalf of borrowers and our shareof the reserves of 55 Corporate Drive, a consolidated tenancy-in-common, or TIC, interest.

### **Loans and Investments and Loans Held for Sale**

Loans held forinvestment are intended to be held to maturity and, accordingly, are carried atcost, net of unamortized loan origination fees, discounts, repayments, sales ofpartial interests in loans, and unfunded commitments unless such loan orinvestment is deemed to be impaired. Loans held for sale are carried at the lower of cost or market valueusing available market information obtained through consultation with dealersor other originators of such investments. We may originate or acquire preferred equity interests that allow us toparticipate in a percentage of the underlying property’s cash flows fromoperations and proceeds from a sale or refinancing.  Should we make such a preferred equityinvestment, we must determine whether that investment should be accounted foras a loan, joint venture or as an interest in real estate.

Specific valuation allowances are established for impaired loans basedon the fair value of collateral on an individual loan basis.  The fair value of the collateral isdetermined by selecting the most appropriate valuation methodology, ormethodologies, among several generally available and accepted  in the commercial real estate industry.  The determination of the most appropriatevaluation methodology is based on the key characteristics of the collateraltype.  These methodologies include theevaluation of operating cash

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flow from the property during the projected holding period, and theestimated sales value of the collateral computed by applying an expectedcapitalization rate to the stabilized net operating income of the specificproperty, less selling costs, all of which are discounted at market discountrates.

 

If upon completionof the valuation, the fair value of the underlying collateral securing theimpaired loan is less than the net carrying value of the loan, an allowance iscreated with a corresponding charge to the provision for loan losses.  The allowance for each loan is maintained ata level we believe is adequate to absorb probable losses.  We maintained a reserve of $6,608 and $2,460at June 30, 2007 and December 31, 2006, respectively.

Our Manager evaluatesour assets on a regular basis to determine if they continue to satisfy ourinvestment criteria. Subject to certain restrictions, our Manager may cause usto sell our investments opportunistically and use the proceeds of any such salefor debt reduction, additional acquisitions or working capital purposes.

#### **Commercial Mortgage Backed Securities Available-for-Sale**

The Company hasdesignated CMBS as available-for-sale as the Company may dispose of thesecurities prior to maturity and the Company does not hold them for the purposeof selling them in the near-term.   Available-for-sale securities are carried at estimated fair value withthe net unrealized gains or losses recorded as a component of accumulated othercomprehensive income (loss) in stockholders equity.  Unrealized losses on securities that in thejudgment of management is other than temporary, are charged against earnings asa loss on the income statement.

When the fairvalue of an available-for-sale security is less than the amortized cost, weconsider whether there is an other-than-temporary impairment in the value ofthe security (for example, whether the security will be sold prior to therecovery of fair value).  If, in our judgment, an other-than-temporary impairmentexists, the cost basis of the security is reduced to the then-current fairvalue, and this loss is realized and charged against earnings.  Thedetermination of other-than-temporary impairment is a subjective process, anddifferent judgments and assumptions could affect the timing of lossrealization.

We determine thefair value of CMBS based on the types of securities in which we haveinvested.  For liquid, investment-gradesecurities, we consult with dealers of such securities to periodically obtainupdated market pricing for the same or similar instruments.  For non-investment grade securities, weactively monitor the performance of the underlying properties and loans andupdate our pricing model to reflect changes in projected cash flows.  The value of the securities is derived byapplying discount rates to such cash flows based on current market yields.  The yields employed are obtained from our ownexperience in the market, advice from dealers and/or information obtained inconsultation with other investors in similar instruments.  Because fair value estimates may vary to somedegree, we must make certain judgments and assumptions about the appropriateprice to use to calculate the fair values for financial reportingpurposes.  Different judgments and assumptionscould result in different presentations of value.

In accordance withSFAS No. 115, when the estimated fair value of the security classified asavailable-for-sale has been below amortized cost for a significant period oftime and the Company concludes that it no longer has the ability or intent tohold the security for the period of time over which the Company expects thevalues to recover to amortized cost, the investment is written down to its fairvalue, and this loss is realized and charged against earnings.

#### **Credit Tenant Lease Investments**

Consolidated CTL investments are recorded at cost lessaccumulated depreciation.  Costs directlyrelated to the acquisition of such investments are capitalized.  Certain improvements are capitalized whenthey are determined to increase the useful life of the building.  Capitalized items are depreciated using thestraight-line method over the shorter of the useful lives of the capitalizeditem or 40 years for buildings or facilities, the remaining life of the facilityfor facility improvements, four to seven years for personal property andequipment, and the shorter of the remaining lease term or the expected life fortenant improvements.

Results of operations of properties acquired are included inthe Statement of Income from the date of acquisition.

In accordance with FASB No. 144, or SFAS 144, “Accountingfor the Impairment of Disposal of Long-Lived Assets,” a property to be disposedof is reported at the lower of its carrying amount or its estimated fair value,less its cost to sell.  Once an asset isheld for sale, depreciation expense and straight-line rent adjustments are nolonger recorded and historic results are reclassified as DiscontinuedOperations.

In accordance with FASB No. 141, or SFAS 141, “BusinessCombinations,” we allocate the purchase price of real estate to land andbuilding and, if determined to be material, intangibles, such as the value ofabove-, below- and at-market leases and origination costs

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associated with the in-place leases.  We depreciate theamount allocated to building and other intangible assets over their estimateduseful lives, which generally range from three to 40 years.  The values ofthe above- and below-market leases are amortized and recorded as either anincrease (in the case of below-market leases) or a decrease (in the case ofabove-market leases) to rental income over the remaining term of the associatedlease.  The value associated with in-place leases and tenant relationshipsare amortized over the expected term of the relationship, which includes anestimated probability of the lease renewal, and its estimated term.  If atenant vacates its space prior to the contractual termination of the lease andno rental payments are being made on the lease, any unamortized balance of therelated intangible will be written off.  The tenant improvements andorigination costs are amortized as an expense over the remaining life of thelease (or charged against earnings if the lease is terminated prior to itscontractual expiration date).  We assess fair value of the leases based onestimated cash flow projections that utilize appropriate discount andcapitalization rates and available market information.  Estimates offuture cash flows are based on a number of factors including the historicaloperating results, known trends, and market/economic conditions that may affectthe property.

**Investments in Unconsolidated Joint Ventures**

#### We account for our investments inunconsolidated joint ventures under the equity method of accounting since weexercise significant influence, but do not unilaterally control the entitiesand are not considered to be the primary beneficiary under FIN46R.  In thejoint ventures, the rights of the other investor are protective andparticipating. Unless we are determined to be the primary beneficiary, theserights preclude us from consolidating the investments.  The investmentsare recorded initially at cost as an investment in unconsolidated jointventures, and subsequently are adjusted for equity in net income (loss) andcash contributions and distributions.  Any difference between the carryingamount of the investments on our balance sheet and the underlying equity in netassets is amortized as an adjustment to equity in net income (loss) of unconsolidatedjoint ventures over the lesser of the joint venture term or 40 years. None of the joint venture debt is recourse to us.  As of June 30, 2007 and December 31, 2006, wehad investments in unconsolidated joint ventures of $74,302 and $57,567,respectively.

#### **Revenue Recognition**

Interest income ondebt investments is recognized over the life of the investment using theeffective interest method and recognized on the accrual basis.  Fees received in connection with loancommitments are deferred until the loan is funded and are then recognized overthe term of the loan using the effective interest method.  Anticipated exit fees, whose collection isexpected, are also recognized over the term of the loan as an adjustment toyield.  Fees on commitments that expireunused 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 recognizedover the term of that guarantee using the straight-line method.  Income recognition is generally suspended fordebt investments at the earlier of the date at which payments become 90 dayspast due or when, in our opinion, a full recovery of income and principalbecomes doubtful.  Income recognition isresumed when the loan becomes contractually current and performance isdemonstrated to be resumed.

In some instances we may sell all or a portion of our investments to athird party.  To the extent the fairvalue received for an investment exceeds the amortized cost of that investmentand FASB Statement No. 140, or SFAS 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities,” criteria ismet, under which control of the asset that is sold is surrendered making it a “truesale,” a gain on the sale will be recorded through earnings as otherincome.  To the extent an investment thatis sold has a discount or fees, which were deferred at the time the investmentwas made and were being recognized over the term of the investment, the unamortizedportion of the discount or fees are recognized at the time of sale and recordedas a gain on the sale of the investment through other income.  For the three months ended June 30, 2007 and2006, we recognized $1,668 and $314, respectively, and for the six months endedJune 30, 2007 and 2006, we recognized $4,354 and $1,428, respectively, in netgains from the sale of debt investments or commitments.

Rental revenue is recognized on astraight-line basis over the term of the lease. The excess of rents recognizedover amounts contractually due pursuant to the underlying leases is included inother assets on the accompanying balance sheets. We may establish, on a currentbasis, an allowance against this account for future potential tenant creditlosses, which may occur. The balance reflected on the balance sheet will be netof such allowance.

In addition to base rent, thetenants in our CTL investments also pay all operating costs of owned propertyincluding real estate taxes.

#### **Reserve for Possible Loan Losses**

The expense for possible loan losses in connection with debt investmentsis the charge to earnings to increase the allowance for possible loan losses tothe level that management estimates to be adequate considering delinquencies,loss experience and collateral quality. Other factors considered relate to geographic trends and projectdiversification, the size of the portfolio and current economicconditions.  Based upon these factors, wemay establish the provision for possible loan losses by individual asset orcategory of asset.

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When it is probable that we will be unable to collect all amountscontractually due, the account is considered impaired.

Where impairment is indicated, a valuation write-down or write-off ismeasured based upon the excess of the recorded investment amount over the netfair value of the collateral, as reduced by selling costs.  Any deficiency between the carrying amount ofan asset and the net sales price of foreclosed collateral is charged tothe allowance for loan losses.  Wemaintained a reserve for possible loan losses of $6,608 against investmentswith a carrying value of $153,721 as of June 30, 2007, and a reserve forpossible loan losses of $2,460 against investments with a carrying value of$131,427 as of December 31, 2006.

**Deferred Costs**

Deferred costsconsist of fees and direct costs incurred to originate new investments and areamortized using the effective yield method over the related term of theinvestment.

In March 2006, werecorded a nonrecurring charge of $525 for third-party professional expenses inconnection with a possible business combination involving the acquisition of apublicly-traded commercial real estate finance company with business linesconsidered by management to be highly complementary to ours.  The decision to expense these costs was madeonce management concluded the proposed transaction was unlikely to occur onterms advantageous to us.

**DeferredFinancing Costs**

Deferredfinancing costs represent commitment fees, legal and other third party costsassociated with obtaining commitments for financing which result in a closingof such financing.  These costs areamortized over the terms of the respective agreements and the amortization isreflected in interest expense. Unamortized deferred financing costs are expensed when the associateddebt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions, which do not close,are expensed in the period in which it is determined that the financing willnot close.

**Stock Based Compensation Plans**

We have a stock-based compensation plan, described more fully in Note14.  We account for this plan using thefair value recognition provisions of FASB Statement 123(R), “Share-BasedPayment, a revision of FASB Statement No. 123, Accounting for Stock-BasedCompensation.”

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

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

The fair value of each stockoption granted is estimated on the date of grant for awards to co-leasedemployees, and quarterly for options issued to non-employees, using theBlack-Scholes option pricing model with the following weighted averageassumptions for grants in 2007 and 2006.
|                                  | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|----------------------------------|------------|-----------|------------|-----------|------------|
| Dividend yield                   |       | 7.9       | %          | 8.0       | %          |
| Expected life of  option         |       | 6.0 years |       | 6.7 years |       |
| Risk-free  interest rate         |       | 5.04      | %          | 4.14      | %          |
| Expected stock price  volatility |       | 25.0      | %          | 21.0      | %          |

 

**IncentiveDistribution (Class B Limited Partner Interest)**

The Class Blimited partner interests are entitled to receive an incentive return equal to25% of the amount by which funds from operations, or FFO plus certainaccounting gains (as defined in the partnership agreement of our OperatingPartnership which was amended and restated in April 2006) exceed the product ofour weighted average stockholders equity (as defined in the amended andrestated partnership agreement of our Operating Partnership) multiplied by 9.5%(divided by four to adjust for quarterly calculations). We will record anydistributions on the Class B limited partner interests as an incentivedistribution expense in the period when earned and when payment of such amountshas become probable and reasonably estimable in accordance with the partnershipagreement.

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These cashdistributions will reduce the amount of cash available for distribution to ourcommon unit holders in our Operating Partnership and to commonstockholders.  We incurred approximately$3,784 and $6,601 with respect to such Class B limited partner interests forthe three and six months ended June 30, 2007, respectively, and $1,578 and$2,771 for the three and six months ended June 30, 2006, respectively.

#### **Derivative Instruments**

**In the normal course of business,we use a variety of derivative instruments to manage, or hedge, interest raterisk.  We require that hedging derivativeinstruments be effective in reducing the interest rate risk exposure that theyare designated to hedge.  Thiseffectiveness is essential for qualifying for hedge accounting.  Some derivative instruments are associatedwith an anticipated transaction.  Inthose cases, hedge effectiveness criteria also require that it be probable thatthe underlying transaction occurs. Instruments that meet these hedging criteria are formally designated ashedges at the inception of the derivative contract.**

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

In the normalcourse of business, we are exposed to the effect of interest rate changes andlimit these risks by following established risk management policies andprocedures including the use of derivatives. To address exposure to interest rates, we use derivatives primarily tohedge the mark-to-market risk of our liabilities with respect to certain of ourassets.  We may also use derivatives tohedge variability in sales proceeds to be received upon the sale of loans heldfor sale.

We use a varietyof commonly used derivative products that are considered plain vanilladerivatives.  These derivatives typicallyinclude interest rate swaps, caps, collars and floors.  We also use total rate of return swaps, orTROR swaps, which are tied to the Lehman Brothers CMBS index. We expresslyprohibit the use of unconventional derivative instruments and using derivativeinstruments for trading or speculative purposes.  Further, we have a policy of only enteringinto contracts with major financial institutions based upon their creditratings and other factors.

**FASB No. 133, or SFAS 133, “Accountingfor Derivative Instruments and Hedging Activities,” as amended by FASB No. 149,requires us to recognize all derivatives on the balance sheet at fairvalue.  Derivatives that are not hedgesmust 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 thechange in fair value of the hedged asset, liability, or firm commitment throughearnings, or recognized in other comprehensive income until the hedged item isrecognized in earnings.  The ineffectiveportion of a derivative’s change in fair value will be immediately recognizedin earnings.  SFAS 133 may increase ordecrease reported net income and stockholders’ equity prospectively, dependingon future levels of LIBOR, swap spreads and other variables affecting the fairvalues of derivative instruments and hedged items, but will have no effect oncash flows, provided the contract is carried through to full term.**

We may employswaps, forwards or purchased options to hedge qualifying forecastedtransactions.  Gains and losses relatedto these transactions are deferred and recognized in net income as interestexpense or other income in the same period or periods that the underlyingtransaction occurs, expires or is otherwise terminated.

All hedges held byus are deemed to be effective in meeting the hedging objectives established byour corporate policy governing interest rate risk management.  The effect of our derivative instruments onour financial statements is discussed more fully in Note 17.

# **IncomeTaxes**

We elected to betaxed 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 certainorganizational and operational requirements, including a requirement todistribute at least 90% of our ordinary taxable income to stockholders.  As a REIT, we generally will not be subjectto federal income tax on taxable income that we distribute to ourstockholders.  If we fail to qualify as aREIT in any taxable year, we will then be subject to federal income taxes onour taxable income at regular corporate rates and we will not be permitted to qualifyfor treatment as a REIT for federal income tax purposes for four yearsfollowing the year during which qualification is lost unless the InternalRevenue Service grants us relief under certain statutory provisions.  Such an event could materially adverselyaffect our net income and net cash available for distributions tostockholders.  However, we believe thatwe will be organized and operate in such a manner as to qualify for treatmentas a REIT and we intend to operate in the foreseeable future in such a mannerso that we will qualify as a REIT for federal income tax purposes.  We may, however, be subject to certain stateand local taxes.

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Our taxable REITsubsidiaries, individually referred to as a TRS, are subject to federal, stateand local taxes.

**UnderwritingCommissions and Costs**

**Underwriting commissions and costs incurred inconnection with our stock offerings are reflected as a reduction of additionalpaid-in-capital.**

**EarningsPer Share**

Wepresent both basic and diluted earnings per share, or EPS.  Basic EPS excludes dilution and is computedby dividing net income available to common stockholders by the weighted averagenumber of common shares outstanding during the period.  Diluted EPS reflects the potential dilutionthat could occur if securities or other contracts to issue common stock wereexercised or converted into common stock, where such exercise or conversionwould result in a lower EPS amount.

**Useof Estimates**

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

**Concentrationsof Credit Risk**

**Financialinstruments that potentially subject us to concentrations of credit riskconsist primarily of cash investments, debt investments and accountsreceivable.  Gramercy places its cashinvestments in excess of insured amounts with high quality financial institutions.  Our Manager performs ongoing analysis ofcredit risk concentrations in our debt investment portfolio by evaluatingexposure to various markets, underlying property types, investment structure,term, sponsors, tenants and other credit metrics.  Five investments accounted for more than 22%of the total carrying value of our debt investments as of June 30, 2007compared to four investments, which accounted for more than 21% of the totalcarrying value of our debt investments as of December 31, 2006. Fourinvestments accounted for approximately 20% and 19% of the revenue earned onour debt investments for the three and six months ended June 30, 2007 comparedto five investments which accounted for approximately 21% and 20% of therevenue earned on our debt investments for the three and six months ended June30, 2006.**

**Recently Issued Accounting Pronouncements**

**In June of 2006 the FASB issuedFinancial Interpretation No. 48, or FIN 48.  This interpretation clarifiesthe accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FAS 109. This interpretation prescribesa recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. This interpretation was effective January 1, 2007 for the Company.The adoption of FIN 48 did not have a material impact on our financial resultsfor the three and six months ended June 30, 2007.**

**In September 2006, the FASBissued Statement No. 157, Fair Value Measurements, or SFAS 157.  SFAS No. 157 provides guidance for using fairvalue to measure assets and liabilities. This statement clarifies the principlethat fair value should be based on the assumptions that market participantswould use when pricing the asset or liability. SFAS No. 157 establishes a fairvalue hierarchy, giving the highest priority to quoted prices in active marketsand the lowest priority to unobservable data. SFAS No. 157 applies wheneverother standards require assets or liabilities to be measured at fair value.This statement is effective in fiscal years beginning after November 15, 2007.We believe that the adoption of this standard on January 1, 2008 will not havea material effect on financial results.**

**In February 2007, the FASBissued Statement No. 159, or SFAS 159, ‘‘The Fair Value Option for FinancialAssets and Financial Liabilities.’’ SFAS 159 permits entities to choose tomeasure many financial instruments, and certain other items, at fair value.SFAS 159 also establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. SFAS 159 applies toreporting periods beginning after November 15, 2007.  W**e are currently evaluating the effect, ifany, that this pronouncement will have on our future financial results.

**In June 2007, the AmericanInstitute of Certified Public Accountants (“AICPA”) issued Statement ofPosition (“SOP”) 07-01 “Clarification of the Scope of the Audit and AccountingGuide Investment Companies and Accounting by Parent Companies and Equity MethodInvestors for Investments in Investment Companies” (“SOP 07-1”).  SOP 07-1 clarifies the scope of accountingfor investment companies and provides guidance for determining whether anentity is within the scope of the AICPA Audit and Accounting Guide InvestmentCompanies (the “Guide”).  For thoseentities that are investment companies under SOP 07-1, the specialized industryaccounting principles of the Guide (referred to as Investment Companyaccounting) should be retained by a parent company in consolidation or by anequity method investor.  The SOP alsoprovides for certain disclosure requirements for parent companies and equity**

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**method investors in investmentcompanies that continue investment company accounting in the parent’sconsolidated financial statements or the financial statements of the equitymethod investor.  The SOP is effectivefor fiscal years beginning on or after December 15, 2007.  While the Company maintains an exemption fromthe Investment Company Act of 1940, as amended, and is therefore not regulatedas an investment company, it is nonetheless in the process of assessing whetherSOP 07-1 is applicable.**

**3.   Loans, OtherLending Investments, and CMBS**

**The aggregate carrying values, allocated by producttype and weighted average coupons of our loans, other lending investments andCMBS as of June 30, 2007 and December 31, 2006 were as follows:**
| ** **                                           | ** ** | **Carrying Value (1)  ($ in thousands)** | ** ** | **Allocation by  Investment Type** | ** ** | **Fixed Rate:  Average Yield** | ** ** | **Floating Rate:  Average Spread over  LIBOR (2)** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                     | ** ** | **2006**                                     | ** ** | **2007**                                 | ** ** | **2006**                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Whole loans,  floating rate                          |       | $                                                            | 1,554,017  |                                         | $          | 1,372,316                                |       | 54                                                                     | %          | 63 | % | — |   | — |   | 338 | bps | 327 | bps |
| Whole loans,  fixed rate                             |       | 192,023                                                      |       | 42,376                                       |       | 7                                        | %          | 2                                                                      | %          | 7.94 | % | 11.69 | % | — |   | — |   |
| Corporate whole  loans – floating rate          |       | 146,620                                                      |       | —                                       |       | 5                                        | %          | —                                                                 |       | — |   | — |   | 210 | bps | — |   |
| Subordinate  interests in whole loans, floating rate |       | 154,575                                                      |       | 236,308                                      |       | 5                                        | %          | 11                                                                     | %          | — |   | — |   | 453 | bps | 445 | bps |
| Subordinate  interests in whole loans, fixed rate    |       | 44,556                                                       |       | 48,769                                       |       | 2                                        | %          | 2                                                                      | %          | 7.16 | % | 8.54 | % | — |   | — |   |
| Mezzanine loans,  floating rate                      |       | 476,068                                                      |       | 226,675                                      |       | 17                                       | %          | 10                                                                     | %          | — |   | — |   | 614 | bps | 665 | bps |
| Mezzanine loans,  fixed rate                         |       | 217,573                                                      |       | 216,216                                      |       | 8                                        | %          | 10                                                                     | %          | 8.93 | % | 9.92 | % | — |   | — |   |
| Preferred  equity, fixed rate                        |       | 44,324                                                       |       | 44,224                                       |       | 2                                        | %          | 2                                                                      | %          | 10.45 | % | 10.68 | % | — |   | — |   |
| CMBS, floating  rate                                 |       | 6,427                                                        |       | —                                       |       | —                                   | %          | —                                                                 | %          | — |   | — |   | 229 | bps | — |   |
| CMBS, fixed rate                                     |       | 17,638                                                       |       | —                                       |       | —                                   | %          | —                                                                 | %          | 12.98 | % | — |   | — |   | — |   |
| Total / Average                                      |       | $                                                            | 2,853,821  |                                         | $          | 2,186,884                                |       | 100                                                                    | %          | 100 | % | 8.68 | % | 10.04 | % | 393 | bps | 384 | bps |

 

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**(1)**          Debtinvestments are presented after scheduled amortization payments andprepayments, and are net of unamortized fees, discounts, asset sales andunfunded commitments.

**(2)**          Spreadsover an index other than LIBOR have been adjusted to a LIBOR based equivalent.

As of June 30,2007, our loans, other lending investments and CMBS had the following maturitycharacteristics:
| Year of Maturity     | ** ** | **Number of  Investments  Maturing** | ** ** | **Current  Carrying Value  (In thousands)** | ** ** | **% of Total** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| 2007                           |       | 16                                        |       | $                                                     | 541,310    |                     | 19         | % |
| 2008                           |       | 24                                        |       | 968,182                                               |       | 34                       | %          |
| 2009                           |       | 24                                        |       | 686,901                                               |       | 24                       | %          |
| 2010                           |       | 11                                        |       | 229,544                                               |       | 8                        | %          |
| 2011                           |       | 2                                         |       | 56,939                                                |       | 2                        | %          |
| Thereafter                     |       | 13                                        |       | 370,945                                               |       | 13                       | %          |
| Total                          |       | 90                                        |       | 2,853,821                                             |       | 100                      | %          |
|                           |       |                                      |       |                                                  |       |                     |       |
| Weighted average  maturity (1) |       |                                      |       | 2.3 years                                             |       |                     |       |
|                                |            |                                           |            |                                                       |            |                          |            |  |

 

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(1)          The calculation of weighted average maturityis based upon the remaining initial term of the investment and does not includeoption or extension periods or the ability to prepay the investment after anegotiated lock-out period, which may be available to the borrower.

