Table of Contents



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



FORM 10-Q



ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2009o

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


Commission File Number: 001-32248



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



Maryland(State or other jurisdiction of incorporation or
organization)

06-1722127(I.R.S. Employer Identification No.)420 Lexington Avenue, New York, New York 10170(Address of principal executive offices) (Zip Code)(212) 297-1000(Registrant's telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. YES ý    NO o

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

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

The number of shares outstanding of the registrant's common stock, $0.001 par value, was 49,876,864 as of May 11, 2009.



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Table of Contents



GRAMERCY CAPITAL CORP.        INDEX



PART I.

FINANCIAL INFORMATIONITEM 1.

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

1Condensed Consolidated Statements of Operations for the three
months ended March 31, 2009 and 2008 (unaudited)

2Condensed Consolidated Statement of Stockholders' Equity and
Comprehensive Income (Loss) for the three months ended March 31, 2009 (unaudited)

3Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2009 and 2008 (unaudited)

4Notes to Condensed Consolidated Financial Statements
(unaudited)

6ITEM 2.

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

66ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

109ITEM 4.

CONTROLS AND PROCEDURES

112PART II.

OTHER INFORMATION

113ITEM 1.

LEGAL PROCEEDINGS

113ITEM 1A.

RISK FACTORS

113ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS

115ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

115ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS

115ITEM 5.

OTHER INFORMATION

115ITEM 6.

EXHIBITS

116SIGNATURES

117


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Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS



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

March 31,
2009

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

$
904,196

$
891,500Building and improvements


2,414,527


2,441,839Less: accumulated depreciation


(61,493
)

(47,071
)Total real estate investments, net


3,257,230


3,286,268Cash and cash equivalents


83,199


136,828Restricted cash


233,140


234,781Pledged government securities, net


100,483


101,576Loans and other lending investments, net


1,914,606


2,213,473Commercial mortgage-backed securities


887,585


869,973Investments in joint ventures


99,433


96,777Assets held for sale


261,554


189,922Tenant and other receivables, net


27,005


28,129Accrued interest


23,392


25,447Acquired lease assets, net of accumulated amortization of $44,851 and $30,760


499,652


536,212Deferred costs, net of accumulated amortization of $32,361 and $26,451


47,016


53,248Other assets


53,669


48,322Total assets

$
7,487,964

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

$
1,771,512

$
1,833,005Mezzanine loans payable


573,464


580,462Unsecured credit facility





172,301Term loan, credit facility and repurchase facility


79,601


95,897Collateralized debt obligations


2,607,759


2,608,065Junior subordinated notes


150,000


Total secured and other debt


5,182,336


5,289,730Accounts payable and accrued expenses


74,378


88,437Management and incentive fees payable


1,972


979Dividends payable


4,661


2,325Accrued interest payable


8,004


8,167Deferred revenue


99,683


98,693Below-market lease liabilities, net of accumulated amortization of $74,639 and $53,369


845,769


846,351Leasehold interests, net of accumulated amortization of $2,872 and $2,182


20,361


21,051Liabilities related to assets held for sale


60,372


110,543Derivative instruments, at fair value


206,529


157,776Other liabilities


27,394


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





150,000Total liabilities


6,531,459


6,788,523Commitments and contingencies





Stockholders' Equity:Common stock, par value $0.001, 100,000,000 shares authorized, 49,863,831 and 49,852,243 shares
issued and outstanding at March 31, 2009 and December 31, 2008, respectively


50


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


111,205


111,205Additional paid-in-capital


1,078,109


1,077,983Accumulated other comprehensive income (loss)


(209,522
)

(160,739
)Retained earnings (accumulated deficit)


(26,069
)