Forthe three and six months ended June 30, 2007 and 2006 the Company’s investmentincome from our loans, other lending investments and CMBS was generated by the followinginvestment types:

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| ** **                            | ** ** | **Three months ended  June 30, 2007** | ** ** | **Three months ended  June 30, 2006** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Investment Type**              | ** ** | **Investment  Income**                                    | ** ** | **% of  Total**                                      | ** ** | **Investment  Income** | ** ** | **% of  Total** | ** ** |
| Whole loans                           |       | $                                                         | 44,294     |                                                      | 61         | % | $ | 22,505 |   | 58 | % |
| Subordinate  interests in whole loans |       | 8,778                                                     |       | 12                                                        | %          | 11,925 |   | 30 | % |
| Mezzanine loans                       |       | 18,114                                                    |       | 25                                                        | %          | 3,939 |   | 10 | % |
| Preferred equity                      |       | 1,218                                                     |       | 2                                                         | %          | 765 |   | 2 | % |
| CMBS                                  |       | 424                                                       |       | —                                                    |       | — |   | — |   |
| Total                                 |       | $                                                         | 72,828     |                                                      | 100        | % | $ | 39,134 |   | 100 | % |

 
| ** **                            | ** ** | **Six months ended  June 30, 2007** | ** ** | **Six months ended  June 30, 2006** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Investment Type**              | ** ** | **Investment  Income**                                  | ** ** | **% of  Total**                                    | ** ** | **Investment  Income** | ** ** | **% of  Total** | ** ** |
| Whole loans                           |       | 77,611                                                  |       | 59                                                      | %          | $ | 39,677 |   | 56 | % |
| Subordinate  interests in whole loans |       | 15,039                                                  |       | 11                                                      | %          | 22,091 |   | 31 | % |
| Mezzanine loans                       |       | 37,306                                                  |       | 28                                                      | %          | 7,737 |   | 11 | % |
| Preferred equity                      |       | 2,417                                                   |       | 2                                                       | %          | 1,508 |   | 2 | % |
| CMBS                                  |       | 424                                                     |       | —                                        |       | — |   | — |   |
| Total                                 |       | $                                                       | 132,797    |                                                    | 100        | % | $ | 71,013 |   | 100 | % |
|                                       |            |                                                         |            |                                                         |            |  |  |  |  |  |  |

 

AtJune 30, 2007 and December 31, 2006, loans, otherlending investments and CMBS, excluding corporate whole loans, had the following geographic diversification:
|              | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------|------------|-----------------------------|------------|---------------------------------|------------|
| **Region**   | ** ** | **Carrying  Value**         | ** ** | **% of  Total**            | ** ** | **Carrying  Value** | ** ** | **% of  Total** | ** ** |
| Northeast    |       | $                           | 1,301,825  |                            | 48         | % | $ | 1,169,790 |   | 53 | % |
| West         |       | 639,692                     |       | 24                              | %          | 579,568 |   | 27 | % |
| South        |       | 400,894                     |       | 15                              | %          | 310,909 |   | 14 | % |
| Southwest    |       | 137,376                     |       | 5                               | %          | 84,723 |   | 4 | % |
| Mid Atlantic |       | 108,831                     |       | 4                               | %          | — |   | — | % |
| Midwest      |       | 75,818                      |       | 3                               | %          | 41,894 |   | 2 | % |
| Various      |       | 42,765                      |       | 1                               | %          | — |   | — | % |
| Total        |       | $                           | 2,707,201  |                            | 100        | % | $ | 2,186,884 |   | 100 | % |

 

**Thefollowing is a summary of the Company’s CMBS at June 30, 2007, all of which aredesignated as available-for-sale and are carried at estimated fair value:**

 
| **Description**     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| Floating rate  CMBS |       | $                   | 7,164      |                        | $          | —                      |       | $                              | (737       | ) | $ | 6,427 |   |
| Fixed rate CMBS     |       | $                   | 18,138     |                        | $          | —                      |       | $                              | (500       | ) | $ | 17,638 |   |
| Total               |       | $                   | 25,302     |                        | $          | —                      |       | $                              | (1,237     | ) | $ | 24,065 |   |

 

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**The following table shows the Company’s fair valueand gross unrealized losses and the length of time that individual securitieshave been in a continuous unrealized loss position at June 30, 2007:**
| ** **          | ** ** | **12 Months or Less** | ** ** | **12 Months or More** | ** ** | **Total**           | ** ** |
|---------------------|------------|--------------------------------------|------------|--------------------------------------|------------|---------------------|------------|
| **Description**     | ** ** | **Fair Value**                  | ** ** | **Gross  Unrealized  Losses**        | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| Floating rate  CMBS |       | $                                    | 6,427      |                                 | $          | (737                | )          | — |   | — |   | $ | 6,427 |   | $ | (737 | ) |
| Fixed rate CMBS     |       | 17,638                               |       | (500                                 | )          | —              |       | — |   | 17,638 |   | (500 | ) |
| Total               |       | $                                    | 24,065     |                                 | (1,237     | )                   | —     |   | — |   | $ | 24,065 |   | $ | (1,237 | ) |
|                     |            |                                      |            |                                      |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

The temporaryimpairment of the available-for-sale securities results from the fair value ofthe securities falling below the amortized cost basis.  These unrealized losses are primarily theresult of market factors other than credit impairment and the Company believesthe carrying value of the securities are fully recoverable over their expectedholding period.  The Company possessesboth the intent and the ability to hold the securities until the Company hasrecovered the amortized costs. Accordingly, the Company does not believe any of the securities areother than temporarily impaired.

In connection witha preferred equity investment, which was repaid in October 2006, we haveguaranteed a portion of the outstanding principal balance of the first mortgageloan that is a financial obligation of the entity in which we have invested inthe event of a borrower default under such loan.  The loan matures in 2032.  This guarantee is considered to be anoff-balance-sheet arrangement and will survive until the repayment of the firstmortgage loan.  As compensation, wereceived a credit enhancement fee of $125 from the borrower, which isrecognized as the fair value of the guarantee and has been recorded on ourbalance sheet as a liability. The liability will be amortized over the life ofthe guarantee using the straight-line method and corresponding fee income willbe recorded.  Our maximum exposure underthis guarantee is approximately $1,433 as of June 30, 2007.  Under the terms of the guarantee, theinvestment sponsor is required to reimburse us for the entire amount paid underthe guarantee until the guarantee expires.

**4.  Property Acquisitions**

***55 CorporateDrive***

**In June 2006 we closed on theacquisition of a 49.75% TIC interest in 55 Corporate Drive, located inBridgewater, New Jersey, with a 0.25% interest to be acquired in thefuture.  The property is comprised ofthree buildings totaling 670,000 square feet which is 100% net leased to anentity whose obligations are guaranteed by Sanofi-Aventis Group through April2023. The transaction was valued at $236,000 and was financed with a $190,000,10-year, fixed-rate first mortgage loan. The remaining 50% of the property is owned as a TIC interest by SLGreen.   Upon closing the acquisition ofthe property, the $90,000 whole loan previously held by us was repaid in fullusing proceeds from the new mortgage financing. **We recorded our *pro rata* share of net income of the property of $89 and $163for the three months and six months ended June 30, 2007, respectively.  Following the acquisition and until theproperty was placed into service in December 2006, all income and expense atthe property were capitalized as the property was being redeveloped andaccordingly, no amounts were recognized in our results from operations for thethree and six months ended June 30, 2006.

**5.Disposition of Security Interests in Property**

***200 FranklinSquare Drive***

InSeptember 2005, we closed on the acquisition of a 100% fee interest in 200Franklin Square Drive, located in Somerset, New Jersey. The property is a200,000 square foot building which is 100% net leased to Philips Holding USAInc., a wholly-owned subsidiary of Royal Philips Electronics, through December2021.  The property was acquired for apurchase price of $50,250, excluding closing costs, and financed with a$41,000, 10-year, fixed-rate first mortgage loan.

In March 2006,following the conversion of the entity that owns 200 Franklin Square Drive intoa Delaware statutory trust, or DST, we sold approximately 29.3% of our securityinterests in the DST to a third party. Subsequently, we sold an additional 45.7% of our security interests inthe DST to the same party, reducing our final ownership interest to 25.0%.  We received total cash consideration of$12,800 for these interests and the buyer assumed 75% of the DST’s underlyingmortgage debt.  The disposition resultedin a net gain

14

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of $4,530, aftertransaction costs.  As a result of thedisposition, this investment is now classified as an investment in jointventure and accounted for using the equity method.  As of June 30, 2007 the investment has acarrying value of $2,397.  We recordedour *pro rata* share of net income of thejoint venture of $29 and $60 for the three and six months ended June 30, 2007.

**6. Investments inUnconsolidated Joint Ventures**

***South Buildingat One Madison Avenue, New York, New York***

**In April 2005, we closed on a$57,503 initial investment in a joint venture with SL Green to acquire, own andoperate the South Building located at One Madison Avenue, New York, New York,or the South Building.  The joint ventureis owned 45% by a wholly-owned subsidiary and 55% by a wholly-owned subsidiaryof SL Green.  The joint venture interestsare *pari passu*.  Also on April 29, 2005, the joint venturecompleted the acquisition of the South Building from Metropolitan LifeInsurance Company for the purchase price of approximately $802,800 plus closingcosts, financed in part through a $690,000 first mortgage loan on the SouthBuilding.  The first mortgage isnon-recourse to us.  The South Buildingcomprises approximately 1.2 million square feet and is almost entirely netleased to Credit Suisse Securities (USA) LLC, or CS, pursuant to a lease with a15-year remaining term.  As of June 30,2007 the investment had a carrying value of $54,539.  We recorded our *pro rata*share of net losses of the joint venture of $293 and $353 for the three monthsended June 30, 2007 and 2006, respectively, and our *pro rata*share of the net losses of the joint venture of $628 and $753 for the sixmonths ended June 30, 2007 and 2006, respectively.  On July 2, 2007 we entered into an agreementto sell our entire investment in the joint venture to SL Green Realty Corp. forapproximately $147.6 million. The sale closed on August 1, 2007.**

***101 S. MarengoAvenue, Pasadena, California***

**In November 2005, we closed onthe purchase of a 50% interest in an office building in Pasadena, CA.  We also acquired an interest in certainrelated assets as part of the transaction. The 345,000 square foot officeproperty, which is net leased to Bank of America through September 2015,assuming the exercise of options, and related collateral were acquired for $52,000plus closing costs, using a non-recourse, $50,000, 10-year fixed-rate firstmortgage loan.  We recorded our *pro rata* share of net losses of the joint venture of $350and $334 for the three months ended June 30, 2007 and 2006, respectively, andour *pro rata* share of the net losses of thejoint venture of $741 and $661 for the six months ended June 30, 2007 and 2006,respectively.**

***2 Herald Square, New York, NewYork***

**In April 2007, we closed on a$17,492 initial investment in a 45% TIC interest to acquire the fee interest ina parcel of land located at 2 Herald Square, located along 34**th Street in New York, New York.  The property is subject to a long-term groundlease with an unaffiliated third party for a term of 70 years.  The remaining TIC interest is owned by awholly-owned subsidiary of SL Green. The TIC interests are *pari passu*.   As of June 30, 2007, the investment had acarrying value of $18,227.  We recordedour *pro rata*share of net income of $1,099for the three and six months ended June 30, 2007.

**7.  Junior Subordinated Debentures**

**In January 2006, May 2005 andAugust 2005, we completed issuances of $50,000 each in unsecured trustpreferred securities through three DST’s, Gramercy Capital Trust I, or GCTI,Gramercy Capital Trust II, or GCTII, and Gramercy Capital Trust III, or GCTIII, that are also wholly-owned subsidiaries of our Operating Partnership.  The securities issued in January 2006 bearinterest 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 arrangementpreviously entered into in contemplation of this financing.  Thereafter the rate will float based on thethree-month LIBOR plus 270 basis points. The securities issued in May 2005 bear interest at a fixed rate of 7.57%for the first ten years ending June 2015 and the securities issued in August2005 bear interest at a fixed rate of 7.75% for the first ten years endingOctober 2015.  Thereafter the rates willfloat based on the three-month LIBOR plus 300 basis points.**

**All issuances of trust preferredsecurities require quarterly interest distributions; however, payments may bedeferred while the interest expense is accrued for a period of up to fourconsecutive quarters if our Operating Partnership exercises its right to defersuch payments.  The trust preferredsecurities are redeemable, at the option of our Operating Partnership, in wholeor in part, with no prepayment premium any time after June 30, 2010, October 30,2010 or January 30, 2011 for the securities issued by GCTI, GCTII and GCTIII,respectively.**

**GCTI, GCTII and GCTIII eachissued $1,550 aggregate liquidation amount of common securities, representing100% of the voting common stock of those entities to our Operating Partnershipfor a total purchase price of $4,650. GCTI, GCTII and GCTIII used the proceeds from the sale of the trustpreferred securities and the common securities to purchase our OperatingPartnership’s junior subordinated notes. The terms of the junior subordinated notes match the terms of the trustpreferred securities.  The notes aresubordinate and junior in right of payment to all present and future seniorindebtedness and certain other of our financial obligations.  We realized net proceeds from each offeringof approximately $48,956.**

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Our interests in GCTI, GCTII and GCTIII areaccounted for using the equity method and the assets and liabilities of thoseentities are not consolidated into our financial statements.  Interest on the junior subordinated notes isincluded in interest expense on our consolidated income statements while thevalue of the junior subordinated notes, net of our investment in the truststhat issued the securities, are presented as a separate item in ourconsolidated balance sheet.

**8.  Collateralized DebtObligations**

During 2005 we issuedapproximately $1,000,000 of CDOs through two indirect subsidiaries, GramercyReal Estate CDO 2005-1 Ltd., or the 2005 Issuer, and Gramercy Real EstateCDO 2005-1 LLC, or the 2005 Co-Issuer. The CDO consists of $810,500 of investmentgrade notes, $84,500 of non-investment grade notes, which were co-issued by the2005 Issuer and the 2005 Co-Issuer, and $105,000 of preferred shares, whichwere issued by the 2005 Issuer.  Theinvestment grade notes were issued with floating rate coupons with a combinedweighted average rate of three-month LIBOR plus 0.49%.  We incurred approximately $11,957 of costsrelated to Gramercy Real Estate CDO 2005-1, which are amortized on a level-yield basis over the average life of the CDO.

During 2006 we issued anadditional approximately $1,000,000 of CDOs through two newly-formed indirectsubsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006 Issuer,and Gramercy Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. The CDOconsists of $903,750 of investment grade notes, $38,750 of non-investment gradenotes, 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 withfloating rate coupons with a combined weighted average rate of three-monthLIBOR plus 0.37%. We incurred approximately $11,364 of costs related toGramercy Real Estate CDO 2006-1, which are amortized on a level-yield basisover the average life of the CDO.

We retained all non-investmentgrade securities, the preferred shares and the common shares in the Issuer ofeach CDO.  The Issuer in each CDO holdsassets, consisting primarily of whole loans, subordinate interests in wholeloans, mezzanine loans and preferred equity investments, which serve ascollateral for the CDO.  Each CDO may bereplenished, pursuant to certain rating agency guidelines relating to creditquality and diversification, with substitute collateral for loans that arerepaid during the first five years of the CDO. Thereafter, the CDO securitieswill be retired in sequential order from senior-most to junior-most as loansare repaid.  The financial statements ofthe Issuer of each CDO are consolidated in our financial statements. Theinvestment grade notes are treated as a secured financing, and are non-recourseto us. Proceeds from the sale of the investment grade notes issued in each CDOwere used to repay substantially all outstanding debt under our repurchaseagreements and to fund additional investments.

**9.   Debt Obligations**

#### **Repurchase Facilities**

 

**We have two repurchasefacilities, one with Wachovia Capital Markets, LLC or one or more of itsaffiliates, or Wachovia, and one with Goldman Sachs Mortgage Company, orGoldman.**

The repurchasefacility with Wachovia is a $500,000 facility. This facility was initially established as a $250,000 facility, wasincreased to $350,000 effective January 3, 2005, and was subsequently increasedto $500,000 effective April 22, 2005. On June 28, 2007, we modified the facilityby further reducing the interest spreads. As a result of the modifications, the $500,000 facility bears interestat spreads of 0.65% to 2.50% over one-month LIBOR and, based on our expectedinvestment activities, provides for advance rates that vary from 60% to 95%based upon the collateral provided under a borrowing base calculation.  On October 13, 2006, we extended the facility’smaturity date until October 2009.  Thelender has a consent right with respect to the inclusion of investments in thisfacility, determines periodically the market value of the investments, and hasthe right to require additional collateral if the estimated market value of theincluded investments declines.  We had noaccrued interest and borrowings of $363,554 at a weighted average spread toLIBOR of 1.54% as of June 30, 2007, and no accrued interest and borrowings of$151,403 at a weighted average spread to LIBOR of 1.86%, as of December 31,2006.

Borrowings underthe Wachovia facility at June 30, 2007 and December 31, 2006 were secured bythe following investments:
|                          | ** ** | **Carrying Value (1)** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| **Investment Type** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Whole loans              |       | $                                | 517,887    |   | $ | 117,328 |   |
| Mezzanine loans          |       | 221,823                          |       | 139,680 |   |
| Preferred equity         |       | 32,485                           |       | 14,955 |   |
| Total                    |       | $                                | 772,195    |   | $ | 271,963 |   |

 

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**(1)**          Approximates fair value.

16

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We also have arepurchase facility with Goldman.  OnOctober 13, 2006 we increased this facility from $200,000 to $400,000 andextended its maturity date until September 2009.  On June 28, 2007, we modified the facility byfurther reducing the interest spreads. As a result of the modifications, the facility bears interest at spreadsof 1.00% to 1.50% over one-month LIBOR and, based on our expected investmentactivities, provides for advance rates that vary from 70% to 90% based upon thecollateral provided under a borrowing base calculation.  As with the Wachovia facility, the lender hasa consent right to the inclusion of investments in this facility, determinesperiodically the market value of the investments, and has the right to requireadditional collateral if the estimated market value of the included investmentsdeclines.  We had accrued interest of$1,006 and borrowings of $193,105 at a weighted average spread to LIBOR of1.20% as of June 30, 2007, and accrued interest of $261 and borrowings of$126,009 at a weighted average spread to LIBOR of 1.51% under this facility atDecember 31, 2006.

Borrowings under the Goldman facility at June 30, 2007 and December 31,2006 were secured by the following investments:
|                          | ** ** | **Carrying Value (1)** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| **Investment Type** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Whole loans              |       | $                                | 214,571    |   | $ | 97,795 |   |
| Mezzanine loans          |       | 41,586                           |       | 71,798 |   |
| Total                    |       | $                                | 256,157    |   | $ | 169,593 |   |

 

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**(1)   Approximates fair value.**

The terms of ourrepurchase facilities (together with any related guarantees) include covenantsthat****(a) limit our maximum totalindebtedness to no more than 85% of total assets, (b) require us to maintainminimum liquidity of at least $15,000, (c) require our fixed charge coverageratio to be at no time less than 1.25 to 1.00, (d) require our minimum interestcoverage ratio to be at no time less than 1.35 to 1.00, and (e) require us tomaintain minimum tangible net worth of not less than (i) $400,000, plus (ii)75% of the net proceeds of our subsequent equity issuances following the dateof the June 2007 amendments. The covenants also restrict us from makingdistributions in excess of a maximum of 100% of our FFO (as defined therein)under the Wachovia facility, except that we may in any case pay distributions necessaryto maintain our REIT status.  An event of default can be triggered on ourrepurchase facilities if, among other things, GKK Manager LLC is terminated asour Manager.  As of June 30, 2007 andDecember 31, 2006, we were in compliance with all such covenants.

The repurchasefacilities require that we pay down borrowings under these facilities asprincipal payments on the loans and investments pledged to these facilities arereceived.  Assets pledged as collateral under thesefacilities may include stabilized and transitional whole loans, subordinateinterests in whole loans, mezzanine loans, and rated CMBS or commercial realestate CDO securities originated or acquired by us.

In certaincircumstances, we have purchased debt investments from a counterparty andsubsequently financed the acquisition of those debt investments throughrepurchase agreements with the same counterparty.  We currently record the acquisition of thedebt investments as assets and the related repurchase agreements as financingliabilities gross on the consolidated balance sheets. Interest income earned onthe debt investments and interest expense incurred on the repurchaseobligations are reported gross on the consolidated income statements.  However, under a certain technical interpretationof FAS 140, such transactions may not qualify as a purchase by us.  We believe, and it is industry practice, thatwe are accounting for these transactions in an appropriate manner.  However, the result of this technicalinterpretation would prevent us from presenting the debt investments andrepurchase agreements and the related interest income and interest expense on agross basis on our financial statements. Instead, we would present the net investment in these transactions withthe counterparty and a derivative with the corresponding change in fair valueof the derivative being recorded through earnings.  The value of the derivative would reflectchanges in the value of the underlying debt investments and changes in thevalue of the underlying credit provided by the counterparty.

#### **UnsecuredRevolving Credit Facility**

In May 2006, weclosed on a $100,000 senior unsecured revolving credit facility with KeyBankNational Association, or KeyBank, with an initial term of three years and aone-year extension option.  On June 28,2007 the facility was increased to $175,000 and interest spreads on thefacility were reduced.  The facility issupported by a negative pledge of an identified asset base with advance ratesthat vary from 30% to 90% of the asset value provided under a borrowing basecalculation.  The lender also has consentrights to the inclusion of assets in the borrowing base calculation. Followingthe modifications in June 2007, the facility bears interest at 1.65% overone-month LIBOR. We had accrued interest of $288 and borrowings of $90,000 asof June 30, 2007, and accrued interest of $75 and borrowings of $15,000 at aspread to LIBOR of 2.10% under this facility at December 31, 2006.

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The terms of theunsecured revolving credit facility include covenants that****(a) limit our maximum total indebtednessto no more than 85% of total assets, (b) require our fixed charge coverageratio to be at no time less than 1.30, and (c) require us to maintain minimumtangible net worth of not less than $450,000 plus 75% of the net proceeds fromequity offerings completed following the date of the June 2007 amendment.  The covenants also restrict us from makingdistributions in excess of a maximum of 100% of our FFO (as defined by theNational Association of Real Estate Investment Trusts, or NAREIT), except thatwe may in any case pay distributions necessary to maintain our REITstatus.  An event of default can be triggered on our unsecured revolving creditfacility if, among other things, GKK Manager LLC is terminated as ourManager.  As of June 30, 2007 andDecember 31, 2006, we were in compliance with all such covenants.

In conjunctionwith the closing of the unsecured revolving credit facility with KeyBank in2006, our $25,000 revolving credit facility with Wachovia was terminated.

#### **MortgageLoans**

We have oneconsolidated interest-only mortgage loan related to 55 Corporate Drive in anamount equal to our ownership percentage in the entity multiplied by theoutstanding principal balance of the mortgage loan, which financed theacquisition of 55 Corporate Drive in June 2006. The mortgage has an outstanding principal balance of $190,000, of whichwe have consolidated 49.75% or $94,525, with an effective interest rate of5.75% and a term of ten years.

Combined aggregateprincipal maturities of our consolidated CDOs, repurchase facilities, trustpreferred securities, proportionately consolidated mortgage note payablerelated to our TIC interests in 55 Corporate Drive, and unsecured revolvingcredit facility as of June 30, 2007 are as follows:
|            | ** ** | **CDOs**  | ** ** | **Repurchase   Facilities** | ** ** | **Trust Preferred   Securities** | ** ** | **Mortgage Notes   Payable** | ** ** | **Unsecured   Revolving  Credit  Facility** | ** ** | **Total** | ** ** |
|------------|------------|-----------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------------|------------|-----------|------------|
| 2007       |       | $         | —     |                             | $          | —                                     |       | $                                      | —     |                                             | $          | —    |       | $ | — |   | $ | — |   |
| 2008       |       | —    |       | —                           |       | —                                     |       | —                                 |       | —                                           |       | —    |       |
| 2009       |       | —    |       | 556,659                          |       | —                                     |       | —                                 |       | —                                           |       | 556,659   |       |
| 2010       |       | —    |       | —                           |       | —                                     |       | —                                 |       | 90,000                                           |       | 90,000    |       |
| 2011       |       | —    |       | —                           |       | —                                     |       | —                                 |       | —                                           |       | —    |       |
| Thereafter |       | 1,714,250 |       | —                           |       | 150,000                                    |       | 94,525                                 | (1)        | —                                           |       | 1,958,775 |       |
| Total      |       | $         | 1,714,250  |                             | $          | 556,659                                    |       | $                                      | 150,000    |                                             | $          | 94,525    |       | $ | 90,000 |   | $ | 2,605,434 |   |

 

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(1) We have a 49.75% interest in the mortgage note.

**10. **Operating Partnership Agreement / Manager

At June 30, 2007,we owned all of the Class A limited partnership interests in our OperatingPartnership.  At June 30, 2007, themajority of the Class B limited partnership interests were owned by our Managerand SL Green Operating Partnership, L.P. Interests were also held by certainofficers and employees of SL Green, including some of whom are our executiveofficers, certain of which interests are subject to performance thresholds.

At June 30, 2007, themajority of the interests in our Manager were held by SL Green OperatingPartnership, L.P. Interests were also held by certain officers and employees ofSL Green, including some of whom are our executive officers, certain of whichinterests are subject to performance thresholds.

**11.  Related Party Transactions**

In connection with our initial public offering, weentered into a management agreement with our Manager, which was subsequentlyamended and restated in April 2006.  Theamended and restated management agreement provides for a term through December2009 with automatic one-year extension options and is subject to certaintermination rights.  We pay our Manageran annual management fee equal to 1.75% of our gross stockholders equity (as definedin the amended and restated management agreement) inclusive of our trustpreferred securities.  We incurredexpense to our Manager under this agreement of an aggregate of $3,109 and$5,775 for the three and six months ended June 30, 2007, respectively and$2,501 and $4,739 for the three and six months ended June 30, 2006,respectively.

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To provide an incentive to enhance the value of our common stock, theholders of the Class B limited partner interests of our Operating Partnershipare entitled to an incentive return equal to 25% of the amount by which FFOplus certain accounting gains and losses (as defined in the amended andrestated partnership agreement of our Operating Partnership) exceed the productof our weighted average stockholders equity (as defined in the amended andrestated partnership agreement of our Operating Partnership) multiplied by 9.5%(divided by four to adjust for quarterly calculations).  We will record any distributions on the ClassB limited partner interests as an incentive distribution expense in the periodwhen earned and when payments of such amounts have become probable andreasonably estimable in accordance with the partnership agreement.  We incurred $3,784 and $6,601 with respect tosuch Class B limited partner interests for the three and six months ended June30, 2007, respectively and $1,578 and $2,771 for the three and six months endedJune 30, 2006, respectively.

We are obligated to reimburse our Manager for its costs incurred underan asset servicing agreement between our Manager and an affiliate of SL GreenOperating Partnership, L.P. and a separate outsourcing agreement between ourManager and SL Green Operating Partnership, L.P.  The asset servicing agreement, which was amendedand restated in April 2006, provides for an annual fee payable to SL GreenOperating Partnership, L.P. by us of 0.05% of the book value of all credittenant lease assets and non-investment grade bonds and 0.15% of the book valueof all other assets.  The asset servicingfee can be reduced by SL Green Operating Partnership, L.P. for fees paiddirectly to outside servicers by us.  Theoutsourcing agreement currently provides for an annual fee payable by us, whichfee is currently $1,326 per year, increasing 3% annually over the prior year onthe anniversary date of the outsourcing agreement in August of each year.  For the three months ended June 30, 2007 and2006, we realized expense of $332 and $322, respectively, and for the sixmonths ended June 30, 2007 and 2006, we realized expense of $664 and $645,respectively, to our Manager under the outsourcing agreement.  For the three months ended June 30, 2007 and2006, we realized expense of $890 and $539, respectively, and for the sixmonths ended June 30, 2007 and 2006, we realized expense of $1,659 and $1,000,respectively, to our Manager under the asset servicing agreement.

In connection withthe closing of our first CDO in July 2005, the Issuer, Gramercy Real Estate CDO2005-1 Ltd., entered into a collateral management agreement with our Manager.Pursuant to the collateral management agreement, our Manager has agreed toprovide certain advisory and administrative services in relation to thecollateral debt securities and other eligible investments securing the CDOnotes.  The collateral managementagreement provides for a senior collateral management fee, payable quarterly inaccordance with the priority of payments as set forth in the indenture, equalto 0.15% per annum of the net outstanding portfolio balance, and a subordinatecollateral management fee, payable quarterly in accordance with the priority ofpayments as set forth in the indenture, equal to 0.25% per annum of the netoutstanding portfolio balance.  Netoutstanding portfolio balance is the sum of the (i) aggregate principal balanceof the collateral debt securities, excluding defaulted securities, (ii)aggregate principal balance of all principal proceeds held as cash and eligibleinvestments in certain accounts, and (iii) with respect to the defaultedsecurities, the calculation amount of such defaulted securities. Ascompensation for the performance of its obligations as collateral manager underthe first CDO, our Board of Directors has allocated to our Manager thesubordinate collateral management fee paid on securities not held by us.  At June 30, 2007 and December 31, 2006 weowned all of the non-investment grade bonds, preferred equity and equity inboth CDOs.  The senior collateral management fee andbalance of the subordinate collateral management fee is allocated to us.  For the three months ended June 30, 2007 and2006, we realized expense of $512 and $499, respectively, and for the sixmonths ended June 30, 2007 and 2006, we realized expense of $1,019 and $1,000,respectively, to our Manager under such collateral management agreement.

Collateral managerfees paid on our CDO that closed in August 2006 are governed by the amended andrestated management agreement as a “transitional managed” CDO, as defined inthe amended and restated management agreement, consisting primarily of debtinvestments secured by non-stabilized real estate.  The amended and restated management agreementprovides that in connection with formations of collateralized debt obligationsor other securitization vehicles after the execution of the amended andrestated management agreement, if a collateral manager is retained, our Manageror an affiliate will be the collateral manager and will receive the followingfees:  (i) 0.25% per annum of the book value of the assets owned for “transitionalmanaged” CDOs, (ii) 0.15% per annum of the book value of the assets ownedfor “non-transitional managed” CDOs, (iii) 0.10% per annum of the book value ofthe assets owned for static CDOs that own primarily non-investment grade bonds,and (iv) 0.05% per annum of the book value of the assets owned for static CDOsthat own primarily investment grade bonds; limited in each instance by the feesthat are paid to the collateral manager. The balance of the fees paid by theCDOs for collateral management services are paid to us.  For the three and six months ended June 30, 2007 we realized expense of$571 and $1,136, respectively, to our Manager under this agreement.

**In April 2005, we closed on a$57,503 initial investment in a joint venture with SL Green to acquire, own andoperate the South Building located at One Madison Avenue, New York, New York,or the South Building.  The jointventure, which was created to acquire, own and operate the South Building, isowned 45% by a wholly-owned subsidiary of us and 55% by a wholly-owned subsidiaryof SL Green.  The**

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**joint venture interests are *pari passu*.  Also on April 29, 2005, the joint venturecompleted the acquisition of the South Building from Metropolitan LifeInsurance Company for the purchase price of approximately $802,800 plus closingcosts, financed in part through a $690,000 first mortgage loan on the SouthBuilding.  The South Building comprisesapproximately 1.2 million square feet and is almost entirely net leased to CSpursuant to a lease with a 15-year remaining term.  On July 2, 2007 we entered into an agreementto sell our entire investment in the joint venture to SL Green Realty Corp. forapproximately $147.6 million. The sale closed on August 1, 2007.**

**In June 2006 we closed on theacquisition of a 49.75% TIC interest in 55 Corporate Drive, located inBridgewater, New Jersey with a 0.25% interest to be acquired in thefuture.  The remaining 50% of theproperty is owned as a TIC interest by an affiliate of SL Green OperatingPartnership, L.P..  The property iscomprised of three buildings totaling approximately six hundred and seventythousand square feet which is 100% net leased to an entity whose obligationsare guaranteed by Sanofi-Aventis Group through April 2023. The transaction wasvalued at $236,000 and was financed with a $190,000, 10-year, fixed-rate firstmortgage loan.**

Commencing in May 2005 we are party to a lease agreementwith SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporateoffices at 420 Lexington Avenue, New York, New York.  The lease is for approximately five thousandsquare feet with an option to lease an additional approximately two thousandsquare feet and carries a term of ten years with rents on the entire seventhousand square feet of approximately $249 per annum for year one rising to$315 per annum in year ten.  For thethree and six months ended June 30, 2007 we incurred expenses of  $62 and $125, respectively, under this lease.

**BrightStar Couriers LLC, or Bright Star, provides messenger services to us.  Bright Star is owned by Gary Green, a son ofStephen L. Green, our Chairman.  Theaggregate amount of fees paid by us for such services for the three and sixmonths ended June 30, 2007 was $2 and $3, respectively, and $2 and $3 for thethree and six months ended June 30, 2006, respectively.**

**In July2005, we closed on the purchase from an SL Green affiliate of a $40,000mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained an interest-onlyparticipation.  We have determined thatthe yield on our mezzanine loan after giving effect to the interest-onlyparticipation retained by the seller is at market.  The mezzanine loan is secured by the equityinterests in an office property in New York, New York.**

**InFebruary 2006, we closed on the purchase of a $90,000 whole loan, which bearsinterest at three month LIBOR plus 2.15%, to a joint venture in which SL Greenis an equity holder.  The loan is securedby 55 Corporate Drive in Bridgewater, New Jersey.  The loan was repaid in full in June 2006 withthe proceeds from new mortgage financing obtained in connection with the saleof the property, 49.75% of which is now owned by us through a TIC structure.**

**In March2006, we closed on the purchase of a $25,000 mezzanine loan, which bearsinterest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green isan equity holder.  The mezzanine loan wasrepaid in full on May 9, 2006, when we originated a $90,287 whole loan, whichbears interest at one-month LIBOR plus 2.75%, to the joint venture.  The whole loan is secured by office andindustrial properties in northern New Jersey and has a book value of $90,216and $90,049 as of June 30, 2007 and December 31, 2006, respectively.**

**In August2006, we acquired from a financial institution a 50% *pari passu*interest in a $65,000 preferred equity investment secured by an office propertyin New York, New York.  An affiliate ofSL Green simultaneously acquired and owns the other 50% *pari passu*interest. The investment bears interest at a blended fixed rate of 10.52%.**

**InDecember 2006, we acquired from a financial institution a *pari passu*interest of $125,000 in a $200,000 mezzanine loan, which bears interest at6.384% and is secured by a multi-family portfolio in New York, New York.  An affiliate of SL Green simultaneouslyacquired the remaining $75,000 *pari passu*interest in the mezzanine loan.**

**Duringthe three months ended March 31, 2006, we earned fees of $163 from SL Greenrepresenting SL Green’s proportionate share of fees for financing andstructural advisory services related to a specific potential transaction.**

**InJanuary 2007, we originated two mezzanine loans totaling $200,000.  The $150,000 loan is secured by a pledge ofcash flow distributions and partial equity interests in a portfolio ofmulti-family properties and currently bears interest at one-month LIBOR plus6.00%.  The $50,000 loan was initiallysecured by cash flow distributions and partial equity interests in an officeproperty.  On March 8, 2007 the $50,000loan was increased by $31,000 when the existing mortgage loan on the propertywas defeased, upon which event our loan became secured by a first mortgage lienon the property and was reclassified as a whole loan.  The whole loan currently bears interest atone-month LIBOR plus 6.00% for the initial funding and one-month LIBOR plus1.00% for the subsequent funding.  Atclosing, an affiliate of SL Green acquired from us and currently holds a 15.15%*pari passu* interest in the mezzanineloan and the whole loan.  As of**

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**June 30,2007, our interest in the mezzanine loan had a carrying value of $114,408 andour interest in the whole loan had a carrying value of $69,573.**

**In March2007, we closed on the acquisition of a $62,500 *pari passu*interestin one tranche of a multiple-level mezzanine structure primarily secured bypledges of equity and rights to cash distributions, which was used to fund theacquisition of a large office portfolio. The investment bore interest at one-month LIBOR plus 2.85%.  At closing, an affiliate of SL Greensimultaneously acquired a $62,500 *pari passu*interestin the same tranche of the mezzanine structure. The investment was repaid in full in May 2007.**

**In April 2007, we closed on a$17,492 initial investment in a 45% TIC interest to acquire the fee interest ina parcel of land located at 2 Herald Square, located along 34**th Street in New York, New York.  The property is subject to a long-term groundlease with an unaffiliated third party for a term of 70 years.  The remaining TIC interest is owned by awholly-owned subsidiary of SL Green. The TIC interests are *pari passu*.   As of June 30, 2007, the investment had acarrying value of $18,227.  We recordedour *pro rata* share of net income of $1,099for the three and six months ended June 30, 2007.

**In July 2007, we closed on a $25,083investment in a 45% TIC interest to acquire a 79% fee interest and 21%leasehold interest in the property located at 885 Third Avenue, otherwise knownas The Lipstick Building.  The propertyis subject to a 70-year ground lease, with an unaffiliated third party. Theremaining TIC interest is owned by a wholly-owned subsidiary of SL Green.  The TIC interests are *pari passu*.**

**In July 2007, we closed on a$12,772, 100% fee interest in the property located at 292 Madison Avenue, NewYork, NY, purchased from SL Green. Simultaneously, the Company enteredinto a 70-year ground lease, with an unaffiliated third party.**

**12.  DeferredCosts**

Deferred costs atJune 30, 2007 and December 31, 2006 consisted of the following:
|                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Deferred  financing            |       | $        | 37,743     |     | $          | 35,103 |   |
| Deferred  acquisition          |       | 1,802    |       | 2,195    |       |
|                           |       | 39,545   |       | 37,298   |       |
| Less accumulated  amortization |       | (11,332  | )          | (8,571   | )          |
|                           |       | $        | 28,213     |     | $          | 28,727 |   |

 

Deferred financing costs relate to our existing repurchase facilitieswith Wachovia and Goldman, our unsecured revolving credit facility withKeyBank, our CDOs, the proportionately consolidated mortgage note payablerelated to our TIC interest in 55 Corporate Drive and the trust preferred securities.  These costs are amortized on a straight-linebasis to interest expense based on the remaining term of the related financing.

 

Deferred acquisition costs consist of fees and direct costs incurred tooriginate our investments and are amortized using the effective yieldmethod over the related term of the investment.

**13.  FairValue of Financial Instruments**

The following discussion of fairvalue was determined by our Manager, using available market information andappropriate valuation methodologies.  Considerable judgment is necessary tointerpret market data and develop estimated fair value.  Accordingly, fair values are not necessarilyindicative of the amounts we could realize on disposition of the financialinstruments.  The use of different marketassumptions and/or estimation methodologies may have a material effect onestimated fair value amounts.

Cash equivalents, accruedinterest, and accounts payable balances reasonably approximate their fairvalues due to the short maturities of these items.  The carrying value of our CDOs, repurchaseand revolving  credit facilitiesapproximate fair value because they bear interest at floating rates, which webelieve, for facilities with a similar risk profile, reasonably approximatemarket rates.  Our junior subordinateddebentures reasonably approximate fair value based upon the amount at whichsimilarly issued instruments would be issued in the current market.  Our fixed rate mortgage payable is carried atits unpaid principal balance, which approximates fair value due to the shortperiod of time the note has been outstanding. Loans and CMBS are carried at amounts which reasonably approximate theirfair value as determined by our Manager.

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The fair value of our fixed-rate debt investments as determined by ourManager in consultation with market dealers of such instruments as of June 30,2007 and December 31, 2006 is:
|                              | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **Carrying   Value**   | ** ** | **Fair Value**             | ** ** | **Carrying   Value** | ** ** | **Fair Value** | ** ** |
| Fixed-rate debt  investments |       | $                           | 498,476    |                            | $          | 498,476 |   | $ | 351,585 |   | $ | 351,585 |   |
| Fixed-rate CMBS              |       | $                           | 17,638     |                            | $          | 17,638 |   | $ | — |   | $ | — |   |

 

Disclosure about fair value offinancial instruments is based on pertinent information available to us at June30, 2007.  Although we are not aware of anyfactors that would significantly affect the reasonable fair value amounts, suchamounts have not been comprehensively revalued for purposes of these financialstatements since that date and current estimates of fair value may differsignificantly from the amounts presented herein.

**14.  Stockholders’ Equity**

Our authorized capital stockconsists of 125,000,000 shares, $0.001 par value, of which we have authorizedthe issuance of up to 100,000,000 shares of common stock, $0.001 par value pershare, and 25,000,000 shares of preferred stock, par value $0.001 pershare.  As of June 30, 2007, 26,072,471shares of common stock and 4,600,000 shares of preferred stock were issued andoutstanding.

**PreferredStock**

**On April 18, 2007, we issued4,600,000 shares of our 8.125% Series A cumulative redeemable preferred stock(including the underwriters’ over-allotment option of 600,000 shares) with amandatory liquidation preference of $25.00 per share. Holders of the Series Acumulative redeemable preferred shares receive annual dividends of $2.03125 pershare paid on a quarterly basis and dividends are cumulative, subject tocertain provisions. On or after April 18, 2012, we may at our option redeem theSeries A cumulative redeemable preferred stock at par for cash. Net proceeds(after deducting underwriting fees and expenses) from the offering wereapproximately $111,205.**

**CommonStock**

As of the date of our formation,April 12, 2004, we had 500,000 shares of common stock outstanding valued atapproximately $200.  On August 2, 2004 wecompleted our initial public offering of 12,500,000 shares of common stockresulting in net proceeds of approximately $172,900, which was used to fundinvestments and commence our operations. As of June 30, 2007, 493,583 restricted shares had also been issuedunder our 2004 Equity Incentive Plan, or the Equity Incentive Plan.  These shares have a vesting period of two tofour years and are not entitled to receive distributions declared by us on ourcommon stock until such time as the shares have vested, or the shares have beendesignated to receive dividends by the Compensation Committee of our Board ofDirectors.

On December 3, 2004, we sold5,500,000 shares of our common stock, at a price of $17.27 per share, resultingin net proceeds of approximately $93,740 under a private placement exemptionfrom the registration requirements of Section 5 of the Securities Act of 1933,as amended, or the Securities Act.  Wesubsequently registered these shares for resale under the Securities Act inAugust 2005.  A total of 4,225,000 shareswere sold to various institutional investors and an additional 1,275,000 shareswere sold to SL Green Operating Partnership, L.P. pursuant to its contractualright to choose to maintain a 25% ownership interest in the outstanding sharesof our common stock.  Of the 5,500,000shares sold, 2,000,000 shares were settled on December 31, 2004 and theremaining 3,500,000 shares were settled on January 3, 2005.

On September 14, 2005, we sold3,833,333 shares of common stock, at a price of $25.80 per share, resulting innet proceeds of approximately $97,830.  Atotal of 2,875,000 shares were sold through public offering and an additional958,333 shares were sold to SL Green Operating Partnership, L.P. pursuant toits contractual right to choose to maintain a 25% ownership interest in ouroutstanding shares of common stock.  Netproceeds were used for loan acquisitions and originations, repayment ofoutstanding principal under one of our repurchase facilities and generalcorporate purposes.

On May 16, 2006, we sold3,000,000 shares of common stock, at a price of $26.75 per share, resulting innet proceeds of approximately $79,787.  Atotal of 2,250,000 shares were sold through a public offering and an additional750,000 shares were sold to SL Green Operating Partnership, L.P. pursuant toits contractual right to choose to maintain a 25% ownership interest in ouroutstanding shares of common stock. After this offering, SL Green Operating Partnership, L.P. owned6,418,333 shares of our 

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common stock.  Net proceeds were used for loan acquisitionsand originations, repayment of outstanding principal under our repurchasefacilities and general corporate purposes.

In May 2007 our new $500,000shelf registration statement was declared effective by the Securities andExchange Commission, or SEC.  This registration statement provides us withthe ability to issue common and preferred stock, depository shares andwarrants.  We currently have $500,000 available under the shelf.

**Equity Incentive Plan**

As part of our initial public offering, we institutedour Equity Incentive Plan.  The EquityIncentive Plan, as amended, authorizes (i) the grant of stock options thatqualify as incentive stock options under Section 422 of the Internal RevenueCode of 1986, as amended, or ISOs, (ii) the grant of stock options that do notqualify, or NQSOs, (iii) the grant of stock options in lieu of cash directors’fees and (iv) grants of shares of restricted and unrestricted commonstock.  The exercise price of stock optionswill 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 ofgrant.  At June 30, 2007, approximately664,714 shares of common stock were available for issuance under the EquityIncentive Plan.

Managementand outsourcing fees paid to our Manager and SL Green Operating Partnership,L.P. are sufficient to reimburse our Manager and SL Green OperatingPartnership, L.P. for the applicable compensation, including payroll taxes, ofthe employees who provide services to Gramercy pursuant to the confirmatoryaddendum to the Management Agreement between Gramercy, our Manager and ourOperating Partnership.  These awardeesare considered co-leased employees. Options granted under the Equity Incentive Plan to recipients who areco-leased employees of Gramercy are exercisable at the fair market value on thedate of grant and, subject to termination of employment, expire ten years fromthe date of grant, are not transferable other than on death, and areexercisable in three to four annual installments commencing one year from thedate of grant.  In some instances,options may be granted under the Equity Incentive Plan to persons who providesignificant services to us or our affiliates, but are not considered co-leasedemployees because compensation for their services is not covered by ourmanagement agreement or outsourcing agreement. Options granted to recipients that are not co-leased employees have thesame terms as those issued to co-leased employees except as it relates to anyperformance-based provisions within the grant. To the extent there are performance provisions associated with a grantto a recipient who is not a co-leased employee, an estimated expense related tothese options is recognized over the vesting period and the final expense isreconciled at the point performance has been met, or the measurement date.  If no performance based provision exists, thefair value of the options is calculated on a quarterly basis and the relatedexpense is recognized over the vesting period.

Asummary of the status of our stock options as of June 30, 2007 and December 31,2006 are presented below:
| ** **                    | ** ** | **June 30, 2007** | ** ** | **December 31, 2006**        | ** ** |
|-------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | **Options  Outstanding**    | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Balance at  beginning of year |       | 830,001                     |       | $                                      | 18.02      |   | 733,584 |   | $ | 16.47 |   |
| Granted                       |       | 424,500                     |       | $                                      | 30.94      |   | 197,500 |   | $ | 23.49 |   |
| Exercised                     |       | (57,664                     | )          | $                                      | 18.47      |   | (63,749 | ) | $ | 15.95 |   |
| Lapsed or  cancelled          |       | (25,834                     | )          | $                                      | 20.96      |   | (37,334 | ) | $ | 20.18 |   |
| Balance at end of  period     |       | 1,171,003                   |       | $                                      | 21.45      |   | 830,001 |   | $ | 18.02 |   |

 

All options were granted withina price range of $15.00 to $33.54.  Theremaining weighted average contractual life of the options was 8.5 years.  Compensation expense of $1,141 will berecorded over the course of the next 15 months, representing the remainingweighted average vesting period of the option awards as of June 30, 2007.  Compensation expense of $136 and $326 was recordedfor the three and six months ended June 30, 2007 and 2006, respectively,related to the issuance of stock options, compared to $61 and $147 for thethree and six months ended June 30, 2006, respectively.

Through June 30, 2007, 495,583restricted shares had been issued under the Equity Incentive Plan, of which 68%have vested.   The unvested shares arenot currently entitled to receive distributions declared by us on our commonstock until such time as the shares have vested.  Unvested shares may be entitled to receivedividends at the discretion of the Compensation Committee of our Board ofDirectors.  Holders of restricted sharesare prohibited from selling such shares until they vest but are provided theability to vote such shares beginning on the date of grant.  Compensation expense of $1,578 will berecorded over the course of the next 7 months, representing the remainingweighted average vesting period of the restricted stock awards as of June 30,2007.  Compensation expense of $652 and$1,875 was recorded for the three and six months ended June 30, 2007,respectively, related to the issuance of restricted 

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shares, compared to $295 and$652 for the three and six months ended June 30, 2006, respectively.

**Outperformance Plan**

In June 2005, the compensation committee of our board of directorsapproved a long-term incentive compensation program, the 2005 OutperformancePlan.  Participants in the 2005Outperformance Plan, all of whom are co-leased employees, will share in a “performancepool” if our total return to stockholders for the period from June 1, 2005through May 31, 2008 exceeds a cumulative total return to stockholders of 30%during the measurement period over a base share price of $20.21 per share.  The size of the pool will be 10% of the outperformanceamount in excess of the 30% benchmark, subject to a maximum limit equal to thelesser of 4% of our outstanding shares and units of limited partnershipinterest as of the end of the performance period, or 1,200,000 shares.  If our total return to stockholders from June1, 2005 to any subsequent date exceeds 80% and remains at that level or higherfor 30 consecutive days, then a minimum performance pool will beestablished.  In the event the potentialperformance pool reaches the maximum dilution cap before May 31, 2008 andremains at that level or higher for 30 consecutive days, the performance periodwill end early and the pool will be formed on the last day of such 30-dayperiod.  Each participant’s award underthe 2005 Outperformance Plan is designated as a specified percentage of theaggregate performance pool to be allocated to such participant assuming the 30%benchmark is achieved.  Individual awardsunder the 2005 Outperformance Plan will be made in the form of partnershipunits, or LTIP Units, that may ultimately become exchangeable for shares of ourcommon stock or cash, at our election. Under the 2005 Outperformance Plan, LTIP Units have been granted andadditional LTIP Units may be granted in the future prior to the determinationof the performance pool; however, these LTIP Units will only vest uponsatisfaction of performance and other thresholds, and will not be entitled todistributions until after the performance pool, or minimum performance pool, isestablished.  The 2005 OutperformancePlan provides that if a pool is established, each participant will also beentitled to the distributions that would have been paid on the number of LTIPUnits earned, had they been issued at the beginning of the performanceperiod.  Those distributions will be paidin the form of additional LTIP Units. Once a performance pool has been established, the earned LTIP Units willreceive regular quarterly distributions on a per unit basis equal to thedividends per share paid on our common stock, whether or not they arevested.  Any LTIP Units that are notearned upon the establishment of the performance pool will be automaticallyforfeited, and the LTIP Units that are earned will be subject to time-basedvesting, with 50% of the LTIP Units earned vesting in May 2009 and the balancevesting one year later based on continued employment with our Manager or SLGreen.   We will record the expenseof the restricted stock award in accordance with FASB Statement No.123(R).  Compensation expense of $383 and$766 was recorded for the three and six months ended June 30, 2007,respectively, related to the 2005 Outperformance Plan, compared to $293 and$586 for the three and six months ended June 30, 2006, respectively.