1,222Total Gramercy Capital Corp. stockholders' equity


953,773


1,029,721Non-controlling interests


2,732


2,712Total equity


956,505


1,032,433Total liabilities and stockholders' equity

$
7,487,964

$
7,820,956


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

1

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

Three months ended
March 31,2009

2008RevenuesRental revenue

$
79,716

$
1,788Investment income


52,934


74,595Operating expense reimbursements


30,060


Gain on sales and other income


1,485


4,013Total revenues


164,195


80,396Operating ExpensesOther property operating expenses


19,355


Utilities


9,952


Real estate taxes


9,567


Ground rent and leasehold obligations


4,427


Direct billable expenses


2,163


Total property operating expenses


45,464


Net operating income


118,731


80,396Other expenses:Interest expense


65,352


40,068Management fees


5,672


7,145Incentive fee





2,496Depreciation and amortization


27,463


1,117Impairment on loans held for sale


84,428


Marketing, general and administrative


8,784


2,804Provision for loan loss


52,771


8,000Total expenses


244,470


61,630Income (loss) from continuing operations before equity in net income of unconsolidated
joint ventures


(125,739
)

18,766Equity in net income of unconsolidated joint ventures


2,212


3,323Income (loss) from continuing operations before provision for taxes, gain on extinguishment of
debt, and discontinued operations


(123,527
)

22,089Gain on extinguishment of debt


107,229


3,690Provision for taxes


(2,267
)

(11
)Net income (loss) from continuing operations


(18,565
)

25,768Net loss from discontinued operations


(6,370
)

(297
)Net income (loss)


(24,935
)

25,471Net loss attributable to non-controlling interests


(20
)

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


(24,955
)

25,471Accrued preferred stock dividends


(2,336
)

(2,336
)Net income (loss) available to common stockholders

$
(27,291
)
$
23,135Basic earnings per share:Net income (loss) from continuing operations, after preferred stock dividends

$
(0.42
)
$
0.67Net loss from discontinued operations


(0.13
)

(0.01
)Net income (loss) available to common stockholders

$
(0.55
)
$
0.66Diluted earnings per share:Net income (loss) from continuing operations, after preferred stock dividends

$
(0.42
)
$
0.67Net loss from discontinued operations


(0.13
)

(0.01
)Net income (loss) available to common stockholders

$
(0.55
)
$
0.66Dividends per common share




$
0.63Basic weighted average common shares outstanding


49,860


34,854Diluted weighted average common shares and common share equivalents outstanding


50,030


35,015


The accompanying notes are an integral part of these financial statements

2

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

Common
StockAccumulated
Other
Comprehensive
Income
(Loss)Retained
Earnings
(Accumulated
deficit)

Total
Gramercy
Capital
Corp.Shares

Par
Value

Series A
Preferred
Stock

Additional
Paid-
In-Capital

Non-
controlling
interests

Total

Comprehensive
Income (loss)Balance at December 31, 2008


49,852

$
50

$
111,205

$
1,077,983

$
(160,739
)
$
1,222

$
1,029,721

$
2,712

$
1,032,433Net income

















(24,955
)

(24,955
)

20


(24,935
)

(24,955
)Change in net unrealized loss on derivative instruments














(48,925
)




(48,925
)




(48,925
)

(48,925
)Net unrealized gain/ (loss) on securities previously designed as available-for-sale














142





142





142


142Issuance of stockstock purchase plan


12























Stock-based compensation fair value











126








126





126Dividends accrued on preferred stock

















(2,336
)

(2,336
)




(2,336
)Balance at March 31, 2009


49,864

$
50

$
111,205

$
1,078,109

$
(209,522
)
$
(26,069
)
$
953,773

$
2,732

$
956,505

$
(73,738
)


The accompanying notes are an integral part of these financial statements

3

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

Three months ended March 31,2009

2008Operating ActivitiesNet income (loss)

$
(24,955
)
$
25,471Adjustments to net cash provided by operating activities:Depreciation and amortization


28,124


4,795Amortization of leasehold interest


(690
)

Non-controlling interest


20


Amortization of acquired leases to rental income


(18,759
)

Amortization of deferred costs


5,858


Amortization of discount, net, and other fees


(7,441
)