**Deferred Stock Compensation Plan forDirectors**

Under our Independent Director’s Deferral Program, whichcommenced April 2005, our independent directors may elect to defer up to100% of their annual retainer fee, chairman fees and meeting fees.  Unlessotherwise elected by a participant, fees deferred under the program shall becredited in the form of phantom stock units.  The phantom stock units areconvertible 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 byus, as defined by the program.  Phantom stock units are credited to eachindependent director quarterly using the closing price of our common stock onthe applicable dividend record date for the respective quarter.  Eachparticipating independent director who elects to receive fees in the form ofphantom stock units has the option to have their account credited for anequivalent amount of phantom stock units based on the dividend rate for eachquarter or have dividends paid in cash.

As of June 30,2007, there were approximately 26,950 phantom stock units outstanding, of which16,951 units are vested.

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**Earnings per Share**

Earnings per share for the threemonths ended June 30, 2007 and 2006 is computed as follows:
|                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Numerator (Income)**                       |       |                                                |       |                                              |       |   |   |   |   |
| Basic Earnings:                              |       |                                                |       |                                              |       |   |   |   |   |
| Net income  available to common stockholders |       | $                                                   | 19,965     |                                              | $          | 12,817 |   | 37,014 |   | $ | 23,370 |   |
| Effect of dilutive  securities               |       | —                                              |       | —                                            |       | — |   | — |   |
| Diluted Earnings:                            |       |                                                |       |                                              |       |   |   |   |   |
| Net income  available to common stockholders |       | $                                                   | 19,965     |                                              | $          | 12,817 |   | 37,014 |   | $ | 23,370 |   |
|                                         |       |                                                |       |                                              |       |   |   |   |   |
| **Denominator (Weighted Average  Shares)**   | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                        |       |                                                |       |                                              |       |   |   |   |   |
| Shares available  to common stockholders     |       | 26,049                                              |       | 24,334                                            |       | 26,037 |   | 23,575 |   |
| Effect of Diluted  Securities:               |       |                                                |       |                                              |       |   |   |   |   |
| Stock-based  compensation plans              |       | 1,389                                               |       | 1,185                                             |       | 1,406 |   | 1,182 |   |
| Phantom stock  units                         |       | 24                                                  |       | 11                                                |       | 24 |   | 11 |   |
| Diluted Shares                               |       | 27,462                                              |       | 25,530                                            |       | 27,467 |   | 24,768 |   |

 

**15. Benefit Plans**

**We do not maintain a defined benefit pension plan,post-retirement health and welfare plan, 401(k) plan or other benefits plans aswe do not have any employees.  Thesebenefits are provided to its employees by our Manager, a majority-ownedsubsidiary of SL Green.**

**16.**       Commitments and Contingencies

We and our Operating Partnership are not presently involvedin any material litigation nor, to our knowledge, is any material litigationthreatened against us or our investments, other than routine litigation arisingin the ordinary course of business. Management believes the costs, if any, incurred by our Operating Partnershipand us related to litigation will not materially affect our financial position,operating results or liquidity.

Our corporate offices at 420 Lexington Avenue, New York, NewYork 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 five thousandsquare feet with an option to lease an additional approximately two thousandsquare feet and carries a term of ten years with rents on the entire seventhousand square feet of approximately $249 per annum for year one rising to$315 per annum in year ten.

The following is a schedule of future minimum lease paymentsunder our operating lease as of June 30, 2007.
|                               | ** ** | **Operating  Lease** | ** ** |
|-------------------------------|------------|----------------------|------------|
| 2007                          |       | $                    | 129        |   |
| 2008                          |       | 261                  |       |
| 2009                          |       | 265                  |       |
| 2010                          |       | 283                  |       |
| 2011                          |       | 297                  |       |
| Thereafter                    |       | 1,054                |       |
| Total minimum  lease payments |       | $                    | 2,289      |   |

 

**17.  Financial Instruments:Derivatives and Hedging**

FASB No. 133, or SFAS 133, “Accounting for Derivative Instruments andHedging Activities,” which became effective January 1, 2001, requires Gramercyto recognize all derivatives on the balance sheet at fair value.  Derivatives that are not hedges must beadjusted 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 thechange in fair value of the hedged asset, liability, or firm commitment throughearnings, or

 

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recognized in other comprehensive income until the hedged item isrecognized in earnings.  The ineffectiveportion of a derivative’s change in fair value will be immediately recognizedin earnings.  SFAS 133 may increase ordecrease reported net income and stockholders’ equity prospectively, dependingon future levels of LIBOR interest rates and other variables affecting the fairvalues of derivative instruments and hedged items, but will have no effect oncash flows, provided the contract is carried through to full term.

 

The following table summarizes the notional and fair value ofour derivative financial instrument at June 30, 2007.  The notional value is an indication of theextent of our involvement in this instrument at that time, but does notrepresent exposure to credit, interest rate or market risks:
|                    | ** ** | **Benchmark Rate**                     | ** ** | **Notional  Value** | ** ** | **Strike  Rate** | ** ** | **Effective  Date** | ** ** | **Expiration  Date** | ** ** | **Fair  Value** | ** ** |
|--------------------|------------|---------------------------------------------|------------|---------------------|------------|------------------|------------|---------------------|------------|----------------------|------------|-----------------|------------|
| Interest Rate Swap |       | 1  month LIBOR                              |       | $                   | 64,076     |             | 4.990      | %                   | 1/2007     |                 | 1/2017     |            | $          | 2,393 |   |
| Total Return Swap  |       | Lehman  CMBS Investment Grade 8.5+ Yr Index |       | 63,738              |       | +22              | bps        | 3/2007              |       | 3/2008               |       | 264             |       |
| Interest Rate Swap |       | 1  month LIBOR                              |       | 59,400              |       | 4.938            | %          | 5/2007              |       | 11/2012              |       | 1,128           |       |
| Interest Rate Swap |       | 1  month LIBOR                              |       | 42,718              |       | 4.990            | %          | 1/2007              |       | 1/2017               |       | 1,597           |       |
| Interest Rate Swap |       | 1  month LIBOR                              |       | 69,300              |       | 5.025            | %          | 3/2007              |       | 3/2017               |       | 2,384           |       |
| Interest Rate Swap |       | 3  month LIBOR                              |       | 39,454              |       | 4.420            | %          | 7/2005              |       | 2/2014               |       | 2,074           |       |
| Interest Rate Swap |       | 1  month LIBOR                              |       | 36,500              |       | 4.837            | %          | 12/2006             |       | 11/2009              |       | 306             |       |
| Total Return Swap  |       | Lehman  CMBS Investment Grade 8.5+ Yr Index |       | 36,400              |       | +20              | bps        | 5/2007              |       | 5/2008               |       | (8              | )          |
| Interest Rate Swap |       | 1  month LIBOR                              |       | 31,686              |       | 3.855            | %          | 7/2005              |       | 11/2009              |       | 967             |       |
| Interest Rate Swap |       | 3  month LIBOR                              |       | 24,837              |       | 5.445            | %          | 8/2006              |       | 7/2016               |       | 86              |       |
| Interest Rate Cap  |       | 3  month LIBOR                              |       | 23,713              |       | 5.700            | %          | 11/2005             |       | 12/2007              |       | —          |       |
| Interest Rate Swap |       | 1  month LIBOR                              |       | 22,275              |       | 5.078            | %          | 4/2007              |       | 4/2017               |       | 663             |       |
| Total Return Swap  |       | Lehman  CMBS Investment Grade 8.5+ Yr Index |       | 20,600              |       | +20              | bps        | 3/2007              |       | 4/2008               |       | (11             | )          |
| Interest Rate Cap  |       | 3  month LIBOR                              |       | 20,000              |       | 6.000            | %          | 4/2007              |       | 10/2007              |       | —          |       |
| Interest Rate Swap |       | 1  month LIBOR                              |       | 16,412              |       | 5.081            | %          | 5/2007              |       | 5/2017               |       | 529             |       |
| Interest Rate Swap |       | 3  month LIBOR                              |       | 12,000              |       | 9.850            | %          | 8/2006              |       | 8/2011               |       | 61              |       |
| Basis Swap         |       | Prime  Composite-3 month LIBOR              |       | 9,363               |       | +722             | bps        | 8/2006              |       | 12/2007              |       | (1              | )          |
| Interest Rate Swap |       | 1  month LIBOR                              |       | 6,294               |       | 4.760            | %          | 1/2006              |       | 3/2015               |       | 250             |       |
| Interest Rate Swap |       | 1  month LIBOR                              |       | 3,960               |       | 4.959            | %          | 12/2005             |       | 12/2015              |       | 135             |       |
| Interest Rate Swap |       | 1  month LIBOR                              |       | 3,465               |       | 4.280            | %          | 7/2005              |       | 12/2009              |       | 74              |       |
| Interest Rate Swap |       | 3  month LIBOR                              |       | 3,465               |       | 5.178            | %          | 4/2006              |       | 3/2010               |       | 7               |       |
| Total              |       |                                        |       | $                   | 609,656    |             |       |                |       |                 |       |            | $          | 12,898 |   |

 

At June 30, 2007, derivativeinstruments were reported at their fair value as net assets of $12,898.  Offsetting adjustments are represented asdeferred gains in Accumulated Other Comprehensive Income of $12,517.  For the three and six months ended June 30,2007, we recognized a reduction in interest expense of $21 and $14,respectively, attributable to the ineffective component of our derivativeinstruments designated as cash flow hedges. We reclassified through earnings $515 and $940 for the three and sixmonths ended, respectively, representing interest net settlements and the gainsand losses previously reported in Accumulated Other Comprehensive Income, whichwere reclassified into earnings at the same time that the forecastedtransactions affect earnings. In addition, for the three and six months endedJune 30, 2007, we recorded $403 and $892 decrease and increase, respectively,in earnings representing the change in value of undesignated derivatives whichare not speculative for economic purposes, one of which was related to a debtinvestment sold during the six months ended June 30, 2007.  Currently, all derivative instruments aredesignated as cash flow hedging instruments with the exception of a $20,000notional cap, and a $9,363 notional Prime-LIBOR basis swap, which are effectiveeconomic hedges but have not been designated. Over time, the realized and unrealized gains and losses held inAccumulated Other Comprehensive Income will be reclassified into earnings inthe same periods in which the hedged interest payments affect earnings.

We are hedgingexposure to variability in future interest payments on our debt facilities andcash flows for future transactions except in the case of swaps we may enterinto from time to time, including TROR swaps, which are intended to hedge ourexposure to variability in the rate of return in excess of anticipated futureinterest payments on that portion of our debt facilities used to fund fixedrate

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mortgage loanassets held as available for sale.

**18.  Income Taxes**

 

We elected to betaxed as a REIT, under Sections 856 through 860 of the Internal Revenue Codebeginning with our taxable year ended December 31, 2004.  To qualify as a REIT, we must meet certainorganizational and operational requirements, including a requirement todistribute at least 90% of our ordinary taxable income to stockholders.  As a REIT, we generally will not be subjectto federal income tax on taxable income that we distribute to ourstockholders.  If we fail to qualify as aREIT in any taxable year, we will then be subject to federal income taxes onour taxable income at regular corporate rates and we will not be permitted toqualify for treatment as a REIT for federal income tax purposes for four yearsfollowing the year during which qualification is lost unless the InternalRevenue Service grants us relief under certain statutory provisions.  Such an event could materially adverselyaffect our net income and net cash available for distributions tostockholders.  However, we believe thatwe are organized and will operate in such a manner as to qualify for treatmentas a REIT and we intend to operate in the foreseeable future in such a mannerso that we will qualify as a REIT for federal income tax purposes.  We may, however, be subject to certain state andlocal taxes.

For the three months endedJune 30, 2007 and 2006, we recorded $429 and $335 of income tax expense,respectively, in income from continuing operations for income attributable toour wholly-owned taxable REIT subsidiaries. We have assumed an effective taxrate for the three months ended June 30, 2007 of 44% taking into considerationthe anticipated applicable U.S. federal statutory tax rate at June 30, 2007 of34% and state and local taxes.

 

**19.  Environmental Matters**

**Our management believes we are in compliance in allmaterial respects with applicable Federal, state and local ordinances andregulations regarding environmental issues. Our management is not aware of any environmental liability that itbelieves would have a materially adverse impact on our financial position,results of operations or cash flows.**

**20.  Segment Reporting**

**Statementof Financial Accounting Standard No. 131, or “SFAS No. 131,” establishesstandards for the way that public entities report information about operatingsegments in their annual financial statements. As of June 30, 2007 we were a REIT focused primarily on originating andacquiring loans and securities related to real estate and under the provisionsof SFAS No. 131 operated in only one segment.**

**21. Supplemental Disclosure of Non-Cash Investing and Financing Activities**

Followingthe conversion of the entity that owns 200 Franklin Square Drive into a DST, wesold approximately 75% of our security interests in the DST to a third party,reducing our final ownership interest to 25.0%. We received total cash consideration of $12,800 for these interests andthe buyer assumed 75% of the DST’s underlying mortgage debt.  As a result of the transaction, the propertyis no longer consolidated onto our balance sheet, but instead is accounted foras an equity method investment.

The following table represents non-cashactivities recognized in other comprehensive income for the three months endedJune 30, 2007 and 2006:
|                                                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred gains/(losses)  and other non-cash activity related to derivatives |       | $        | 10,864     |     | $          | 6,015 |   |
|                                                                             |            |          |            |          |            |  |  |

 

**22.  SubsequentEvents**

**In July 2007 we entered into anagreement to sell our entire investment in the One Madison Avenue joint ventureto SL Green Realty Corp. for approximately $147.6 million. The sale closed on August1, 2007.**

**In July 2007, we closed on a $25,083investment in a 45% TIC interest to acquire a 79% fee interest and 21%leasehold interest in the property located at 885 Third Avenue, otherwise knownas The Lipstick Building.  The propertyis subject to a 70-year ground lease, with an unaffiliated third party. Theremaining TIC interest is owned by a wholly-owned subsidiary of SL Green.  The TIC interests are *pari passu*.**

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**In July 2007, we closed on a $12,772,100% fee interest in the property located at 292 Madison Avenue, New York, NY,purchased from SL Green. Simultaneously, the Company entered into a 70-year groundlease, with an unaffiliated third party.**

On July 25, 2007, wepriced Gramercy Real Estate CDO 2007-1 (“CDO 3”), which closed on August 8,2007 and resulted in the issuance of approximately $1,100,000 of CDOs throughtwo indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the2007 Issuer, and Gramercy Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer.CDO 3 will consist of $1,045,550 of investment grade notes, $22,000 ofnon-investment grade notes, which will be co-issued by the 2007 Issuer and the2007 Co-Issuer, and $32,450 of preferred shares, which will be issued by the2007 Issuer.  The investment grade noteswere issued with a combination of floating rate and fixed rate coupons with acombined weighted average spread of 44.7 basis points.  Transaction costs related to Gramercy RealEstate CDO 2007-1 will be amortized on an effective-yield basis over theaverage life of the CDO.

We retained allnon-investment grade securities, the preferred shares and the common shares inthe 2007 Issuer.  CDO 3 will hold assets,consisting primarily of investment-grade rated CMBS,  whole loans, subordinate interests in wholeloans, mezzanine loans and preferred equity investments, which serve ascollateral for the CDO.  The non-CMBScollateral of CDO 3 may be replenished, pursuant to certain rating agencyguidelines relating to credit quality and diversification, with substitutecollateral for loans that are repaid or sold by the Issuer during the firstfive years of the CDO. Thereafter, the CDO securities will be retired insequential order from senior-most to junior-most as collateral is repaid.  The financial statements of the 2007 Issuerwill be consolidated in our financial statements. The investment grade noteswill be treated as a secured financing, and will be non-recourse to us.

TheCompany will utilize the proceeds of the CDO 3 issuance to retire certainoutstanding borrowings, and to acquire virtually all of the Company’s existingfixed-rate loans currently financed in CDO 1 and CDO 2.  CDO 3 closed on  August 8, 2007.

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**ITEM2:  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

**Overview**

We are acommercial real estate specialty finance company that focuses on the directorigination and acquisition of whole loans, subordinate interests in wholeloans, mezzanine loans, preferred equity, and net lease investments involvingcommercial properties throughout the United States. We have also established areal estate securities business that will focus on the acquisition, trading andfinancing of commercial mortgage backed securities, or CMBS, and other realestate related securities.  When evaluatingtransactions, we assess our risk-adjusted return and target transactions withyields that seek to provide excess returns for the risks being taken.  We conduct substantially all of ouroperations through our operating partnership, GKK Capital LP, or our OperatingPartnership.  We are externally managedand advised by GKK Manager LLC, or our Manager, a majority-owned subsidiary ofSL Green Realty Corp. (NYSE: SLG), or SL Green. We have elected to be taxed as a REIT under the Internal Revenue Codeand generally will not be subject to federal income taxes to the extent wedistribute our income to our stockholders. However, we may establish TRSs to effect various taxabletransactions.  Those TRSs would incurfederal, state and local taxes on the taxable income from theiractivities.  Unless the context requiresotherwise, all references to “we,” “our” and “us” mean Gramercy Capital Corp.

In each financingtransaction we undertake, we seek to control as much of the capital structureas possible in order to be able to identify and retain that portion thatprovides the best risk adjusted returns. This is generally achieved through the direct origination of wholeloans, the ownership of which permits a wide variety of financing, syndication,and securitization executions to achieve excess returns for the risks beingtaken.  By providing a single source offinancing for developers and sponsors, we streamline the lending process,provide greater certainty for borrowers, and retain the high yield debtinstruments that we manufacture.  Byoriginating, rather than buying, whole loans, subordinate interests in wholeloans, mezzanine debt and preferred equity, we strive to deliver superiorreturns to our stockholders.

Since ourinception, we have completed transactions in a variety of markets and securedby a variety of property types, and the market for commercial real estate debthas continued to demonstrate low rates of default, high relative returns, andinflows of capital.  Consequently, themarket for debt instruments has evidenced declining yields and more flexiblecredit standards and loan structures.  Inparticular, “conduit” originators who package whole loans for resale toinvestors have driven debt yields lower while maintaining substantial liquiditybecause of the strong demand for the resulting securities.  Because of reduced profits in the most liquidsectors of the mortgage finance business, several large institutions have begunoriginating large bridge loans for the purpose of generating interest income, ratherthan the typical focus on trading profits. In this environment we have focused on areas where we have comparativeadvantages rather than competing for product merely on the basis of yield orstructure.  This has particularlyincluded whole loan origination in markets and transactions where we have anadvantage due to (i) knowledge or relationships we have, (ii) knowledge orrelationships of our largest stockholder, SL Green, and (iii) where we have anability to better assess and manage risks over time.  When considering investment opportunities insecondary market transactions in tranched debt, we generally avoid first lossrisk in larger transactions due to the high current valuation of the underlyingreal estate relative to historic valuation levels.  Because of the significant increase in thevalue of institutional quality assets relative to historic norms, we typicallyfocus on positions in which a conventional refinancing at loan maturity wouldprovide for a complete return of our investment.

Because of thehigh relative valuation of debt instruments in the current market and agenerally increasing rate environment, we have carefully managed our exposureto interest rate changes that could affect our liquidity.  We generally match our assets and liabilitiesin terms of base interest rate (generally one-month LIBOR) and expectedduration.  We have also been active inthe equity and debt markets since 2004 to take advantage of cost effectivesources of capital, maintain liquidity and attractively finance our business.We raised $95,000 of additional equity in December 2004 and January 2005 toreduce our outstanding indebtedness and maintain sufficient liquidity for ourinvestment portfolio.  In September 2005we sold 3,833,333 shares of common stock resulting in net proceeds ofapproximately $97,830 and in May 2006 we sold 3,000,000 shares of common stockresulting in net proceeds of approximately $80,000.  In April 2007 we sold 4,600,000 shares of our8.125% Series A cumulative redeemable preferred stock, resulting in netproceeds of approximately $111,205.  Theproceeds of these offerings were used to fund loan acquisitions andoriginations, repay outstanding principal amounts under our repurchasefacilities or unsecured revolving credit facilities and for general corporatepurposes. We have also sold a total of $150,000 of trust preferred securitiesin three $50,000 issuances in May and August 2005 and January 2006 throughwholly-owned subsidiaries of our Operating Partnership with 30 year terms.  The securities issued in May 2005 bear interestat a fixed rate of 7.57% for the first ten years ending, the securities issuedin August 2005 bear interest at a fixed rate of 7.75% for the first ten yearsand the securities issued in January 2006 bear interest at a fixed rate of7.65% for the first ten years.  After thefirst ten years, the 2005 issuances bear interest at three-month LIBOR plus 300basis points while the 2006 issuance bears interest at three-month LIBOR plus270 basis points.  The proceeds from theissuances of the trust preferred securities were used to fund existing andfuture investment opportunities.   InJuly 2005 we closed our first $1,000,000 CDO which extended the term of ourliabilities and reduced our overall cost of funds with respect to debtinvestments financed by the CDO and

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previouslyfinanced by our repurchase agreements, to approximately 49 basis points overLIBOR, excluding transaction costs.  Oursecond $1,000,000 CDO was closed in August 2006 at a weighted average interestspread of approximately 37 basis points over LIBOR, excluding transactioncosts.  The proceeds of the CDOs wereused to repay our repurchase facilities and to fund additional investmentactivities.  In addition, we have anunsecured credit facility which was increased in June 2007 to $175,000 from$100,000 and its term was extended to June 2010.  The facility is available for fundinginvestments and general corporate purposes.

As of June 30, 2007, we held loans, otherlending investments and CMBS of $2,853,821 net of fees, discounts, and unfundedcommitments with an average spread to LIBOR of 393 basis points for ourfloating rate investments, and an average yield of 8.68% for our fixed rateinvestments.  As of June 30, 2007, wealso held interests in five credit tenant lease, or CTL, investments comprisedof a 49.75% TIC interest in 55 Corporate Drive in Bridgewater, New Jersey,andfour joint venture investments.

**The aggregate carrying values, allocated by producttype and weighted average coupons of our loans, other lending investments andCMBS as of June 30, 2007 and December 31, 2006 were as follows:**
|                                                      | ** ** | **Carrying Value (1)  ($ in thousands)** | ** ** | **Allocation by  Investment Type** | ** ** | **Fixed Rate:  Average Yield** | ** ** | **Floating Rate:  Average Spread over  LIBOR (2)** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                     | ** ** | **2006**                                     | ** ** | **2007**                                 | ** ** | **2006**                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Whole loans, floating  rate                          |       | $                                                            | 1,554,017  |                                         | $          | 1,372,316                                |       | 54                                                                     | %          | 63 | % | — |   | — |   | 338 | bps | 327 | bps |
| Whole loans, fixed rate                              |       | 192,023                                                      |       | 42,376                                       |       | 7                                        | %          | 2                                                                      | %          | 7.94 | % | 11.69 | % | — |   | — |   |
| Corporate whole loans –  floating rate          |       | 146,620                                                      |       | —                                       |       | 5                                        | %          | —                                                                 |       | — |   | — |   | 210 | bps | — |   |
| Subordinate interests in  whole loans, floating rate |       | 154,575                                                      |       | 236,308                                      |       | 5                                        | %          | 11                                                                     | %          | — |   | — |   | 453 | bps | 445 | bps |
| Subordinate interests in  whole loans, fixed rate    |       | 44,556                                                       |       | 48,769                                       |       | 2                                        | %          | 2                                                                      | %          | 7.16 | % | 8.54 | % | — |   | — |   |
| Mezzanine loans,  floating rate                      |       | 476,068                                                      |       | 226,675                                      |       | 17                                       | %          | 10                                                                     | %          | — |   | — |   | 614 | bps | 665 | bps |
| Mezzanine loans, fixed  rate                         |       | 217,573                                                      |       | 216,216                                      |       | 8                                        | %          | 10                                                                     | %          | 8.93 | % | 9.92 | % | — |   | — |   |
| Preferred equity, fixed  rate                        |       | 44,324                                                       |       | 44,224                                       |       | 2                                        | %          | 2                                                                      | %          | 10.45 | % | 10.68 | % | — |   | — |   |
| CMBS, floating rate                                  |       | 6,427                                                        |       | —                                       |       | —                                   | %          | —                                                                 | %          | — |   | — |   | 229 | bps | — |   |
| CMBS, fixed rate                                     |       | 17,638                                                       |       | —                                       |       | —                                   | %          | —                                                                 | %          | 12.98 | % | — |   | — |   | — |   |
| Total / Average                                      |       | $                                                            | 2,853,821  |                                         | $          | 2,186,884                                |       | 100                                                                    | %          | 100 | % | 8.68 | % | 10.04 | % | 393 | bps | 384 | bps |

 

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**(1)**          Debtinvestments are presented after scheduled amortization payments andprepayments, and are net of unamortized fees, discounts, asset sales andunfunded commitments.

**(2)**          Spreadsover an index other than LIBOR have been adjusted to a LIBOR based equivalent.

We monitor ourportfolio periodically and prior to each acquisition to confirm that wecontinue to qualify for the exemption from registration provided bySections 3(c)(5)(C) and 3(c)(6) of the Investment Company Act of 1940, asamended, or the Investment Company Act. Qualifying for the Section 3(c)(5)(C) exclusion requires that at least55% of our portfolio be comprised of “qualifying assets,” and a total of atleast 80% of our portfolio be comprised of “real estate-related assets,” acategory that includes qualifying assets. We generally expect mortgage loans,CTLs, and Tier 1 mezzanine loans to be qualifying assets. Tier 1 mezzanineloans are loans granted to a mezzanine borrower that directly owns interests inthe entity that owns the property being financed.  Subordinate interests in whole loans mayconstitute qualifying assets under Section 3(c)(5)(C), provided that we havethe unilateral right to foreclose, directly or indirectly, on the mortgage andthat we may act as the controlling class or directing holder of the note. Wegenerally do not treat preferred equity investments as qualifying assets. Weexpect that all of these classes of investments, including subordinateinterests in whole loans and preferred equity investments will be consideredreal estate-related assets under the Investment Company Act for purposes of the80% investment threshold.

**Critical Accounting Policies**

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

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### **Loansand Investments and Loans Held for Sale**

Loans held forinvestment are intended to be held to maturity and, accordingly, are carried atcost, net of unamortized loan origination fees, discounts, repayments, sales ofpartial interests in loans, and unfunded commitments unless such loan orinvestment is deemed to be impaired. Loans held for sale are carried at the lower of cost or market valueusing available market information obtained through consultation with dealersor other originators of such investments. We may originate or acquire preferred equity interests that allow us toparticipate in a percentage of the underlying property’s cash flows fromoperations and proceeds from a sale or refinancing.  Should we make such a preferred equityinvestment, we must determine whether that investment should be accounted foras a loan, joint venture or as an interest in real estate.

Specific valuation allowances are established for impaired loans basedon the fair value of collateral on an individual loan basis.  The fair value of the collateral is determinedby selecting the most appropriate valuation methodology, or methodologies,among several generally available and accepted in the commercial real estate industry. The determination of the most appropriate valuation methodology is basedon the key characteristics of the collateral type.  These methodologies include the evaluation ofoperating cash flow from the property during the projected holding period, andthe estimated sales value of the collateral computed by applying an expectedcapitalization rate to the stabilized net operating income of the specificproperty, less selling costs, all of which are discounted at market discountrates.

 

If upon completionof the valuation, the fair value of the underlying collateral securing theimpaired loan is less than the net carrying value of the loan, an allowance iscreated with a corresponding charge to the provision for loan losses.  The allowance for each loan is maintained ata level we believe is adequate to absorb probable losses.  We maintained a reserve of $6,608 and $2,460at June 30, 2007 and December 31, 2006, respectively.

Our Managerevaluates our assets on a regular basis to determine if they continue tosatisfy our investment criteria. Subject to certain restrictions, our Managermay cause us to sell our investments opportunistically and use the proceeds ofany such sale for debt reduction, additional acquisitions or working capitalpurposes.

#### **CommercialMortgage Backed Securities Available-for-Sale**

The Company hasdesignated its CMBS as available-for-sale as the Company may dispose of thesecurities prior to maturity and the Company does not hold them for the purposeof selling them in the near term.   Available-for-sale securities are carried at estimated fair value withthe net unrealized gains or losses recorded as a component of accumulated othercomprehensive income (loss) in stockholders equity.  Unrealized losses on securities that in thejudgment of management is other than temporary, are charged against earnings asa loss on the income statement.  Ifavailable-for-sale securities were classified as trading securities, therecould be substantially greater volatility in earnings from period-to-period asthese investments would be marked to market and any reduction in the value ofthe securities versus the previous carrying value would be considered anexpense on our statement of operations. We had no investments as of June 30,2007 that were accounted for as trading securities.

When the fairvalue of an available-for-sale security is less than the amortized cost, weconsider whether there is an other-than-temporary impairment in the value ofthe security (for example, whether the security will be sold prior to therecovery of fair value).  If, in our judgment, an other-than-temporary impairmentexists, the cost basis of the security is written down to the then-current fairvalue, and this loss is realized and charged against earnings.  Thedetermination of other-than-temporary impairment is a subjective process, anddifferent judgments and assumptions could affect the timing of lossrealization.

We determine thefair value of CMBS based on the types of securities in which we haveinvested.  For liquid, investment-gradesecurities, we consult with dealers of such securities to periodically obtain updatedmarket pricing for the same or similar instruments.  For non-investment grade securities, weactively monitor the performance of the underlying properties and loans andupdate our pricing model to reflect changes in projected cash flows.  The value of the securities is derived byapplying discount rates to such cash flows based on current market yields.  The yields employed are obtained from our ownexperience in the market, advice from dealers and/or information obtained inconsultation with other investors in similar instruments.  Because fair value estimates may vary to somedegree, we must make certain judgments and assumptions about the appropriateprice to use to calculate the fair values for financial reportingpurposes.  Different judgments andassumptions could result in different presentations of value.

In accordance withSFAS No. 115, when the estimated fair value of the security classified asavailable-for-sale has been below amortized cost for a significant period oftime and the Company concludes that it no longer has the ability or intent tohold the security for the period of time over which the Company expects thevalues to recover to amortized cost, the investment is written down to its

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fair value, andthis loss is realized and charged against earnings.

#### **CreditTenant Lease Investments**

Consolidated CTL investments are recorded at cost lessaccumulated depreciation.  Costs directlyrelated to the acquisition of such investments are capitalized.  Certain improvements are capitalized whenthey are determined to increase the useful life of the building.  Capitalized items are depreciated using thestraight-line method over the shorter of the useful lives of the capitalizeditem or 40 years for buildings or facilities, the remaining life of thefacility for facility improvements, four to seven years for personal propertyand equipment, and the shorter of the remaining lease term or the expected lifefor tenant improvements.

Results of operations of properties acquired are included inthe Statement of Income from the date of acquisition.

In accordance with FASB No. 144, or SFAS 144, “Accountingfor the Impairment of Disposal of Long-Lived Assets,” a property to be disposedof is reported at the lower of its carrying amount or its estimated fair value,less its cost to sell.  Once an asset isheld for sale, depreciation expense and straight-line rent adjustments are nolonger recorded and historic results are reclassified as DiscontinuedOperations.

In accordance with FASB No. 141, or SFAS 141, “BusinessCombinations,” we allocate the purchase price of real estate to land andbuilding and, if determined to be material, intangibles, such as the value ofabove, below and at-market leases and origination costs associated with thein-place leases.  We depreciate the amount allocated to building and otherintangible assets over their estimated useful lives, which generally range fromthree to 40 years.  The values of the above and below-market leases areamortized and recorded as either an increase (in the case of below-marketleases) or a decrease (in the case of above-market leases) to rental incomeover the remaining term of the associated lease.  The value associatedwith in-place leases and tenant relationships are amortized over the expectedterm of the relationship, which includes an estimated probability of the leaserenewal, and its estimated term.  If a tenant vacates its space prior tothe contractual termination of the lease and no rental payments are being madeon the lease, any unamortized balance of the related intangible will be writtenoff.  The tenant improvements and origination costs are amortized as anexpense over the remaining life of the lease (or charged against earnings ifthe lease is terminated prior to its contractual expiration date).  Weassess fair value of the leases based on estimated cash flow projections thatutilize appropriate discount and capitalization rates and available marketinformation.  Estimates of future cash flows are based on a number offactors including the historical operating results, known trends, andmarket/economic conditions that may affect the property.

**Investments in Unconsolidated Joint Ventures**

#### We account for our investments in unconsolidated joint ventures underthe equity method of accounting since we exercise significant influence, but donot unilaterally control the entities and are not considered to be the primarybeneficiary under FIN 46R.  In the joint ventures, the rights of the otherinvestor are protective and participating. Unless we are determined to be theprimary beneficiary, these rights preclude us from consolidating theinvestments.  The investments are recorded initially at cost as aninvestment in unconsolidated joint ventures, and subsequently are adjusted forequity in net income (loss) and cash contributions and distributions.  Anydifference between the carrying amount of the investments on our balance sheetand the underlying equity in net assets is amortized as an adjustment to equityin net income (loss) of unconsolidated joint ventures over the lesser of thejoint venture term or 40 years.  None of the joint venture debt isrecourse to us.  As of June 30, 2007 andDecember 31, 2006, we had investments in unconsolidated joint ventures of$74,302 and $57,567, respectively.

#### **RevenueRecognition**

Interest income ondebt investments is recognized over the life of the investment using theeffective interest method and recognized on the accrual basis.  Fees received in connection with loancommitments are deferred until the loan is funded and are then recognized overthe term of the loan using the effective interest method.  Anticipated exit fees, whose collection isexpected, are also recognized over the term of the loan as an adjustment toyield.  Fees on commitments that expireunused 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 recognizedover the term of that guarantee using the straight-line method.

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

In some instances we may sell all or a portion of our investments to athird party.  To the extent the fairvalue received for an investment exceeds the amortized cost of that investmentand FASB Statement No. 140, or SFAS 140, “Accounting for Transfers and

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Servicing of Financial Assets and Extinguishments of Liabilities,”criteria is met, under which control of the asset that is sold is surrenderedmaking it a “true sale,” a gain on the sale will be recorded through earningsas other income.  To the extent aninvestment that is sold has a discount or fees, which were deferred at the timethe investment was made and were being recognized over the term of theinvestment, the unamortized portion of the discount or fees are recognized atthe time of sale and recorded as a gain on the sale of the investment throughother income.  For the three and sixmonths ended June 30, 2007, we recognized $1,668 and $4,354, respectively, innet gains from the sale of debt investments or commitments.   For the three and six months ended June 30,2006, we recognized $314 and $1,428, respectively, in net gains from the saleof debt investments or commitments.

Rental revenue is recognized on astraight-line basis over the term of the lease. The excess of rents recognizedover amounts contractually due pursuant to the underlying leases is included inother assets on the accompanying balance sheets. We may establish, on a currentbasis, an allowance against this account for future potential tenant creditlosses, which may occur. The balance reflected on the balance sheet will be netof such allowance.

In addition to base rent, thetenants in our CTL investments also pay all operating costs of owned propertyincluding real estate taxes.

#### **Reservefor Possible Loan Losses**

The expense for possible loan losses in connection with debt investmentsis the charge to earnings to increase the allowance for possible loan losses tothe level that management estimates to be adequate considering delinquencies,loss experience and collateral quality. Other factors considered relate to geographic trends and projectdiversification, the size of the portfolio and current economic conditions.  Based upon these factors, we may establishthe provision for possible loan losses by individual asset or category ofasset. When it is probable that we will be unable to collect all amountscontractually due, the account is considered impaired.

Where impairment is indicated, a valuation write-down or write-off ismeasured based upon the excess of the recorded investment amount over the netfair value of the collateral, as reduced by selling costs.  Any deficiency between the carrying amount ofan asset and the net sales price of foreclosed collateral is charged tothe allowance for loan losses.  Wemaintained a reserve for possible loan losses of $6,608 against investmentswith a carrying value of $153,721 as of June 30, 2007, and a reserve forpossible loan losses of $2,460 against investments with a carrying value of$131,427 as of December 31, 2006.

**StockBased Compensation Plans**

We have a stock-based compensation plan, described more fully in Note14.  We account for this plan using thefair value recognition provisions of FASB Statement 123(R), “Share-BasedPayment, a revision of FASB Statement No. 123, Accounting for Stock-BasedCompensation.”

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

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

The fair value of each stockoption granted is estimated on the date of grant for awards to co-leasedemployees, and quarterly for options issued to non-employees, using the Black-Scholesoption pricing model with the following weighted average assumptions for grantsin 2007 and 2006.
|                                 | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|---------------------------------|------------|-----------|------------|-----------|------------|
| Dividend yield                  |       | 7.9       | %          | 8.0       | %          |
| Expected life of option         |       | 6.0 years |       | 6.7 years |       |
| Risk-free interest rate         |       | 5.04      | %          | 4.14      | %          |
| Expected stock price volatility |       | 25.0      | %          | 21.0      | %          |

 

**IncentiveDistribution (Class B Limited Partner Interest)**

The Class Blimited partner interests are entitled to receive an incentive return equal to25% of the amount by which funds from operations, or FFO plus certainaccounting gains (as defined in the partnership agreement of our OperatingPartnership which was

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amended andrestated in April 2006) exceed the product of our weighted average stockholdersequity (as defined in the amended and restated partnership agreement of ourOperating Partnership) multiplied by 9.5% (divided by four to adjust forquarterly calculations). We will record any distributions on the Class Blimited partner interests as an incentive distribution expense in the period whenearned and when payment of such amounts has become probable and reasonablyestimable in accordance with the partnership agreement.  These cash distributions will reduce theamount of cash available for distribution to our common unit holders in our OperatingPartnership and to common stockholders. We incurred approximately $3,784 and $1,578 with respect to such Class Blimited partner interests for the three months ended June 30, 2007 and 2006,respectively.

#### **DerivativeInstruments**

**In thenormal course of business, we use a variety of derivative instruments tomanage, or hedge, interest rate risk.  Werequire that hedging derivative instruments be effective in reducing theinterest rate risk exposure that they are designated to hedge.  This effectiveness is essential forqualifying for hedge accounting.  Somederivative instruments are associated with an anticipated transaction.  In those cases, hedge effectiveness criteriaalso require that it be probable that the underlying transaction occurs.  Instruments that meet these hedging criteriaare formally designated as hedges at the inception of the derivative contract.**

**Todetermine the fair value of derivative instruments, we use a variety of methodsand assumptions that are based on market conditions and risks existing at eachbalance sheet date. For the majority of financial instruments including mostderivatives, long-term investments and long-term debt, standard marketconventions and techniques such as discounted cash flow analysis,option-pricing models, replacement cost, and termination cost are used todetermine fair value.  All methods ofassessing fair value result in a general approximation of value, and such valuemay never actually be realized.**

In the normalcourse of business, we are exposed to the effect of interest rate changes andlimit these risks by following established risk management policies andprocedures including the use of derivatives. To address exposure to interest rates, we use derivatives primarily tohedge the mark-to-market risk of our liabilities with respect to certain of ourassets.  We may also use derivatives tohedge variability in sales proceeds to be received upon the sale of loans heldfor sale.

We use a varietyof commonly used derivative products that are considered plain vanilladerivatives.  These derivatives typicallyinclude interest rate swaps, caps, collars and floors.  We also use total rate of return swaps, orTROR swaps, which are tied to the Lehman Brothers CMBS index. We expresslyprohibit the use of unconventional derivative instruments and using derivativeinstruments for trading or speculative purposes.  Further, we have a policy of only enteringinto contracts with major financial institutions based upon their creditratings and other factors.

**FASB No. 133, or SFAS 133, “Accountingfor Derivative Instruments and Hedging Activities,” as amended by FASB No. 149,requires us to recognize all derivatives on the balance sheet at fairvalue.  Derivatives that are not hedgesmust 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 thechange in fair value of the hedged asset, liability, or firm commitment throughearnings, or recognized in other comprehensive income until the hedged item isrecognized in earnings.  The ineffectiveportion of a derivative’s change in fair value will be immediately recognizedin earnings.  SFAS 133 may increase ordecrease reported net income and stockholders’ equity prospectively, dependingon future levels of LIBOR, swap spreads and other variables affecting the fairvalues of derivative instruments and hedged items, but will have no effect oncash flows, provided the contract is carried through to full term.**

We may employswaps, forwards or purchased options to hedge qualifying forecastedtransactions.  Gains and losses relatedto these transactions are deferred and recognized in net income as interestexpense or other income in the same period or periods that the underlyingtransaction occurs, expires or is otherwise terminated.

All hedges held byus are deemed to be effective in meeting the hedging objectives established byour corporate policy governing interest rate risk management.  The effect of our derivative instruments onour financial statements is discussed more fully in Note 17 to our ConsolidatedFinancial Statements.

# **Income Taxes**

We elected to betaxed 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 certainorganizational and operational requirements, including a requirement todistribute at least 90% of our ordinary taxable income to stockholders.  As a REIT, we generally will not be subjectto federal income tax on taxable income that we distribute to ourstockholders.  If we fail to qualify as aREIT in any taxable year, we will then be subject to federal income taxes onour taxable income at regular corporate rates and we will not be permitted toqualify for treatment as a REIT for federal income tax purposes for four yearsfollowing the year during which qualification is lost unless the

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Internal RevenueService grants us relief under certain statutory provisions.  Such an event could materially adverselyaffect our net income and net cash available for distributions tostockholders.  However, we believe thatwe will be organized and operate in such a manner as to qualify for treatmentas a REIT and we intend to operate in the foreseeable future in such a mannerso that we will qualify as a REIT for federal income tax purposes.  We may, however, be subject to certain stateand local taxes.

Our taxable REITsubsidiaries, individually referred to as a TRS, are subject to federal, stateand local taxes.

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**Resultsof Operations (Amounts in thousands)**

### ***Comparison of thethree months ended June 30, 2007 to the three months ended June 30, 2006***

***Revenues***
|                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **$ Change** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Investment  income                                            |       | $        | 72,828     |     | $          | 39,134            |       | $ | 33,694 |   |
| Rental revenue,  net                                          |       | 1,850    |       | —   |       | 1,850             |       |
| Gain on sales  and other income                               |       | 3,625    |       | 4,371    |       | (746              | )          |
| Total revenues                                                |       | 78,303   |       | 43,505   |       | $                 | 34,798     |   |
|                                                          |       |     |       |     |       |              |       |
| Equity in net income  (loss) of unconsolidated joint ventures |       | $        | 484        |     | $          | (630              | )          | $ | 1,114 |   |

 

Investment income isgenerated on our whole loans, subordinate interests in whole loans, mezzanineloans, preferred equity interests and CMBS investments.  For the three months ended June 30, 2007,$14,690 was earned on fixed rate investments while the remaining $58,138 wasearned on floating rate investments.  Theincrease over the prior year is due primarily to a larger number of investmentsin 2007 versus 2006 at moderately higher spreads on our floating rateinvestments.

**Rental revenue of $1,850 in 2007was earned on our TIC interest in 55 Corporate Drive, which has been held as aproportionately consolidated property since its acquisition in June 2006.Following its acquisition, 55 Corporate Drive was being redeveloped. Theproperty was accounted for as an operating property beginning in the threemonths ended December 31, 2006.  Rentalrevenue in 2007 includes the effect of adjustments for straight-line rent for55 Corporate Drive.**

Gains on sales andother income of $3,625 for the three months ended June 30, 2007 is comprisedprimarily of a gain recorded on the sale of one loan commitment of $1,668.  The remaining balance in other income isprimarily attributable to interest on restricted cash balances in our two CDOs(only one of which was in place during the same period of 2006) and other cashbalances held by us. For the three months ended June 30, 2006, other income of$4,371 was comprised primarily of $314 in gains related to the syndication oftwo floating rate debt investments, and the $2,632 gain on the sale of securityinterests in the entity that owns 200 Franklin Square Drive.

**The income on investments inunconsolidated joint ventures of $484 for the three months ended June 30, 2007represents our proportionate share of income generated by our joint ventureinterests including $1,946 of real estate-related depreciation andamortization, which when added back, results in a contribution to FFO of$2,430.  The loss on investments inunconsolidated joint venture of $630 for the three months ended June 30, 2006was generated primarily on our investment in One Madison Avenue in New York,New York.  Our use of FFO as an importantfinancial measure is discussed in more detail below.**

***Expenses***
|                                        | ** ** | **2007** | ** ** | **2006** | ** ** | **$ Change** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Interest expense                       |       | $        | 39,209     |     | $          | 20,777            |       | $ | 18,432 |   |
| Management fees                        |       | 5,414    |       | 3,861    |       | 1,553             |       |
| Incentive fee                          |       | 3,784    |       | 1,578    |       | 2,206             |       |
| Depreciation and  amortization         |       | 1,088    |       | 228      |       | 860               |       |
| Marketing,  general and administrative |       | 4,103    |       | 2,779    |       | 1,324             |       |
| Provision for  loan loss/(recovery)    |       | 2,900    |       | 500      |       | 2,400             |       |
| Provision for taxes                    |       | 429      |       | 335      |       | 94                |       |
| Total expenses                         |       | $        | 56,927     |     | $          | 30,058            |       | $ | 26,869 |   |

 

Interest expensewas $39,209 for the three months ended June 30, 2007 compared to $20,777 forthe three months ended June 30, 2006. Interest expense for the three months ended June 30, 2007 consistedprimarily of $25,066 of interest on the investment grade tranches of our twoCDOs, $6,404 of interest on borrowings on our master repurchase facilities withWachovia and Goldman, $2,871 of expense on our three $50,000 issuances of trustpreferred securities, $1,620 of interest on our unsecured revolving creditfacility, and the amortization of deferred financing costs related to our CDOs,repurchase facilities and unsecured revolving credit facility.  The $20,777 of interest expense during thesame period in 2006 was comprised primarily of $11,192 of interest on theinvestment grade tranches of our first CDO, $5,802 of interest on borrowings onour master repurchase facilities, and $2,871 of expense accrued against ourthree $50,000 issuances of trust preferred securities.

Management feesincreased $1,553 for the three months ended June 30, 2007 to $5,414 versus$3,861 for the same period in 2006 due 

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primarily to anincrease in our stockholder’s equity as a result of the issuance of our preferredstock, on which base management fees are calculated.  The remaining increase is comprised of $1,083paid or payable to our Manager on investments in our two CDOs (only one ofwhich was in place during the same period in 2006) in accordance with the CDOcollateral management agreements in lieu of the 0.15% fee otherwise payable toSL Green Operating Partnership, L.P. on those investments under the assetservicing agreement, higher fees paid or payable to SL Green OperatingPartnership, L.P. under our outsourcing and servicing agreements due to theincrease in our investment balances and the scheduled 3% annual increase in thefee payable under our outsourcing agreement.

We recorded anincentive fee expense of $3,784 during the three months ended June 30, 2007 inaccordance with requirements of the partnership agreement of our OperatingPartnership which entitles owners of Class B limited partner interests in ourOperating Partnership to an incentive return equal to 25% of the amount bywhich FFO plus certain accounting gains (as defined in the amended and restatedpartnership agreement of our Operating Partnership) exceed the product of ourweighted average stockholders equity (as defined in the amended and restatedpartnership agreement of our Operating Partnership) multiplied by 9.5% (dividedby four to adjust for quarterly calculations). We also recorded incentive fee expense of $1,578 for the three monthsended June 30, 2006, which reflects a lower FFO recognized during that periodcompared to 2007.

The increase inmarketing, general and administrative expenses to $4,103 for the three monthsended June 30, 2007 versus the same period in 2006 was due primarily to higherequity related compensation, professional fees, insurance and general overheadcosts.  As a percentage of totalrevenues, marketing, general and administrative expenses declined to 5.2% forthe three months ended June 30, 2007 from 6.3% for the same period in 2006.

### ***Comparison of thesix months ended June 30, 2007 to the six months ended June 30, 2006***

***Revenues***
|                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **$ Change** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Investment  income                                            |       | $        | 132,797    |     | $          | 71,013            |       | $ | 61,784 |   |
| Rental revenue,  net                                          |       | 3,586    |       | 914      |       | 2,672             |       |
| Gain on sales  and other income                               |       | 10,054   |       | 8,568    |       | 1,486             |       |
| Total revenues                                                |       | 146,437  |       | 80,495   |       | $                 | 65,942     |   |
|                                                          |       |     |       |     |       |              |       |
| Equity in net income  (loss) of unconsolidated joint ventures |       | $        | (211       | )        | $          | (1,357            | )          | $ | 1,146 |   |

 

Investment income isgenerated on our whole loans, subordinate interests in whole loans, mezzanineloans, preferred equity interests and CMBS investments.  For the six months ended June 30, 2007,$24,825 was earned on fixed rate investments while the remaining $107,972 wasearned on floating rate investments.  Theincrease over the prior year is due primarily to a larger number of investmentsin 2007 versus 2006 at moderately higher spreads on our floating rateinvestments.

**Rental revenue of $3,586 in 2007was earned on our TIC interest in 55 Corporate Drive, which has been held as aproportionately consolidated property since its acquisition in June 2006.Following its acquisition, 55 Corporate Drive was being redeveloped. Theproperty was accounted for as an operating property beginning in the threemonths ended December 31, 2006.  Rentalrevenue in 2007 includes the effect of adjustments for straight-line rent andFASB 141 adjustments for below-market leases for 55 Corporate Drive.  Rental revenue of $914 in 2006 was earned on200 Franklin Square Drive, which was acquired in September 2005.  This amount also includes the effect ofadjustments for straight-line rent and FASB 141 adjustments for below marketleases.**

Gains on sale and otherincome of $10,054 for the six months ended June 30, 2007 includes the $1,668gain related to the sale of one loan commitment and the $2,686 gain on the saleof one debt investment.  The remainingincrease over the prior year is primarily attributable to interest onrestricted cash balances in our two CDOs (only one of which was in place in thesame period of 2006) and other cash balances held by us. For the six months endedJune 30, 2006, other income of $8,568 was comprised primarily of incomerecorded on the sale of two fixed rate debt investments and the syndication oftwo floating rate debt investments of $1,428, and the gain on the sale ofsecurity interests in the entity that owns 200 Franklin Square Drive of $4,350.