(5,125
)Payment of capitalized tenant leasing costs


(346
)

Straight-line rent adjustment


6,524


Non-cash impairment charges


90,203


Gains from sale of loans and real estate assets


(558
)

(10
)Equity in net (income) loss of joint ventures


(1,905
)

(3,109
)Gain on extinguishment of debt


(107,229
)

(3,690
)Amortization of stock compensation


126


1,468Provision for loan loss


52,771


8,000Unrealized gain on derivative instruments





147Changes in operating assets, loan commitments and securities and liabilities:Restricted cash


(896
)

Tenant and other receivables


2,010


2,980Other assets


(4,718
)

(7,832
)Management and incentive fees payable


993


117Accounts payable, accrued expenses and other liabilities


(13,406
)

(10,920
)Deferred revenue


(9,113
)

(2,480
)Net cash provided by (used in) operating activities


(3,387
)

9,812Investing ActivitiesCapital expenditures and leasehold costs


(815
)

Proceeds from sale of real estate


13,340


New investment originations and funded commitments


(12,671
)

(145,954
)Principal collections on investments


19,531


140,233Proceeds from sale of loans and loan commitments


17,238


85,132Investment in commercial real estate





(1,828
)Investment in commercial mortgage-backed securities


(15,661
)

(43,379
)Investment in joint venture


(431
)

(517
)Change in accrued interest income


(45
)

Purchase of marketable investments


(6
)

Sale of marketable investments


2,054


Change in restricted cash from investing activities


437


2,539Deferred investment costs


(280
)

(441
)Net cash provided by investing activities


22,691


35,785


4

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Gramercy Capital Corp.

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

Three months ended March 31,2009

2008Financing ActivitiesProceeds from repurchase facilities


9,500


22,867Repayments of repurchase facilities


(18,576
)

(56,287
)Proceeds from unsecured credit facility





50,000Repayments of unsecured credit facility


(45,000
)

Repayment of mortgage notes payable


(15,651
)

Change in restricted cash from financing activities


(1,173
)

57,871Repurchase of collateralized debt obligations





(9,810
)Deferred financing costs and other liabilities


(2,033
)

(636
)Dividends paid on common stock





(92,745
)Dividends paid on preferred stock





(2,336
)Net cash used in financing activities


(72,933
)

(31,076
)Net (decrease) increase in cash and cash equivalents


(53,629
)

14,521Cash and cash equivalents at beginning of period


136,828


293,126Cash and cash equivalents at end of period

$
83,199

$
307,647Non-cash activityDeferred losses and other non-cash activity related to derivatives

$
48,925

$
43,348Debt assumed by purchaser in sale of real estate

$
103,621

$
Supplemental cash flow disclosuresCash paid for interest

$
70,130

$
45,837Cash paid for income taxes paid

$
182

$
313


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

5

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Table of Contents

Gramercy Capital Corp.        Notes To Condensed Consolidated Financial Statements        (Unaudited, amounts in thousands, except share and per share data)        March 31, 2009

1. Business and Organization

Gramercy Capital Corp. (the "Company" or "Gramercy") is a self-managed, integrated, commercial real estate finance and property investment company. The Company was formed in
April 2004 and commenced operations upon the completion of its initial public offering in August 2004. On April 1, 2008, the Company completed the acquisition of American Financial Realty Trust
(NYSE: AFR) ("American Financial") in a transaction with a total value of approximately $3.3 billion, including the assumption of approximately $1.3 billion of American Financial's
secured debt. The acquisition transformed the Company from a pure specialty finance company into a $7.8 billion diversified enterprise with complementary business lines consisting of commercial
real estate finance and property investments.