**The loss on investments inunconsolidated joint ventures of $211 for the six months ended June 30, 2007represents our proportionate share of the losses generated by our joint ventureinterests including $3,893 of real estate-related depreciation andamortization, which when added back, results in a contribution to FFO of$3,682.  The loss on investments inunconsolidated joint venture of $1,357 for the six months ended June 30, 2006was generated primarily on our investment in One Madison Avenue in New York,New York.  Our use of FFO as an importantfinancial measure is discussed in more detail below.**

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***Expenses***
|                                        | ** ** | **2007** | ** ** | **2006** | ** ** | **$ Change** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Interest expense                       |       | $        | 75,670     |     | $          | 38,499            |       | $ | 37,171 |   |
| Management fees                        |       | 10,253   |       | 7,384    |       | 2,869             |       |
| Incentive fee                          |       | 6,601    |       | 2,771    |       | 3,830             |       |
| Depreciation and  amortization         |       | 1,759    |       | 683      |       | 1,076             |       |
| Marketing,  general and administrative |       | 7,923    |       | 5,549    |       | 2,374             |       |
| Provision for  loan loss/(recovery)    |       | 4,148    |       | 500      |       | 3,648             |       |
| Provision for  taxes                   |       | 963      |       | 382      |       | 581               |       |
| Total expenses                         |       | $        | 107,317    |     | $          | 55,768            |       | $ | 51,549 |   |

 

Interest expensewas $75,670 for the six months ended June 30, 2007 compared to $38,499 for thesix months ended June 30, 2006.  Interestexpense for the six months ended June 30, 2007 consisted primarily of $49,892of interest on the investment grade tranches of our two CDOs (only one of whichwas in place during the same period in 2006), $10,582 of interest on borrowingson our master repurchase facilities with Wachovia and Goldman, $5,742 ofexpense on our three $50,000 issuances of trust preferred securities, $3,187 ofinterest on our unsecured revolving credit facility, and the amortization ofdeferred financing costs related to our CDOs, repurchase facilities andunsecured revolving credit facility.  The$38,499 of interest expense during the same period in 2006 was comprisedprimarily of $21,322 of interest on the investment grade tranches of our firstCDO, $9,307 of interest on borrowings on our master repurchase facilities, and$5,432 of expense accrued against our three $50,000 issuances of trustpreferred securities.

Management feesincreased $2,869 for the six months ended June 30, 2007 to $10,253 versus$7,384 for the same period in 2006 due to an increase in our stockholder’sequity as a result of the issuance of our preferred stock, on which basemanagement fees are calculated on.  Theremaining increase is comprised of $2,154 paid or payable to our Manager oninvestments in our two CDOs (only one of which was in place during the sameperiod in 2005) in accordance with the CDO collateral management agreements inlieu of the 0.15% fee otherwise payable to SL Green Operating Partnership, L.P.on those investments under the asset servicing agreement, higher fees paid or payableto SL Green Operating Partnership, L.P. under our outsourcing and servicingagreements due to the increase in our investment balances and the scheduled 3%annual increase in the fee payable under our outsourcing agreement.

We recorded anincentive fee expense of $6,601 during the six months ended June 30, 2007 inaccordance with requirements of the partnership agreement of our OperatingPartnership which entitles owners of Class B limited partner interests in ourOperating Partnership to an incentive return equal to 25% of the amount bywhich FFO plus certain accounting gains (as defined in the amended and restatedpartnership agreement of our Operating Partnership) exceed the product of ourweighted average stockholders equity (as defined in the amended and restatedpartnership agreement of our Operating Partnership) multiplied by 9.5% (dividedby 4 to adjust for quarterly calculations). Comparatively, we recorded incentive fee expense of $2,771 for the sixmonths ended June 30, 2006, which reflects a lower FFO recognized during thatperiod compared to 2007.

The increase inmarketing, general and administrative expenses to $7,923 for the six monthsended June 30, 2007 versus the same period in 2006 was due primarily to higherequity related compensation, professional fees, insurance and general overheadcosts.  As a percentage of totalrevenues, marketing, general and administrative expenses declined to 5.4% forthe six months ended June 30, 2007 from 6.9% for the same period in 2006.

## **Liquidity and Capital Resources**

**Liquidity is a measurement of theability to meet cash requirements, including ongoing commitments to repayborrowings, fund and maintain loans and investments, pay dividends and othergeneral business needs.  Our principalsources of working capital and funds for additional investments primarilyinclude: 1) cash flow from operations; 2) borrowings under our repurchasefacilities and unsecured revolving credit facility; 3) our CDOs; 4) other formsof financing or additional securitizations including CMBS or subsequent CDOofferings; 5) proceeds from common or preferred equity offerings, 6) issuancesof trust preferred securities and, to a lesser extent, 7) the proceeds fromprincipal payments on our investments, and 8) the sale or syndication ofcertain of our debt investments or real estate investments.  We believe these sources of financing will besufficient to meet our short-term liquidity needs.**

**Our ability to fund ourshort-term liquidity needs, including distributions to stockholders, throughcash flow from operations can be evaluated through the consolidated statementof cash flows provided in our financial statements.  However, the net cash from operations or netcash used in operations disclosed on the statement of cash flows should be adjustedto exclude the effect of loans originated for sale and the proceeds of loanssold during any respective reporting period. These activities are included in cash flow from operations in accordancewith GAAP, but constitute an integral part of our investment activity.  Consequently, net cash flow from operationsis not necessarily reflective of our true recurring operating activities andour ability to fund our required distributions to stockholders through our operatingactivities.**

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Our ability to meetour long-term liquidity and capital resource requirements for growth will besubject to obtaining additional debt financing and equity capital.  Our inability to renew, replace or expand oursources of financing on substantially similar terms, may have an adverse effecton our business and results of operations. In addition, an event of default can be triggered under our repurchasefacilities and our unsecured revolving credit facility  if, among other things, the amended andrestated management agreement with our Manager is terminated.  Depending on market conditions, our debtfinancing will generally be in the range of 70% to 80% of the carrying value ofour total assets.  Any indebtedness weincur will likely be subject to continuing covenants and we will likely berequired to make continuing representations and warranties in connection withsuch debt.  Our debt financing terms mayrequire us to keep uninvested cash on hand, or to maintain a certain portion ofour assets free of liens, each of which could serve to limit our borrowingability.  Moreover, our debt may besecured by our assets.  If we default inthe payment of interest or principal on any such debt, breach any representationor warranty in connection with any borrowing or violate any covenant in anyloan document, our lender may accelerate the maturity of such debt requiring usto immediately repay all outstanding principal. If we are unable to make such payment, our lender could foreclose on ourassets that are pledged as collateral to such lender.  The lender could also sue us or force us intobankruptcy.  Any such event would have amaterial adverse effect on our liquidity and the value of our common stock.  In addition, posting additional collateral tosupport our credit and repurchase facilities will reduce our liquidity andlimit our ability to leverage our assets.

**To maintain our status as a REITunder the Internal Revenue Code, we must distribute annually at least 90% ofour taxable income.  These distributionrequirements limit our ability to retain earnings and thereby replenish orincrease capital for operations. However, we believe that our significant capital resources and access tofinancing, as noted above, will provide us with financial flexibility at levelssufficient to meet current and anticipated capital requirements, includingfunding new lending and investment opportunities.**

## **Cash Flows**

Net cash provided byoperating activities increased $34,975 to $54,062 for the six months ended June30, 2007 compared to cash generated of $19,087 for same period in 2006. Operating cash flow was generated primarily by interest income on our wholeloans, subordinate interests in whole loans, mezzanine loans and preferredequity interests and gains on loan sales due, in part, to a larger number ofinvestments in 2007 versus 2006 at a moderately higher spread for our floatingrate investments in 2007.  In addition,we recognized $177,414 of proceeds from the sale of debt investments andcommitments offset by $151,638 of cash used for new investments that are heldfor sale during the six months ended June 30, 2007 as compared to a net use ofcash of $20,548 from the origination and sale of debt investments held for saleduring the same period of 2006.

Net cash used in investing activities increased $152,566 to$687,964 for the six months ended June 30, 2007 compared to $535,398 usedduring the six months ended June 30, 2006.  The primary reason for theadditional use of cash is related to a $502,988 increase in debt investmentoriginations of $1,218,083, offset by $262,803 greater principal collections onour debt investments.

Net cash providedby financing activities increased by $150,201 to $633,991 for the six monthsended June 30, 2007 compared to $483,790 provided during the same period in 2006. This increase was due primarily to the issuance of our preferred stock, whichgenerated $111,205 in net proceeds.  Inaddition, we borrowed $75,000 in proceeds from our unsecured revolving creditfacility, which was not in place during the same period in 2006, and heldhigher cash balances in our two CDOs in 2007 when compared to the same periodin 2006.

## **Capitalization**

Our authorized capital stockconsists of 125,000,000 shares, $0.001 par value, of which we have authorizedthe issuance of up to 100,000,000 shares of common stock, $0.001 par value pershare, and 25,000,000 shares of preferred stock, par value $0.001 pershare.  As of June 30, 2007, 26,072,471shares of common stock and 4,600,000 shares of preferred stock were issued andoutstanding.

**On April 18, 2007, we sold4,600,000 shares of our 8.125% Series A cumulative redeemable preferred stock(which is inclusive of the underwriters’ over-allotment option of 600,000shares) with a mandatory liquidation preference of $25.00 per share. Holders ofthe Series A cumulative redeemable preferred shares receive annual dividends of$2.03125 per share paid on a quarterly basis and dividends are cumulative,subject to certain provisions. On or after April 18, 2012, we may at our optionredeem the Series A cumulative redeemable preferred stock at par for cash. TheSeries A cumulative redeemable preferred stock was recorded net of underwritersdiscount and issuance costs.**   Net proceeds from the offering of approximately$111,205 were used to repay amounts outstanding under our repurchase facilitiesand for other general corporate purposes.

As of the date of our formation,April 12, 2004, we had 500,000 shares of common stock outstanding valued atapproximately $200.  On August 2, 2004 wecompleted our initial public offering of 12,500,000 shares of common stockresulting in net proceeds of

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approximately $172.9 million,which was used to fund investments and commence our operations.  As of June 30, 2007, 493,083 restrictedshares had also been issued under our 2004 Equity Incentive Plan, or our EquityIncentive Plan.  These shares have avesting period of two to four years and are not entitled to receivedistributions declared by us on our common stock until such time as the shareshave vested, or the shares have been designated to receive dividends by theCompensation Committee of our Board of Directors.

On December 3, 2004, we sold5,500,000 shares of our common stock resulting in net proceeds of approximately$93.7 million under a private placement exemption from the registrationrequirements of Section 5 of the Securities Act of 1933, as amended, or theSecurities Act.  We subsequentlyregistered the resale of these shares under the Securities Act in August 2005.  A total of 4,225,000 shares were sold to variousinstitutional investors and an additional 1,275,000 shares were sold to SLGreen Operating Partnership, L.P. pursuant to its contractual right to chooseto maintain a 25% ownership interest in the outstanding shares of our commonstock.  Of the 5,500,000 shares sold,2,000,000 shares were settled on December 31, 2004 and the remaining 3,500,000shares were settled on January 3, 2005.

On September 14, 2005, we sold3,833,333 shares of our common stock, at a price of $25.80 per share, resultingin net proceeds of approximately $97.8 million. A total of 2,875,000 shares were sold through a public offering and anadditional 958,333 shares were sold to SL Green Operating Partnership, L.P.pursuant to its contractual right to choose to maintain a 25% ownershipinterest in our outstanding shares of common stock.  Net proceeds were used for loan acquisitionsand originations, repayment of outstanding principal under one of ourrepurchase facilities and general corporate purposes.

On May 16, 2006, we sold 3,000,000shares of our common stock, at a price of $26.75 per share, resulting in netproceeds of approximately $80.0 million. A total of 2,250,000 shares were sold through a public offering and anadditional 750,000 shares were sold to SL Green Operating Partnership, L.P.pursuant to its contractual right to choose to maintain a 25% ownershipinterest in the outstanding shares of our common stock.  After this offering, SL Green OperatingPartnership, L.P. owned 6,418,333 shares of our common stock.  Net proceeds were used for loan acquisitionsand originations, repayment of outstanding principal under our repurchasefacilities and general corporate purposes.

In May 2007, our new $500,000shelf registration statement was declared effective by the Securities and ExchangeCommission, or SEC.  This registration statement provides us with theability to issue common and preferred stock, depository shares andwarrants.  We currently have $500,000 available under the shelf.

**Outperformance Plan (Amounts in thousands except pershare data)**

In June 2005, the compensation committee of our board of directorsapproved a long-term incentive compensation program, the 2005 OutperformancePlan.  Participants in the 2005Outperformance Plan, all of whom are co-leased employees, will share in a “performancepool” if our total return to stockholders for the period from June 1, 2005through May 31, 2008 exceeds a cumulative total return to stockholders of 30%during the measurement period over a base share price of $20.21 per share.  The size of the pool will be 10% of theoutperformance amount in excess of the 30% benchmark, subject to a maximumlimit equal to the lesser of 4% of our outstanding shares and units of limitedpartnership interest as of the end of the performance period, or 1,200,000shares.  If our total return tostockholders from June 1, 2005 to any subsequent date exceeds 80% and remainsat that level or higher for 30 consecutive days, then a minimum performancepool will be established.  In the eventthe potential performance pool reaches the maximum dilution cap before May 31,2008 and remains at that level or higher for 30 consecutive days, theperformance period will end early and the pool will be formed on the last dayof such 30-day period.  Each participant’saward under the 2005 Outperformance Plan is designated as a specifiedpercentage of the aggregate performance pool to be allocated to suchparticipant assuming the 30% benchmark is achieved.  Individual awards under the 2005Outperformance Plan will be made in the form of partnership units, or LTIPUnits, that may ultimately become exchangeable for shares of our common stockor cash, at our election.  Under the 2005Outperformance Plan, LTIP Units have been granted and additional LTIP Units maybe granted in the future prior to the determination of the performance pool;however, these LTIP Units will only vest upon satisfaction of performance andother thresholds, and will not be entitled to distributions until after theperformance pool, or minimum performance pool, is established.  The 2005 Outperformance Plan provides that ifa pool is established, each participant will also be entitled to thedistributions that would have been paid on the number of LTIP Units earned, hadthey been issued at the beginning of the performance period.  Those distributions will be paid in the formof additional LTIP Units.  Once aperformance pool has been established, the earned LTIP Units will receive regularquarterly distributions on a per unit basis equal to the dividends per sharepaid on our common stock, whether or not they are vested.  Any LTIP Units that are not earned upon theestablishment of the performance pool will be automatically forfeited, and theLTIP Units that are earned will be subject to time-based vesting, with 50% ofthe LTIP Units earned vesting in May 2009 and the balance vesting one yearlater based on continued employment with our Manager or SL Green.   We will record the expense of the restrictedstock award in accordance with FASB Statement No. 123(R).  Compensation expense of 

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$383 and $766 was recorded for the three and six months ended June 30,2007, respectively, related to the 2005 Outperformance Plan, compared to $293and $586 for the three and six months ended June 30, 2006, respectively.

**Deferred Stock Compensation Plan forDirectors**

Under our Independent Director’s Deferral Program, whichcommenced April 2005, our independent directors may elect to defer up to100% of their annual retainer fee, chairman fees and meeting fees.  Unlessotherwise elected by a participant, fees deferred under the program shall becredited in the form of phantom stock units.  The phantom stock units areconvertible 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 byus, as defined by the program.  Phantom stock units are credited to eachindependent director quarterly using the closing price of our common stock onthe applicable dividend record date for the respective quarter.  Eachparticipating independent director who elects to receive fees in the form ofphantom stock units has the option to have their account credited for anequivalent amount of phantom stock units based on the dividend rate for eachquarter or have dividends paid in cash.

As of June 30,2007, there were approximately 26,950 phantom stock units outstanding, of which16,951 units are vested.

**MarketCapitalization**

At June 30, 2007, ourCDOs and borrowings under our repurchase facilities, unsecured revolving creditfacility and mortgage loans (excluding our share of joint venture debt of$426.6 million) represented 75% of our consolidated market capitalization of$3.3 billion (based on a common stock price of $27.54 per share, the closingprice of our common stock on the New York Stock Exchange on June 29,2007).  Market capitalization includesour consolidated debt, preferred and common stock.

**Indebtedness**

**The table below summarizesborrowings under our Wachovia and Goldman repurchase facilities, KeyBank unsecuredrevolving credit facility and any proportionately consolidated mortgage debt orterm loans at June 30, 2007 and December 31, 2006, respectively (amounts inthousands).**
|                                              | ** ** | **June 30, 2007** | ** ** | **December 31,   2006** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| **Debt  Summary:**                           | ** ** | ** **                  | ** ** | ** **                        | ** ** |
| **Balance:**                                 | ** ** | ** **                  | ** ** | ** **                        | ** ** |
| Fixed rate                                   |       | $                           | 94,525     | (1)                               | $          | 94,525 | (1) |
| Variable rate                                |       | 646,659                     |       | 292,412                           |       |
| Total                                        |       | $                           | 741,184    |                              | $          | 386,937 |   |
|                                         |       |                        |       |                              |       |
| **Effective  interest rate for the period:** | ** ** | ** **                  | ** ** | ** **                        | ** ** |
| Fixed rate                                   |       | 5.75                        | %          | 5.75                              | %          |
| Variable rate                                |       | LIBOR+1.45                  | %          | LIBOR+1.72                        | %          |

 

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**(1) We have a 49.75% interest in the entity that is the obligor under themortgage note.**

**RepurchaseFacilities**

We have two repurchasefacilities with an aggregate of $900,000 of total debt capacity.  In August 2004 we closed on a $250,000repurchase facility with Wachovia.  Thisfacility was then increased to $350,000 on January 3, 2005 and subsequentlyincreased to $500,000 on April 22, 2005. On June 28, 2007 we modified the facility by further reducing theinterest spreads.  As a result of themodifications, the $500,000 facility bears interest at spreads of 0.65% to2.50% over one month LIBOR and, based on our expected investment activities,provides for advance rates that vary from 60% to 95% based upon the collateralprovided under a borrowing base calculation. On October 13, 2006 we extended the facility’s maturity date untilOctober 2009.  The lender has a consentright with respect to the inclusion of investments in this facility, determinesperiodically the market value of the investments, and has the right to requireadditional collateral if the estimated market value of the included investmentsdeclines. We had no accrued interest and borrowings of $363,554 at a weightedaverage spread to LIBOR of 1.54% as of June 30, 2007, and no accrued interestand borrowings of $151,403 at a weighted average spread to LIBOR of 1.86%, asof December 31, 2006.

On January 3, 2005, weclosed an additional repurchase facility with Goldman.  On October 13, 2006 we increased thisfacility from $200,000 to $400,000 and extended its maturity date untilSeptember 2009.  On June 28, 2007 wefurther modified this facility by reducing the interest spreads.  As a result of the modifications, thefacility bears interest at spreads of 1.00% to 1.50% over one month LIBOR and,based on our expected investment activities, provides for advance rates thatvary from 70% to 90% based upon the 

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collateral provided undera borrowing base calculation.  As withthe Wachovia repurchase facility, the lender has a consent right to theinclusion of investments in this facility, determines periodically the marketvalue of the investments, and has the right to require additional collateral ifthe estimated market value of the included investments declines.  We had accrued interest of $1,006 andborrowings of $193,105 at a weighted average spread to LIBOR of 1.20% as ofJune 30, 2007, and accrued interest of $261 and borrowings of $126,009 at aweighted average spread to LIBOR of 1.51% under this facility at December 31,2006.

The repurchasefacilities require that we pay down borrowings under these facilities asprincipal payments on the loans and investments pledged to these facilities arereceived.  Assets pledged as collateral under thesefacilities may include stabilized and transitional whole loans, subordinateinterests in whole loans, mezzanine loans, and rated CMBS or commercial realestate CDO securities originated or acquired by us.

In certaincircumstances, we have purchased debt investments from a counterparty andsubsequently financed the acquisition of those debt investments throughrepurchase agreements with the same counterparty.  We currently record the acquisition of thedebt investments as assets and the related repurchase agreements as financingliabilities gross on the consolidated balance sheets. Interest income earned onthe debt investments and interest expense incurred on the repurchaseobligations are reported gross on the consolidated income statements.  However, under a certain technical interpretationof FAS 140, such transactions may not qualify as a purchase by us.  We believe, and it is industry practice, thatwe are accounting for these transactions in an appropriate manner.  However, the result of this technicalinterpretation would prevent us from presenting the debt investments andrepurchase agreements and the related interest income and interest expense on agross basis on our financial statements. Instead, we would present the net investment in these transactions withthe counterparty and a derivative with the corresponding change in fair valueof the derivative being recorded through earnings.  The value of the derivative would reflectchanges in the value of the underlying debt investments and changes in thevalue of the underlying credit provided by the counterparty.

**RestrictiveCovenants**

The terms of ourrepurchase facilities (together with any related guarantees) include covenantsthat****(a) limit our maximum totalindebtedness to no more than 85% of total assets, (b) require us to maintainminimum liquidity of at least $15,000, (c) require our fixed charge coverageratio to be at no time less than 1.25 to 1.00, (d) require our minimum interestcoverage ratio to be at no time less than 1.35 to 1.00, and (e) require us tomaintain minimum tangible net worth of not less than (i) $400,000, plus (ii)75% of the net proceeds of our subsequent equity issuances following the dateof the June 2007 amendment. The covenants also restrict us from makingdistributions in excess of a maximum of 100% of our FFO (as defined therein)under the Wachovia facility, except that we may in any case pay distributionsnecessary to maintain our REIT status.  An event of default can be triggered on ourrepurchase facilities if, among other things, GKK Manager LLC is terminated asour Manager.  As of June 30, 2007 andDecember 31, 2006, we were in compliance with all such covenants.

In May 2006, weclosed on a $100,000 senior unsecured revolving credit facility with KeyBankNational Association, or KeyBank, with an initial term of three years and aone-year extension option.  On June 28,2007 the facility was increased to $175,000 and interest spreads on thefacility were reduced.  The facility issupported by a negative pledge of an identified asset base with advance ratesthat vary from 30% to 90% of the asset value provided under a borrowing basecalculation.  The lender also has consentrights to the inclusion of assets in the borrowing base calculation. Followingthe modifications in June 2007, the facility bears interest at 1.65% overone-month LIBOR. We had accrued interest of $288 and borrowings of $90,000 asof June 30, 2007, and accrued interest of $75 and borrowings of $15,000 at aspread to LIBOR of 2.10% under this facility at December 31, 2006.

The terms of theunsecured revolving credit facility include covenants that****(a) limit our maximum total indebtednessto no more than 85% of total assets, (b) require our fixed charge coverageratio to be at no time less than 1.30, and (c) require us to maintain minimumtangible net worth of not less than $450,000 plus 75% of the net proceeds fromequity offerings completed following the date of the June 2007 amendment.  The covenants also restrict us from makingdistributions in excess of a maximum of 100% of our FFO (as defined by theNational Association of Real Estate Investment Trusts, or NAREIT), except thatwe may in any case pay distributions necessary to maintain our REITstatus.  An event of default can be triggered on our unsecured revolving creditfacility if, among other things, GKK Manager LLC is terminated as ourManager.  As of June 30, 2007 andDecember 31, 2006, we were in compliance with all such covenants.

In conjunctionwith the closing of the unsecured revolving credit facility with KeyBank, our$25,000 revolving credit facility with Wachovia was terminated.

#### **Mortgage Loan**

We have one consolidatedinterest-only mortgage loan in an amount equal to our ownership percentage inthe entity multiplied by the 

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outstanding principalbalance of the mortgage loan, which loan financed the acquisition of 55Corporate Drive in June 2006.  Themortgage has an outstanding principal balance of $190,000, of which we haveconsolidated 49.75% or $94,525, with an effective interest rate of 5.75% and aterm of ten years.

#### **Collateralized Debt Obligations**

During2005 we issued approximately $1,000,000 of CDOs through two indirectsubsidiaries, Gramercy Real Estate CDO 2005-1 Ltd., or the 2005 Issuer,and Gramercy Real Estate CDO 2005-1 LLC, or the 2005 Co-Issuer. The CDOconsists of $810,500 of investment grade notes, $84,500 of non-investment gradenotes, 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 withfloating rate coupons with a combined weighted average rate of three-monthLIBOR plus 0.49%.  We incurredapproximately $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.