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

Substantially
all of the Company's operations are conducted through GKK Capital LP, a Delaware limited partnership, or the Operating Partnership. The Company, as the sole general
partner of, and currently the holder of 100% of the common units of the Operating Partnership, has responsibility and discretion in the management and control of the Operating Partnership, and the
limited partners of the Operating Partnership have no authority to transact business for, or participate in the management activities of the Operating Partnership. Accordingly, the Company
consolidates the accounts of the Operating Partnership. The Company qualified as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue
Code, commencing with its taxable year ended December 31, 2004 and the Company expects to qualify for the current fiscal year. To maintain the Company's qualification as a REIT, the Company
plans to distribute at least 90% of taxable income.

The
Company was externally managed and advised by GKK Manager LLC, or the Manager, a wholly-owned subsidiary of SL Green Realty Corp., or SL Green, as of
March 31, 2009. At March 31, 2009 and December 31, 2008, SL Green Operating Partnership, L.P. owned approximately 12.5% of the outstanding shares of the Company's
common stock. In April 2009, the Company completed the internalization of the management through the direct acquisition of the Manager. As a self-managed integrated commercial real estate
finance and property investment company, beginning in May 2009,

6

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

1. Business and Organization (Continued)

management
and incentive fees payable by the Company to the Manager have ceased and the Company added 77 former employees of the Manager to its own staff. The Company expensed $2,826 for acquisition
costs incurred through March 31, 2009 in connection with the acquisition.

As
of March 31, 2009, Gramercy Finance held loans and other lending investments and CMBS of $2,954,641 net of fees, discounts, and unfunded commitments, reserves for possible loan
losses, and other adjustments, with an average spread to 30-day LIBOR of 484 basis points for its floating rate investments, and an average yield of approximately 7.25% for its fixed rate
investments. As
of March 31, 2009, Gramercy Finance also held interests in two credit tenant net lease investments, or CTL investments, two interests in joint ventures holding fee positions on properties
subject to long-term ground leases and a 100% fee interest in a property subject to a long-term ground lease.

As
of March 31, 2009, Gramercy Realty's portfolio consisted of 682 bank branches, 333 office buildings and six land parcels, of which 76 bank branches and one office building were
partially owned through joint ventures. Gramercy Realty's wholly-owned properties aggregated approximately 26.2 million rentable square feet and its partially-owned properties aggregated
approximately 0.7 million rentable square feet, including 0.4 million rentable square feet in an unconsolidated joint venture. As of March 31, 2009, the occupancy of Gramercy
Realty's wholly-owned properties was 88.4% and the occupancy for its partially-owned properties was 99.9%. Gramercy Realty's two largest tenants are Bank of America, and Wachovia Bank, (now owned by
Wells Fargo & Company), and as of March 31, 2009, they represented approximately 40.9% and 15.3%, respectively, of the rental income of the Company's portfolio and occupied approximately
47.1% and 18.3%, respectively, of Gramercy Realty's total rentable square feet.

Due
to the nature of the business of Gramercy Realty's tenant base, Gramercy Realty typically enters into long-term net leases with its financial institution tenants. As of
March 31, 2009, the weighted average remaining term of Gramercy Realty's leases was 10.2 years and approximately 79.9% of its base revenue was derived from net leases. With
in-house capabilities in acquisitions, asset management, property management and leasing, Gramercy Realty is focused on maximizing the value of its portfolio through strategic sales,
effective and efficient property management, and leasing operations.

The
Company relies on the credit and equity markets to finance and grow its business. During the second half of 2007 and throughout 2008, severe credit and liquidity issues in the
sub-prime residential lending and single family housing sectors negatively impacted the asset-backed and corporate fixed income markets, and the equity securities of financial institutions
and real estate companies. As the severity of residential sector issues increased, nearly all securities markets experienced reduced liquidity and greater risk premiums as concerns about the outlook
for the U.S. and world economic growth increased. These concerns continue to persist in 2009 and risk premiums in many capital markets remain at or near all-time highs with liquidity
extremely low or virtually non-existent when compared to historical standards. As a result, most commercial real estate finance and financial services industry participants, including the Company,
have reduced new investment activity until the capital markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In this environment, the Company is focused
on actively managing portfolio credit, generating and

7

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

1. Business and Organization (Continued)

recycling
liquidity from existing assets, leasing vacant space and reducing corporate overhead as a percentage of its total assets and total revenues.

Basis of Quarterly Presentation

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

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

2. Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the Company's accounts and those of the Company's subsidiaries which are
wholly-owned or controlled by the
Company, or entities which are variable interest entities in which the Company is the primary beneficiary under FASB Interpretation No. 46R, or FIN 46R, "Consolidation of Variable
Interest Entities." FIN 46R requires a variable interest entity, or VIE, to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE's
anticipated losses and/or a majority of the expected returns. The Company has evaluated its investments for potential classification as variable interests by evaluating the sufficiency of each
entity's equity investment at risk to absorb losses, and determined that the Company is the primary beneficiary for one variable interest entity and has included the accounts of this entity in the
condensed consolidated financial statements. Entities which the Company does not control and entities which are VIE's, but where the Company is not the primary beneficiary, are accounted for under the
equity method. All significant intercompany balances and transactions have been eliminated.

Variable Interest Entities

The Company's ownership of the subordinated classes of CMBS from a single issuer may provide the Company with the right to control the
foreclosure/workout process on the underlying loans. There are certain exceptions to the scope of FIN 46R, one of which provides that an investor that holds a variable interest in a qualifying
special-purpose entity ("QSPE") does not consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. FASB Statement of Financial

8

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

Accounting
Standards No. 140, or SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides the requirements for an entity to
qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose
entity's QSPE status can be affected in future periods by activities by its transferors or other involved parties, including the manner in which certain servicing activities are performed. To the
extent that the Company's CMBS investments were issued by a special-purpose entity that meets the QSPE requirements, the Company records those investments at the purchase price paid. To the extent the
underlying special-purpose entities do not satisfy the QSPE requirements, the Company follows the guidance set forth in FIN 46R as the special-purpose entities would be determined to be VIEs.

The
Company has analyzed the pooling and servicing agreements governing each of its controlling class CMBS investments and the Company believes that the terms of those agreements conform
to industry standards and are consistent with the QSPE criteria.

In
April 2008, the FASB voted to eliminate the scope exception for QSPEs from the guidance in SFAS No. 140 and to remove the scope exception for QSPEs from FIN 46R. This
will require that VIEs previously accounted for as QSPEs be analyzed for consolidation according to FIN 46R. While the
revised standards have not been finalized, and deferred for potential application until 2010, this change may affect the Company's financial statements.

At
March 31, 2009, the Company owned securities of three controlling class CMBS trusts with a carrying value of $39,938. The total par amounts of CMBS issued by the three CMBS
trusts was $921,654. Using the fair value approach to calculate expected losses or residual returns, the Company has concluded that it would not be the primary beneficiary of any of the underlying
special-purpose entities. At March 31, 2009, the Company's maximum exposure to loss as a result of its investment in these QSPEs totaled $39,938 which equals the book value of these investments
as of March 31, 2009.

The
financing structures that the Company offers to the borrowers on certain of its real estate loans involve the creation of entities that could be deemed VIEs and, therefore, could be
subject to FIN 46R. The Company's management has evaluated these entities and has concluded that none of such entities are VIEs that are subject to the consolidation rules of FIN 46R.

9

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Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

The
following is a summary of the Company's involvement with VIEs (excluding QSPEs) as of March 31, 2009:

Company
carrying value
assets

Company
carrying value
liabilities

Face value of
assets held by
the VIE

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

$
50,241

$
44,491

$
50,241

$
44,491Collateralized debt obligations





2,607,759


3,100,000


3,100,000$
50,241

$
2,652,250

$
3,150,241

$
3,144,491Unconsolidated VIEsCommercial mortgage-backed securities

$
39,938

$


$
921,654

$
921,654


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

Real Estate and CTL Investments

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

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

10

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

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

Results
of operations of properties acquired are included in the consolidated statements of operations from the date of acquisition.