During2006 we issued an additional approximately $1,000,000 of CDOs through twonewly-formed indirect subsidiaries, Gramercy Real Estate CDO 2006-1 Ltd.,or the 2006 Issuer, and Gramercy Real Estate CDO 2006-1 LLC, or the 2006Co-Issuer. The CDO consists of $903,750 of investment grade notes, $38,750 ofnon-investment grade notes, which were co-issued by the 2006 Issuer and the2006 Co-Issuer, and $57,500 of preferred shares, which were issued by the 2006Issuer.  The investment grade notes were issuedwith floating rate coupons with a combined weighted average rate of three-monthLIBOR plus 0.37%. We incurred approximately $11,364 of costs related toGramercy Real Estate CDO 2006-1, which are amortized on a level-yield basisover the average life of the CDO.

Weretained all non-investment grade securities, the preferred shares and thecommon shares in the Issuer of each CDO. The Issuer in each CDO holds assets, consisting primarily of wholeloans, subordinate interests in whole loans, mezzanine loans and preferredequity investments, which serve as collateral for the CDO.  Each CDO may be replenished, pursuant tocertain rating agency guidelines relating to credit quality anddiversification, with substitute collateral for loans that are repaid duringthe first five years of the CDO. Thereafter, the CDO securities will be retiredin sequential order from senior-most to junior-most as loans are repaid.  The financial statements of the Issuer ofeach CDO are consolidated in our financial statements. The investment gradenotes are treated as a secured financing, and are non-recourse to us. Proceedsfrom the sale of the investment grade notes issued in each CDO were used torepay substantially all outstanding debt under our repurchase agreements and tofund additional investments.

**JuniorSubordinated Debentures**

**In January 2006, May 2005 andAugust 2005, we completed issuances of $50,000 each in unsecured trustpreferred securities through three DST’s, Gramercy Capital Trust I, or GCTI,Gramercy Capital Trust II, or GCTII, and Gramercy Capital Trust III, or GCTIII, that are also wholly-owned subsidiaries of our Operating Partnership.  The securities issued in January 2006 bearinterest at a fixed rate of 7.65% for the first ten years ending January 2016, withan effective rate of 7.43% when giving effect to the swap arrangementpreviously entered into in contemplation of this financing.  Thereafter the rate will float based on thethree-month LIBOR plus 270 basis points. The securities issued in May 2005 bear interest at a fixed rate of 7.57%for the first ten years ending June 2015 and the securities issued in August2005 bear interest at a fixed rate of 7.75% for the first ten years endingOctober 2015.  Thereafter the rates willfloat based on the three-month LIBOR plus 300 basis points.**

**All issuances of trust preferredsecurities require quarterly interest distributions; however, payments may bedeferred while the interest expense is accrued for a period of up to fourconsecutive quarters if our Operating Partnership exercises its right to defersuch payments.  The trust preferredsecurities are redeemable, at the option of our Operating Partnership, in wholeor in part, with no prepayment premium any time after June 30, 2010, October30, 2010 or January 30, 2011 for the securities issued by GCTI, GCTII andGCTIII, respectively.**

**GCTI, GCTII and GCTIII eachissued $1,550 aggregate liquidation amount of common securities, representing100% of the voting common stock of those entities to our Operating Partnershipfor a total purchase price of $4,650. GCTI, GCTII and GCTIII used the proceeds from the sale of the trustpreferred securities and the common securities to purchase our OperatingPartnership’s junior subordinated notes. The terms of the junior subordinated notes match the terms of the trustpreferred securities.  The notes aresubordinate and junior in right of payment to all present and future seniorindebtedness and certain other of our financial obligations.  We realized net proceeds from each offeringof approximately $48,956.**

Our interests in GCTI, GCTII and GCTIII areaccounted for using the equity method and the assets and liabilities of thoseentities are not consolidated into our financial statements.  Interest on the junior subordinated notes isincluded in interest expense on our consolidated income statements while thevalue of the junior subordinated notes, net of our investment in the truststhat issued the securities, are presented as a separate item in ourconsolidated balance sheet.

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**ContractualObligations**

Combined aggregateprincipal maturities of our CDOs, repurchase facilities, trust preferredsecurities, proportionately consolidated mortgage note related to our TICinterest in 55 Corporate Drive, unsecured revolving credit facility and ourobligations under our management agreement, outsourcing agreement, CDOcollateral management agreement and operating lease as of June 30, 2007 are asfollows (amounts in thousands):
| ** ** | ** ** | **CDOs**  | ** ** | **Repurchase   Facilities** | ** ** | **Trust   Preferred  Securities** | ** ** | **Mortgage   Note   Payable(1)** | ** ** | **Revolving  Credit  Facility** | ** ** | **Outsourcing   and  Management  Agreements (2)** | ** ** | **CDO   Collateral   Management   Agreements** | ** ** | **Operating   Lease** | ** ** | **Total** | ** ** |
|------------|------------|-----------|------------|----------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|
| 2007       |       | $         | —     |                             | $          | —                                 |       | $                                          | —     |                            | $          | —                                                      |       | $                                                             | —     |                       | $          | 7,160     |       | $ | 2,143 |   | $ | 129 |   | $ | 9,432 |   |
| 2008       |       | —    |       | —                           |       | —                                 |       | —                                     |       | —                          |       | 14,237                                                      |       | 4,286                                                         |       | 261                        |       | 18,784    |       |
| 2009       |       | —    |       | 556,659                          |       | —                                 |       | —                                     |       | 90,000                          |       | 14,279                                                      |       | 4,286                                                         |       | 265                        |       | 665,489   |       |
| 2010       |       | —    |       | —                           |       | —                                 |       | —                                     |       | —                          |       | —                                                      |       | 3,351                                                         |       | 283                        |       | 3,634     |       |
| 2011       |       | —    |       | —                           |       | —                                 |       | —                                     |       | —                          |       | —                                                      |       | 1,469                                                         |       | 297                        |       | 1,766     |       |
| Thereafter |       | 1,714,250 |       | —                           |       | 150,000                                |       | 94,525                                     |       | —                          |       | —                                                      |       | —                                                        |       | 1,054                      |       | 1,959,829 |       |
| Total      |       | $         | 1,714,250  |                             | $          | 556,659                                |       | $                                          | 150,000    |                            | $          | 94,525                                                      |       | $                                                             | 90,000     |                       | $          | 35,676    |       | $ | 15,535 |   | $ | 2,289 |   | $ | 2,658,934 |   |

 

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(1)          We have a 49.75% interest in the mortgage.

(2)          Managementfee is calculated as 1.75% of our gross stockholders equity (as defined in theamended and restated management agreement) on June 30, 2007, inclusive of thetrust preferred securities issued on May 20, 2005, August 9, 2005 and January27, 2006.

**Off-Balance-Sheet Arrangements**

We have severaloff-balance-sheet investments, including joint ventures and structured financeinvestments.  These investments all have varying ownershipstructures.  Substantially all of our joint venture arrangements areaccounted for under the equity method of accounting as we have the ability toexercise significant influence, but not control over the operating and financialdecisions of these joint venture arrangements.  Our off-balance-sheetarrangements are discussed in Note 6, “Investments in Unconsolidated JointVentures” in the accompanying financial statements.

**Dividends**

To maintain ourqualification as a REIT, we must pay annual dividends to our stockholders of atleast 90% of our REIT taxable income, determined before taking intoconsideration the dividends paid deduction and net capital gains.  We intend to continue to pay regularquarterly dividends to our stockholders. Before we pay any dividend, whether for Federal income tax purposes orotherwise, which would only be paid out of available cash to the extentpermitted under our unsecured and secured credit and repurchase facilities, andour term loans, we must first meet both our operating requirements andscheduled debt service on our mortgages and loans payable.

**Inflation**

A majority of ourassets and liabilities are interest rate sensitive in nature.  As a result, interest rates and other factorsinfluence our performance more so than inflation.  Changes in interest rates do not necessarilycorrelate with inflation rates or changes in inflation rates.  Further, our financial statements areprepared in accordance with GAAP and our distributions are determined by ourboard of directors based primarily on our net income as calculated for taxpurposes, in each case, our activities and balance sheet are measured withreference to historical costs or fair market value without consideringinflation.

**RelatedParty Transactions (Amounts in thousands)**

In connection withour initial public offering, we entered into a management agreement with ourManager, which was subsequently amended and restated in April 2006.  The amended and restated management agreementprovides for a term through December 2009 with automatic one-year extensionoptions and is subject to certain termination rights.  We pay our Manager an annual management feeequal to 1.75% of our gross stockholders equity (as defined in the amended andrestated management agreement) inclusive of our trust preferredsecurities.  We incurred expense to ourManager under this agreement of an aggregate of $3,109 and $5,775 for the threeand six months ended June 30, 2007, respectively, and $2,501 and $4,739 for thethree and six months ended June 30, 2006, respectively.

To provide anincentive to enhance the value of our common stock, the holders of the Class Blimited partner interests of our Operating Partnership are entitled to anincentive return equal to 25% of the amount by which FFO plus certainaccounting gains and losses (as defined in the amended and restated partnershipagreement of our Operating Partnership) exceed the product of our weightedaverage stockholders equity (as defined in the amended and restated partnershipagreement of our Operating Partnership) multiplied by

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9.5% (divided by 4to adjust for quarterly calculations). We will record any distributions on the Class B limited partnerinterests as an incentive distribution expense in the period when earned andwhen payments of such amounts have become probable and reasonably estimable inaccordance with the partnership agreement. We incurred $3,784 and $6,601 with respect to such Class B limitedpartner interests for the three and six months ended June 30, 2007,respectively, and $1,578 and $2,771 for the three and six months ended June 30,2006, respectively.

We are obligatedto reimburse our Manager for its costs incurred under an asset servicingagreement between our Manager and an affiliate of SL Green OperatingPartnership, L.P. and a separate outsourcing agreement between our Manager andSL Green Operating Partnership, L.P.  Theasset servicing agreement, which was amended and restated in April 2006, providesfor an annual fee payable to SL Green Operating Partnership, L.P. by us of0.05% of the book value of all credit tenant lease assets and non-investmentgrade bonds and 0.15% of the book value of all other assets.  The asset servicing fee can be reduced by SLGreen Operating Partnership, L.P. for fees paid directly to outside servicersby us.  The outsourcing agreementcurrently provides for an annual fee payable by us, which fee is currently$1,326 per year, increasing 3% annually over the prior year on the anniversarydate of the outsourcing agreement in August of each year.  For the three months ended June 30, 2007 and2006, we realized expense of $332 and $322, respectively, and for the sixmonths ended June 30, 2007 and 2006, we realized expense of $664 and $645,respectively, to our Manager under the outsourcing agreement.  For the three months ended June 30, 2007 and2006, we realized expense of $890 and $539, respectively, and for the sixmonths ended June 30, 2007 and 2006, we realized expense of $1,659 and $1,000,respectively, to our Manager under the asset servicing agreement.

In connection with theclosing of our first CDO in July 2005, the Issuer, Gramercy Real Estate CDO2005-1 Ltd., entered into a collateral management agreement with our Manager.Pursuant to the collateral management agreement, our Manager has agreed toprovide certain advisory and administrative services in relation to thecollateral debt securities and other eligible investments securing the CDOnotes.  The collateral managementagreement provides for a senior collateral management fee, payable quarterly inaccordance with the priority of payments as set forth in the indenture, equalto 0.15% per annum of the net outstanding portfolio balance, and a subordinatecollateral management fee, payable quarterly in accordance with the priority ofpayments as set forth in the indenture, equal to 0.25% per annum of the netoutstanding portfolio balance.  Netoutstanding portfolio balance is the sum of the (i) aggregate principal balanceof the collateral debt securities, excluding defaulted securities, (ii)aggregate principal balance of all principal proceeds held as cash and eligibleinvestments in certain accounts, and (iii) with respect to the defaultedsecurities, the calculation amount of such defaulted securities. As compensationfor the performance of its obligations as collateral manager under the firstCDO, our Board of Directors has allocated to our Manager the subordinatecollateral management fee paid on securities not held by us.  At June 30, 2007 and December 31, 2006 weowned all of the non-investment grade bonds, preferred equity and equity inboth CDOs.  The senior collateral management fee andbalance of the subordinate collateral management fee is allocated to us.  For the three months ended June 30, 2007 and2006, we realized expense of $512 and $499, respectively, and for the sixmonths ended June 30, 2007 and 2006, we realized expense of $1,019 and $1,000,respectively, to our Manager under such collateral management agreement.

Collateral manager feespaid on our CDO that closed in August 2006 are governed by the amended andrestated management agreement as a “transitional managed” CDO, as defined inthe amended and restated management agreement, consisting primarily of debtinvestments secured by non-stabilized real estate.  The amended and restated management agreementprovides that in connection with formations of collateralized debt obligationsor other securitization vehicles after the execution of the amended andrestated management agreement, if a collateral manager is retained, our Manageror an affiliate will be the collateral manager and will receive the followingfees:  (i) 0.25% per annum of the book value of the assets owned for “transitionalmanaged” CDOs, (ii) 0.15% per annum of the book value of the assets ownedfor “non-transitional managed” CDOs, (iii) 0.10% per annum of the book value ofthe assets owned for static CDOs that own primarily non-investment grade bonds,and (iv) 0.05% per annum of the book value of the assets owned for static CDOsthat own primarily investment grade bonds; limited in each instance by the feesthat are paid to the collateral manager. The balance of the fees paid by theCDOs for collateral management services are paid to us.  For the three and six months ended June 30, 2007 we realized expense of$571 and $1,136, respectively, to our Manager under this agreement.

**In April 2005, we closed on a$57,503 initial investment in a joint venture with SL Green to acquire, own andoperate the South Building located at One Madison Avenue, New York, New York,or the South Building.  The jointventure, which was created to acquire, own and operate the South Building, isowned 45% by a wholly-owned subsidiary of us and 55% by a wholly-owned subsidiaryof SL Green.  The joint venture interestsare *pari passu*.  Also on April 29, 2005, the joint venturecompleted the acquisition of the South Building from Metropolitan LifeInsurance Company for the purchase price of approximately $802,800 plus closingcosts, financed in part through a $690,000 first mortgage loan on the SouthBuilding.  The South Building comprisesapproximately 1.2 million square feet and is almost entirely net leased to CSpursuant to a lease with a 15-year remaining term.    On July 2, 2007 we entered into an agreementto sell our**

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**entire investment in the jointventure to SL Green Realty Corp. for approximately $147.6. The sale closed onAugust 1, 2007.**

**In June 2006, we closed on theacquisition of a 49.75% TIC interest in 55 Corporate Drive, located inBridgewater, New Jersey with a 0.25% interest to be acquired in thefuture.  The remaining 50% of theproperty is owned as a TIC interest by an affiliate of SL Green OperatingPartnership, L.P..  The property iscomprised of three buildings totaling approximately six hundred and seventythousand square feet which is 100% net leased to an entity whose obligationsare guaranteed by Sanofi-Aventis Group through April 2023. The transaction wasvalued at $236,000 and was financed with a $190,000, 10-year, fixed-rate first mortgageloan.**

Commencing in May 2005, we are party to a lease agreementwith SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporateoffices at 420 Lexington Avenue, New York, New York.  The lease is for approximately five thousandsquare feet with an option to lease an additional approximately two thousandsquare feet and carries a term of ten years with rents on the entire seventhousand square feet of approximately $249 per annum for year one rising to$315 per annum in year ten.  For the threeand six months ended June 30, 2007 we incurred expense of$62 and $125,respectively, under this lease.

**BrightStar Couriers LLC, or Bright Star, provides messenger services to us.  Bright Star is owned by Gary Green, a son ofStephen L. Green, our Chairman.  Theaggregate amount of fees paid by us for such services for the three and sixmonths ended June 30, 2007 was $2 and $3, respectively, and $2 and $3 for thethree and six months ended June 30, 2006, respectively.**

**In July2005, we closed on the purchase from an SL Green affiliate of a $40,000mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained an interest-onlyparticipation.  We have determined thatthe yield on our mezzanine loan after giving effect to the interest-onlyparticipation retained by the seller is at market.  The mezzanine loan is secured by the equityinterests in an office property in New York, New York.**

**InFebruary 2006, we closed on the purchase of a $90,000 whole loan, which bearsinterest at three month LIBOR plus 2.15%, to a joint venture in which SL Greenis an equity holder.  The loan is securedby 55 Corporate Drive in Bridgewater, New Jersey.  The loan was repaid in full in June 2006 withthe proceeds from new mortgage financing obtained in connection with the saleof the property, 49.75% of which is now owned by us through a TIC structure.**

**In March2006, we closed on the purchase of a $25,000 mezzanine loan, which bearsinterest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green isan equity holder.  The mezzanine loan wasrepaid in full on May 9, 2006, when we originated a $90,287 whole loan, whichbears interest at one-month LIBOR plus 2.75%, to the joint venture.  The whole loan is secured by office andindustrial properties in northern New Jersey and has a book value of $90,216and $90,049 as of June 30, 2007 and December 31, 2006, respectively.**

**In August2006, we acquired from a financial institution a 50% *pari passu*interest in a $65,000 preferred equity investment secured by an office propertyin New York, New York.  An affiliate ofSL Green simultaneously acquired and owns the other 50% *pari passu*interest. The investment bears interest at a blended fixed rate of 10.52%.**

**InDecember 2006, we acquired from a financial institution a *pari passu*interest of $125,000 in a $200,000 mezzanine loan, which bears interest at6.384% and is secured by a multi-family portfolio in New York, New York.  An affiliate of SL Green simultaneouslyacquired the remaining $75,000 *pari passu* interestin the mezzanine loan.**

**Duringthe three months ended March 31, 2006, we earned fees of $163 from SL Greenrepresenting SL Green’s proportionate share of fees for financing andstructural advisory services related to a specific potential transaction.**

**InJanuary 2007, we originated two mezzanine loans totaling $200,000.  The $150,000 loan is secured by a pledge ofcash flow distributions and partial equity interests in a portfolio ofmulti-family properties and currently bears interest at one-month LIBOR plus6.00%.  The $50,000 loan was initiallysecured by cash flow distributions and partial equity interests in an officeproperty.  On March 8, 2007 the $50,000loan was increased by $31,000 when the existing mortgage loan on the propertywas defeased, upon which event our loan became secured by a first mortgage lienon the property and was reclassified as a whole loan.  The whole loan currently bears interest atone-month LIBOR plus 6.00% for the initial funding and one-month LIBOR plus1.00% for the subsequent funding.  Atclosing, an affiliate of SL Green acquired from us and currently holds a 15.15%*pari passu* interest in the mezzanineloan and the whole loan.  As of June 30,2007, our interest in the mezzanine loan had a carrying value of $114,408 andour interest in the whole loan had a carrying value of $69,573.**

**In March2007, we closed on the acquisition of a $62,500 *pari passu*interest in one tranche of a multiple-level mezzanine structure primarilysecured by pledges of equity and rights to cash distributions, which was usedto fund the acquisition of a large office portfolio.**

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**Theinvestment bore interest at one-month LIBOR plus 2.85%.  At closing, an affiliate of SL Greensimultaneously acquired a $62,500 *pari passu*interest in the same tranche of the mezzanine structure.  The investment was repaid in full in May2007.**

**In July 2007, we closed on a $25,083investment in a 45% TIC interest to acquire a 79% fee interest and 21%leasehold interest in the property located at 885 Third Avenue, otherwise knownas The Lipstick Building.  The propertyis subject to a 70-year ground lease, with an unaffiliated third party. Theremaining TIC interest is owned by a wholly-owned subsidiary of SL Green.  The TIC interests are *pari passu*.**

**In July2007, we closed on a $12,772, 100% fee interest in the property located at 292Madison Avenue, New York, NY, purchased from SL Green. Simultaneously, theCompany and SL Green entered into a 70-year ground lease, with an unaffiliatedthird party.**

**Fundsfrom Operations**

We present FFObecause we consider it an important supplemental measure of our operatingperformance and believe that it is frequently used by securities analysts,investors and other interested parties in the evaluation of REITS.  We also use FFO for the calculation of theincentive fee payable to the holders of Class B limited partner interests inour Operating Partnership and as one of several criteria to determineperformance-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 theNational Association of Real Estate Investment Trusts, or NAREIT, in April 2002defines FFO as net income (loss) (computed in accordance with GAAP), excludinggains (or losses) from items which are not a recurring part of our business,such as debt restructurings, and sales of properties, plus real estate-relateddepreciation and amortization and after adjustments for unconsolidatedpartnerships and joint ventures.  We consider gains and losses on the sales ofdebt investments and real estate investments including TIC investments to be anormal part of our recurring operations and therefore include such gains andlosses when arriving at FFO.  FFOdoes not represent cash generated from operating activities in accordance withGAAP and should not be considered as an alternative to net income (determinedin accordance with GAAP), as an indication of our financial performance, or tocash flow from operating activities (determined in accordance with GAAP) as ameasure of our liquidity, nor is it entirely indicative of funds available tofund our cash needs, including our ability to make cash distributions.  Our calculation of FFO may be different fromthe calculation used by other companies and, therefore, comparability may belimited.

FFOfor the three and six months ended June 30, 2007 and 2006 are as follows(amounts in thousands):
| ** **                                        | ** ** | **For the Three   Months Ended   June 30, 2007** | ** ** | **For the Three   Months Ended   June 30, 2006** | ** ** | **For the Six   Months Ended   June 30, 2007** | ** ** | **For the Six   Months Ended   June 30, 2006** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| Net income available to  common stockholders      |       | $                                                                                   | 19,965     |                                                                                | $          | 12,817                                                                            |       | $                                                                                 | 37,014     |   | $ | 23,370 |   |
| Add:                                              |       |                                                                                |       |                                                                                |       |                                                                              |       |                                                                              |       |
| Depreciation and  amortization                    |       | 3,174                                                                               |       | 1,322                                                                               |       | 5,593                                                                             |       | 2,744                                                                             |       |
| FFO adjustment  for unconsolidated joint ventures |       | 1,946                                                                               |       | 1,978                                                                               |       | 3,893                                                                             |       | 3,857                                                                             |       |
| FFO from  discontinued operations                 |       | —                                                                              |       | —                                                                              |       | —                                                                            |       | —                                                                            |       |
| Less:                                             |       |                                                                                |       |                                                                                |       |                                                                              |       |                                                                              |       |
| Income from  discontinued operations              |       | —                                                                              |       | —                                                                              |       | —                                                                            |       | —                                                                            |       |
| Gain on sale of  real estate                      |       | —                                                                              |       |                                                                                |       | —                                                                            |       | —                                                                            |       |
| Non real estate  depreciation and amortization    |       | (2,592                                                                              | )          | (1,322                                                                              | )          | (4,428                                                                            | )          | (2,505                                                                            | )          |
| Funds from operations                             |       | $                                                                                   | 22,493     |                                                                                | $          | 14,795                                                                            |       | $                                                                                 | 42,072     |   | $ | 27,466 |   |
|                                              | ** ** | ** **                                                                          | ** ** | ** **                                                                          | ** ** | ** **                                                                        | ** ** | ** **                                                                        | ** ** |
| Funds from operations  per share - basic          |       | $                                                                                   | 0.86       |                                                                                | $          | 0.61                                                                              |       | $                                                                                 | 1.62       |   | $ | 1.17 |   |
| Funds from operations per share - diluted         |       | $                                                                                   | 0.82       |                                                                                | $          | 0.58                                                                              |       | $                                                                                 | 1.53       |   | $ | 1.11 |   |

 

**Cautionary Note Regarding Forward-Looking Information**

Thisreport contains “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, or the Act, and Section 21E of theSecurities Exchange Act of 1934, as amended, or the Exchange Act.  You can identify forward-looking statementsby the use of forward-looking expressions such as “may,” “will,” “should,” “expect,”“anticipate,” “estimate,” “believe,” “intend,” “plan,” “project,” “continue,”or any negative or other variations on such expressions.  Forward-looking statements includeinformation concerning possible or assumed future results of our operations,including any forecasts, projections, plans and objectives for futureoperations.  Although we believe that ourplans, intentions and expectations as reflected in or suggested by thoseforward-

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lookingstatements are reasonable, we can give no assurance that the plans, intentionsor expectations will be achieved.  Wehave listed below some important risks, uncertainties and contingencies whichcould cause our actual results, performance or achievements to be materiallydifferent from the forward-looking statements we make in this report.  These risks, uncertainties and contingenciesinclude, but are not limited to, the following:

·                  the success orfailure of our efforts to implement our current business strategy;

·                  economicconditions generally and in the commercial finance and real estate markets specifically;

·                  the performanceand financial condition of borrowers and corporate customers;

·                  the actions ofour competitors and our ability to respond to those actions;

·                  the cost of ourcapital, which depends in part on our asset quality, the nature of ourrelationships with our lenders and other capital providers, our businessprospects and outlook and general market conditions;

·                  the availabilityof capital;

·                  availability ofqualified personnel;

·                  availability ofinvestment opportunities on real estate-related and other securities;

·                  the adequacy ofour cash reserves and working capital;

·                  unanticipatedincreases in financing and other costs, including a rise in interest rates orrequirements for additional collateral;

·                  the timing ofcash flows, if any, from our investments;

·                  risks ofstructured finance investments;

·                  GKK Manager LLCremaining as our Manager;

·                  environmentaland/or safety requirements;

·                  continuingthreats or terrorist attacks on the national, regional and local economies;

·                  competition withother companies;

·                  our ability tosatisfy complex rules in order for us to qualify as a REIT for federal incometax purposes and qualify for our exemption under the Investment Company Act,our operating partnership’s ability to satisfy the rules in order for it toqualify as a partnership for federal income tax purposes, the ability ofcertain of our subsidiaries to qualify as REITs and certain of our subsidiariesto qualify as taxable REIT subsidiaries for federal income tax purposes, andour ability and the ability of our subsidiaries to operate effectively withinthe limitations imposed by these rules;

·                  changes ingovernmental regulations, tax rates and similar matters;

·                  legislative andregulatory changes (including changes to laws governing the taxation of REITsor the exemptions from registration as an investment company); and

·                  other factorsdiscussed under the heading “Risk Factors” in our Annual Report on Form 10-K/Afor the year ended December 31, 2006.

Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of future events, new information or otherwise.

The risks includedhere are not exhaustive.  Other sectionsof this report may include additional factors that could adversely affect ourbusiness and financial performance. Moreover, we operate in a very competitive and rapidly changingenvironment.  New risk factors emergefrom time to time and it is not possible for management to predict all suchrisk factors, nor can it assess the impact of all such risk factors on ourbusiness or the extent to which any factor, or combination of factors, maycause actual results to differ materially from those contained in anyforward-looking statements.  Given theserisks and uncertainties, investors should not place undue reliance onforward-looking statements as a prediction of actual results.

**RecentlyIssued Accounting Pronouncements**

**In June of 2006 the FASB issuedFinancial Interpretation No. 48, or FIN 48.  This interpretation clarifiesthe accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FAS 109. This interpretation prescribesa recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. This interpretation was effective January 1, 2007 for the Company.The adoption of FIN 48 did not have a material impact on our financial resultsfor the three and six months ended June 30, 2007.**

**In September 2006, the FASBissued Statement No. 157, Fair Value Measurements, or SFAS 157. SFAS No. 157 providesguidance for using fair value to measure assets and liabilities. This statementclarifies the principle that fair value should be based on the assumptions thatmarket participants would use when pricing the asset or liability. SFAS No. 157establishes a fair value hierarchy, giving the highest priority to quotedprices in active markets and the lowest priority to unobservable data. SFAS No.157 applies whenever other standards**

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**require assets or liabilities tobe measured at fair value. This statement is effective in fiscal yearsbeginning after November 15, 2007. We believe that the adoption of thisstandard on January 1, 2008 will not have a material effect on financialresults.**

**In February 2007, the FASBissued Statement No. 159, or SFAS 159, ‘‘The Fair Value Option for FinancialAssets and Financial Liabilities.’’ SFAS 159 permits entities to choose tomeasure many financial instruments, and certain other items, at fair value.SFAS 159 also establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. SFAS 159 applies toreporting periods beginning after November 15, 2007.  W**e are currently evaluating the effect, if any,that this pronouncement will have on our future financial results.

**In June 2007, the AmericanInstitute of Certified Public Accountants (“AICPA”) issued Statement ofPosition (“SOP”) 07-01 “Clarification of the Scope of the Audit and AccountingGuide Investment Companies and Accounting by Parent Companies and Equity MethodInvestors for Investments in Investment Companies” (“SOP 07-1”).  SOP 07-1 clarifies the scope of accountingfor investment companies and provides guidance for determining whether an entityis within the scope of the AICPA Audit and Accounting Guide InvestmentCompanies (the “Guide”).  For thoseentities that are investment companies under SOP 07-1, the specialized industryaccounting principles of the Guide (referred to as Investment Companyaccounting) should be retained by a parent company in consolidation or by anequity method investor.  The SOP alsoprovides for certain disclosure requirements for parent companies and equitymethod investors in investment companies that continue investment companyaccounting in the parent’s consolidated financial statements or the financialstatements of the equity method investor. The SOP is effective for fiscal years beginning on or after December 15,2007.  While the Company maintains anexemption from the Investment Company Act of 1940 and is therefore notregulated as an investment company, it is nonetheless in the process ofassessing whether SOP 07-1 is applicable.**

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**ITEM 3. Quantitative and Qualitative Disclosure About Market Risk**

##### **Market Risk**

Market riskincludes risks that arise from changes in interest rates, commodity prices,equity prices and other market changes that affect market sensitiveinstruments.  In pursuing our businessplan, we expect that the primary market risks to which we will be exposed arereal estate and interest rate risks.

#### **Real Estate Risk**

Commercial andmulti-family property values and net operating income derived from suchproperties are subject to volatility and may be affected adversely by a numberof factors, including, but not limited to, national, regional and localeconomic conditions which may be adversely affected by industry slowdowns andother factors), local real estate conditions (such as an oversupply of retail,industrial, office or other commercial or multi-family space), changes orcontinued weakness in specific industry segments, construction quality, age anddesign, 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 lossesto us.  In addition, decreases inproperty values reduce the value of the collateral and the potential proceedsavailable to a borrower to repay our loans, which could also cause us to sufferlosses.  Even when a property’s netoperating income is sufficient to cover the property’s debt service at the timea loan is made, there can be no assurance that this will continue in thefuture. We employ careful business selection, rigorous underwriting and creditapproval processes and attentive asset management to mitigate these risks.

###### **InterestRate Risk**

Interest rate riskis highly sensitive to many factors, including governmental monetary and taxpolicies, domestic and international economic and political considerations andother factors beyond our control.

Our operatingresults will depend in large part on differences between the income from ourassets and our borrowing costs.  Most ofour assets and borrowings are variable-rate instruments that we finance withvariable rate debt.  The objective ofthis strategy is to minimize the impact of interest rate changes on the spreadbetween the yield on our assets and our cost of funds.  We enter into hedging transactions withrespect to all liabilities relating to fixed rate assets.  If we were to finance fixed rate assets withvariable rate debt and the benchmark for our variable rate debt increased, ournet income would decrease.  Furthermore,as most of our available financing provides for an ability of the lender tomark-to-market our assets and make margin calls based on a change in the valueof our assets, financing fixed rate assets with this debt creates the risk thatan increase in fixed rate benchmarks (such as “swap” yields) would decrease thevalue of our fixed rate assets.  We haveentered into certain swap transactions in anticipation of drawing upon ourmark-to-market debt to hedge against this risk. Some of our loans are subject to various interest rate floors.  As a result, if interest rates fall below thefloor rates, the spread between the yield on our assets and our cost of fundswill increase, which will generally increase our returns.  Because we generate income principally fromthe spread between the yields on our assets and the cost of our borrowing andhedging activities, our net income will generally increase if LIBOR increasesand decreases if LIBOR decreases, but this may not always be true in thefuture.  Our exposure to interest rateswill also be affected by our overall corporate leverage, which we generallytarget to be 70% to 80% of the carrying value of our assets, although ouractual leverage may vary depending on our mix of assets.

In theevent of a significant rising interest rate environment and/or economicdownturn, delinquencies and defaults could increase and result in loan lossesto us, which could adversely affect our liquidity and operating results.  Further, such delinquencies or defaults couldhave an adverse effect on the spreads between interest-earning assets andinterest-bearing liabilities.

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**The aggregate carrying values, allocated by producttype and weighted average coupons of our loans, other lending investments andCMBS as of June 30, 2007 and December 31, 2006 were as follows:**
| ** **                                           | ** ** | **Carrying Value (1)  ($ in thousands)** | ** ** | **Allocation by  Investment Type** | ** ** | **Fixed Rate:  Average Yield** | ** ** | **Floating Rate:  Average Spread over  LIBOR (2)** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                     | ** ** | **2006**                                     | ** ** | **2007**                                 | ** ** | **2006**                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Whole loans,  floating rate                          |       | $                                                            | 1,554,017  |                                         | $          | 1,372,316                                |       | 54                                                                     | %          | 63 | % | — |   | — |   | 338 | bps | 327 | bps |
| Whole loans,  fixed rate                             |       | 192,023                                                      |       | 42,376                                       |       | 7                                        | %          | 2                                                                      | %          | 7.94 | % | 11.69 | % | — |   | — |   |
| Corporate whole  loans – floating rate          |       | 146,620                                                      |       | —                                       |       | 5                                        | %          | —                                                                 |       | — |   | — |   | 210 | bps | — |   |
| Subordinate  interests in whole loans, floating rate |       | 154,575                                                      |       | 236,308                                      |       | 5                                        | %          | 11                                                                     | %          | — |   | — |   | 453 | bps | 445 | bps |
| Subordinate  interests in whole loans, fixed rate    |       | 44,556                                                       |       | 48,769                                       |       | 2                                        | %          | 2                                                                      | %          | 7.16 | % | 8.54 | % | — |   | — |   |
| Mezzanine loans,  floating rate                      |       | 476,068                                                      |       | 226,675                                      |       | 17                                       | %          | 10                                                                     | %          | — |   | — |   | 614 | bps | 665 | bps |
| Mezzanine loans,  fixed rate                         |       | 217,573                                                      |       | 216,216                                      |       | 8                                        | %          | 10                                                                     | %          | 8.93 | % | 9.92 | % | — |   | — |   |
| Preferred  equity, fixed rate                        |       | 44,324                                                       |       | 44,224                                       |       | 2                                        | %          | 2                                                                      | %          | 10.45 | % | 10.68 | % | — |   | — |   |
| CMBS, floating  rate                                 |       | 6,427                                                        |       | —                                       |       | —                                   | %          | —                                                                 | %          | — |   | — |   | 229 | bps | — |   |
| CMBS, fixed rate                                     |       | 17,638                                                       |       | —                                       |       | —                                   | %          | —                                                                 | %          | 12.98 | % | — |   | — |   | — |   |
| Total / Average                                      |       | $                                                            | 2,853,821  |                                         | $          | 2,186,884                                |       | 100                                                                    | %          | 100 | % | 8.68 | % | 10.04 | % | 393 | bps | 384 | bps |

 

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**(1)**          Debtinvestments are presented after scheduled amortization payments andprepayments, and are net of unamortized fees, discounts, asset sales andunfunded commitments.

**(2)**          Spreadsover an index other than LIBOR have been adjusted to a LIBOR-based equivalent.

As of June 30,2007, our debt investment portfolio had the following maturity characteristics:
| Year of Maturity     | ** ** | **Number of  Investments  Maturing** | ** ** | **Current  Carrying Value  (In thousands)** | ** ** | **% of Total** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| 2007                           |       | 16                                        |       | $                                                     | 541,310    |                     | 19         | % |
| 2008                           |       | 24                                        |       | 968,182                                               |       | 34                       | %          |
| 2009                           |       | 24                                        |       | 686,901                                               |       | 24                       | %          |
| 2010                           |       | 11                                        |       | 229,544                                               |       | 8                        | %          |
| 2011                           |       | 2                                         |       | 56,939                                                |       | 2                        | %          |
| Thereafter                     |       | 13                                        |       | 370,945                                               |       | 13                       | %          |
| Total                          |       | 90                                        |       | 2,853,821                                             |       | 100                      | %          |
|                           |       |                                      |       |                                                  |       |                     |       |
| Weighted average  maturity (1) |       |                                      |       | 2.3 years                                             |       |                     |       |
|                                |            |                                           |            |                                                       |            |                          |            |  |

 

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(1)          The calculation of weighted average maturityis based upon the remaining initial term of the investment and does not includeoption or extension periods or the ability to prepay the investment after anegotiated lock-out period, which may be available to the borrower.

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Combined aggregateprincipal maturities of our consolidated CDOs, repurchase facilities, trustpreferred securities, proportionately consolidated mortgage note payablerelated to our TIC interest in 55 Corporate Drive, and unsecured revolvingcredit facility as of June 30, 2007, are as follows:
|            | ** ** | **CDOs**  | ** ** | **Repurchase  Facilities** | ** ** | **Trust  Preferred  Securities** | ** ** | **Mortgage  Note  Payable** | ** ** | **Unsecured  Revolving  Credit  Facility** | ** ** | **Total** | ** ** |
|------------|------------|-----------|------------|----------------------------|------------|----------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|-----------|------------|
| 2007       |       | $         | —     |                       | $          | —                           |       | $                           | —     |                                       | $          | —    |       | $ | — |   | $ | — |   |
| 2008       |       | —    |       | —                     |       | —                           |       | —                      |       | —                                     |       | —    |       |
| 2009       |       | —    |       | 556,659                    |       | —                           |       | —                      |       | —                                     |       | 556,659   |       |
| 2010       |       | —    |       | —                     |       | —                           |       | —                      |       | 90,000                                     |       | 90,000    |       |
| 2011       |       | —    |       | —                     |       | —                           |       | —                      |       | —                                     |       | —    |       |
| Thereafter |       | 1,714,250 |       | —                     |       | 150,000                          |       | 94,525                      | (1)        | —                                     |       | 1,958,775 |       |
| Total      |       | $         | 1,714,250  |                       | $          | 556,659                          |       | $                           | 150,000    |                                       | $          | 94,525    |       | $ | 90,000 |   | $ | 2,605,434 |   |

 

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(1) We have a 49.75% interest in the mortgage note.

The following table summarizes the notional and fair value of ourderivative financial instrument at June 30, 2007.  The notional value is an indication of theextent of our involvement in this instrument at that time, but does notrepresent exposure to credit, interest rate or market risks:

 
|                     | ** ** | **Benchmark Rate**                     | ** ** | **Notional  Value** | ** ** | **Strike  Rate** | ** ** | **Effective  Date** | ** ** | **Expiration  Date** | ** ** | **Fair  Value** | ** ** |
|---------------------|------------|---------------------------------------------|------------|---------------------|------------|------------------|------------|---------------------|------------|----------------------|------------|-----------------|------------|
| Interest Rate  Swap |       | 1  month LIBOR                              |       | $                   | 64,076     |             | 4.990      | %                   | 1/2007     |                 | 1/2017     |            | $          | 2,393 |   |
| Total Return Swap   |       | Lehman  CMBS Investment Grade 8.5+ Yr Index |       | 63,738              |       | +22              | bps        | 3/2007              |       | 3/2008               |       | 264             |       |
| Interest Rate  Swap |       | 1  month LIBOR                              |       | 59,400              |       | 4.938            | %          | 5/2007              |       | 11/2012              |       | 1,128           |       |
| Interest Rate  Swap |       | 1  month LIBOR                              |       | 42,718              |       | 4.990            | %          | 1/2007              |       | 1/2017               |       | 1,597           |       |
| Interest Rate  Swap |       | 1  month LIBOR                              |       | 69,300              |       | 5.025            | %          | 3/2007              |       | 3/2017               |       | 2,384           |       |
| Interest Rate  Swap |       | 3  month LIBOR                              |       | 39,454              |       | 4.420            | %          | 7/2005              |       | 2/2014               |       | 2,074           |       |
| Interest Rate  Swap |       | 1  month LIBOR                              |       | 36,500              |       | 4.837            | %          | 12/2006             |       | 11/2009              |       | 306             |       |
| Total Return Swap   |       | Lehman  CMBS Investment Grade 8.5+ Yr Index |       | 36,400              |       | +20              | bps        | 5/2007              |       | 5/2008               |       | (8              | )          |
| Interest Rate  Swap |       | 1  month LIBOR                              |       | 31,686              |       | 3.855            | %          | 7/2005              |       | 11/2009              |       | 967             |       |
| Interest Rate  Swap |       | 3  month LIBOR                              |       | 24,837              |       | 5.445            | %          | 8/2006              |       | 7/2016               |       | 86              |       |
| Interest Rate Cap   |       | 3  month LIBOR                              |       | 23,713              |       | 5.700            | %          | 11/2005             |       | 12/2007              |       | —          |       |
| Interest Rate  Swap |       | 1  month LIBOR                              |       | 22,275              |       | 5.078            | %          | 4/2007              |       | 4/2017               |       | 663             |       |
| Total Return Swap   |       | Lehman  CMBS Investment Grade 8.5+ Yr Index |       | 20,600              |       | +20              | bps        | 3/2007              |       | 4/2008               |       | (11             | )          |
| Interest Rate Cap   |       | 3  month LIBOR                              |       | 20,000              |       | 6.000            | %          | 4/2007              |       | 10/2007              |       | —          |       |
| Interest Rate  Swap |       | 1  month LIBOR                              |       | 16,412              |       | 5.081            | %          | 5/2007              |       | 5/2017               |       | 529             |       |
| Interest Rate  Swap |       | 3  month LIBOR                              |       | 12,000              |       | 9.850            | %          | 8/2006              |       | 8/2011               |       | 61              |       |
| Basis Swap          |       | Prime  Composite-3 month LIBOR              |       | 9,363               |       | +722             | bps        | 8/2006              |       | 12/2007              |       | (1              | )          |
| Interest Rate  Swap |       | 1  month LIBOR                              |       | 6,294               |       | 4.760            | %          | 1/2006              |       | 3/2015               |       | 250             |       |
| Interest Rate  Swap |       | 1  month LIBOR                              |       | 3,960               |       | 4.959            | %          | 12/2005             |       | 12/2015              |       | 135             |       |
| Interest Rate  Swap |       | 1  month LIBOR                              |       | 3,465               |       | 4.280            | %          | 7/2005              |       | 12/2009              |       | 74              |       |
| Interest Rate  Swap |       | 3  month LIBOR                              |       | 3,465               |       | 5.178            | %          | 4/2006              |       | 3/2010               |       | 7               |       |
| Total               |       |                                        |       | $                   | 609,656    |             |       |                |       |                 |       |            | $          | 12,898 |   |

 

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**ITEM 4. Controls and Procedures**

**Evaluation of Disclosure Controls and Procedures**

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated toour management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure based closely on the definition of “disclosure controls andprocedures” in Rule 13a-15(e). Notwithstanding the foregoing, a control system, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurancethat it will detect or uncover failures within the Company to disclose materialinformation otherwise required to be set forth in the Company’s periodicreports.  Also, we may have investmentsin certain unconsolidated entities.  Aswe do not control these entities, our disclosure controls and procedures withrespect to such entities are necessarily substantially more limited than thosewe maintain with respect to our consolidated subsidiaries.

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

**Changes inInternal Controls over Financial Reporting**

**There were no changes in our internal control overfinancial reporting identified in connection with the evaluation of suchinternal control that occurred during Gramercy’s last fiscal quarter that havematerially affected, or are reasonably likely to materially**affect,Gramercy’s internal control over financial reporting.

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**PART II****                                                   OTHERINFORMATION**

##### **ITEM 1.****                                                     LEGALPROCEEDINGS**

We incorporate byreference the information required by this Item 1 of Part II to the informationregarding litigation in Note 16 to the Consolidated Financial Statementscontained in Part I of this report.

##### **ITEM 1A.****                                         RISKFACTORS**

##### There havebeen no material changes to the risk factors disclosed in Item 1A of Part I inour Annual Report on Form 10-K for the year ended December 31, 2006.

##### **ITEM 2.****                                                  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None

#### **ITEM 3.****                                                     DEFAULTSUPON SENIOR SECURITIES**

None

#### **ITEM 4.****                                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

On May 24, 2007,we held our annual meeting of stockholders (the “Meeting”) in New York, NewYork for the purpose of: (i) electing three Class III directors to serveon the Board until our 2010 annual meeting of stockholders and until theirsuccessors are duly elected and qualified; and (ii) ratifying theappointment of Ernst & Young LLP as our independent registered public accountingfirm for the fiscal year ending December 31, 2007.  The total number of shares of common stockentitled to vote at the Meeting was 26,034,056, of which 21,930,032 shares, or84%, were present in person or by proxy.

The following setsforth the results of the election of directors:
| Name of Class III Nominees | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------------------------------------|------------|------------|------------|--------------|------------|
| Marc Holliday                                  |       | 21,164,277 |       | 765,755      |       |
| Paul J.  Konigsberg                            |       | 21,799,341 |       | 130,691      |       |
| Charles S. Laven                               |       | 21,600,046 |       | 329,986      |       |

 

There was no solicitationin opposition to the foregoing nominees by stockholders.  The terms of office Hugh F. Hall and JeffreyE. Kelter, our Class I directors, and Stephen L. Green and Allan J Baum, ourClass II directors, continued after the Meeting.

 

Theratification of the appointment of Ernst & Young LLP as our independentregistered public accounting firm for the fiscal year ending December 31, 2007was approved by our stockholders with 21,911,061 votes “For,” 8,455 votes “Against”and 10,518 votes “Abstained,” none of which such Abstentions were actuallybroker non-votes that were treated as Abstentions (as discussed in our ProxyStatement).

Furtherinformation regarding the proposals is contained in our Proxy Statement, datedApril 17, 2007.

#### **ITEM 5.****                                                     OTHERINFORMATION**

None

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**ITEM 6.  EXHIBITS**

(a)          Exhibits:
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.1*        |       | 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*        |       | Articles Supplementary designating the Company’s  8.125% Series A Cumulative Redeemable Preferred Stock, liquidation preference  $25.00 per share, par value $.001 per share (incorporated by reference to  Exhibit 3.1 of the Company’s Form 8-K (No. 001-32248) which was filed with  the Commission on April 18, 2007).                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.3*        |       | Bylaws of the Company (incorporated by reference to  Exhibit 3.2 of the Company’s Amendment No. 2 to its Registration Statement on  Form S-11/A (No. 333-114673), which was filed with the Commission on June 23,  2004 and declared effective by the Commission on July 27, 2004)                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1*        |       | Form of specimen stock certificate evidencing the  common stock of the Company, par value $.001 per share (incorporated by  reference to Exhibit 4.1 of the Company’s Form 8-K (No. 001-32248) 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 $.001 per share (incorporated by  reference to Exhibit 4.2 of the Company’s Form 8-K (No. 001-32248) which was  filed with the Commission on April 18, 2007).                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1*       |       | Underwriting Agreement, dated April 13, 2007, by and  among Gramercy Capital Corp., GKK Capital LP, GKK Manager LLC and Wachovia  Capital Markets, LLC, as representative of the several underwriters named  therein (incorporated by reference to Exhibit 1.1 of the Company’s Form 8-K  (No. 001-32248) which was filed with the Commission on April 18, 2007).                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2*       |       | First Amendment to the Third Amended and Restated  Agreement of Limited Partnership of GKK Capital Corp (incorporated by  reference to Exhibit 3.2 of the Company’s Form 8-K (No. 001-32248) which was  filed with the Commission on April 18, 2007).                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3*       |       | Second Amended and Restated Master Repurchase  Agreement, dated June 28, 2007, by and among Gramercy Warehouse Funding II,  LLC, GKK Trading Warehouse II, LLC, and Goldman Sachs Mortgage Company  (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K (No.  001-32248) which was filed with the commission on July 5, 2007.                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4*       |       | Annex I to Second Amended and Restated Master  Repurchase Agreement, dated June 28, 2007, by and among Gramercy Warehouse  Funding II LLC, GKK trading Warehouse II, LLC and Goldman Sachs Mortgage  Company (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K  (No. 001-32248) which was filed with the Commission on July 5, 2007.                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5*       |       | Second Amended and Restated Guaranty, dated June 28,  2007, by and among the Gramercy Capital Corp., GKK Capital LP, Gramercy  Investment Trust and GKK Trading Corp. (incorporated by reference to Exhibit  10.3 of the Company’s Form 8-K (No. 001-32248) which was filed with the  Commission on July 5, 2007).                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6*       |       | First Amendment to Third Amended and Restated Master  Repurchase Agreement, dated June 28, 2007, by and among Gramercy Warehouse  Funding I, LLC, GKK Trading Warehouse I LLC, GKK 450 Lex LLC, Wachovia Bank,  National Association, and Wachovia Capital Markets, LLC, incorporated by  reference to Exhibit 10.4 of the Company’s Form 8-K (No. 001-32248) which was  filed with the Commission on July 5, 2007. |

 

55

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| 10.7*  |   | Fourth Amended and Restated Guarantee Agreement,  dated June 28, 2007, by and among Gramercy Capital Corp., GKK Capital LP,  Gramercy Investment Trust and GKK Trading Corp. (incorporated by reference to  Exhibit 10.5 of the Company’s Form 8-K (No. 001-32248) which was filed with  the Commission on July 5, 2007. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 10.8*  |   | First Amended and Restated Credit Agreement, dated  June 28, 2007, by and among Gramercy Capital LP, Keybank National Association  and Keybank Capital Markets (incorporated by reference to Exhibit 10-6 of the  Company’s Form 8-K (No. 001-32248) which was filed with the Commission on  July 5, 2007).              |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 31.1+  |   | Certification by the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 31.2+  |   | Certification by the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 32.1+  |   | Certification by the Chief Executive Officer  pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                          |
| 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                                                                                                                                                                       |

 

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*Incorporatedby reference.

+Filedherewith.

 

56

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                                                    | GRAMERCY CAPITAL CORP. |
|----------------------------------------------------|------------------------|
|                                               |                   |
|                                               |                   |
|                                               | By:                    | /s/ Robert R.  Foley |   |
|                                               |                   | Robert R. Foley |
|                                               |                   | Chief Financial Officer |
|                                               |                   |   |
|                                               |                   |   |
| Date:     August  9, 2007 |                   |   |

 

57

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