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

In
accordance with FASB Statement No. 141, or SFAS No. 141, "Business Combinations," the Company allocates the purchase price of real estate to land, building, improvements
and intangibles, such as the value of above-, below- and at-market leases, and origination costs associated with the in-place leases. The Company depreciates the amount
allocated to building and other intangible assets over their estimated useful lives, which generally range from three to 40 years. The values of the above-, and below-market leases are
amortized and recorded as either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to rental income over the remaining term of the associated lease.
The value associated with in-place leases are amortized over the expected term, which includes an estimated probability of the lease renewal, and its estimated term. If a tenant vacates
its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off. The tenant
improvements and origination costs are amortized as an expense over the remaining life of the lease or charged against earnings if the lease is terminated prior to its contractual expiration date. The
Company assesses fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash
flows are based on a number of factors including the historical operating results, known trends and market/economic conditions that may affect the property.

11

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

Leasehold Interests

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

Investments in Unconsolidated Joint Ventures

The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting since it exercises
significant influence, but does not unilaterally control the entities and is not considered to be the primary beneficiary under FIN 46R. In the joint ventures, the rights of the other investors
are protective and participating. Unless the Company is determined to be the primary beneficiary, these rights preclude it from consolidating the investments. The investments are recorded initially at
cost as an investment in unconsolidated joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying
amount of the investments on the Company's balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in net income (loss) of unconsolidated joint ventures over the
lesser of the joint venture term or 40 years. None of the joint venture debt is recourse to the Company. As of March 31, 2009 and December 31, 2008, the Company had investments of
$99,433 and $96,777 in unconsolidated joint ventures, respectively.

Cash and Cash Equivalents

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

Restricted Cash

Restricted cash at March 31, 2009 consists of $99,325 on deposit with the trustee of the Company's collateralized debt
obligations, or CDOs, representing the proceeds of repayments from loans serving as collateral in the Company's CDOs, which will be used to fund investments to replace those trust assets which are
repaid or sold by the trust, interest payments received by the trustee on investments that serve as collateral for the Company's CDOs, which are remitted to the Company on a quarterly basis, and
future funding obligations on certain investments. The remaining balance consists of $58,791 held as collateral for letters of credit, $3,189 of interest reserves held on behalf of borrowers and
$75,313, which includes $3,478 related to assets held for sale, which represents amounts escrowed pursuant to mortgage agreements securing the Company's real estate investments and CTL investments for
insurance, taxes, repairs and maintenance, tenant improvements, interest, and debt service and amounts held as collateral under security and pledge agreements relating to leasehold interests.

12

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

Assets Held for Sale



Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan
origination fees, discounts, repayments, sales of partial interests in loans, and unfunded commitments unless such loan or investment is deemed to be impaired. Loans held for sale are carried at the
lower of cost or market value using available market information obtained through consultation with dealers or other originators of such investments. As of March 31, 2009 and
December 31, 2008, the Company had loans and other lending investments held for sale of $152,451 and $0, respectively. At March 31, 2009, the Company recorded an impairment charge of
$84,428 related to the mark-to-market of the loans designated during the quarter as held for sale.



In accordance with FASB Statement No. 144, or SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," real estate investments or CTL investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less cost to sell. Once an asset is
classified as held for sale, depreciation expense is no longer recorded and current and prior periods are reclassified as Discontinued Operations. As of March 31, 2009 and December 31,
2008, the company had real estate investments held for sale of $109,103 and $189,922, respectively.

Commercial Mortgage-Backed Securities

The Company designates its CMBS investments pursuant to FASB Statement No. 115, or SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," on the date of acquisition of the investment. Held to maturity investments are stated at cost plus any premiums or discounts which are amortized through the
consolidated statements of operations using the level yield method. CMBS securities that the Company does not hold for the purpose of selling in the near-term but may dispose of prior to
maturity, are designated as available-for-sale and are carried at estimated fair value with the net unrealized gains or losses recorded as a component of accumulated other
comprehensive income (loss) in stockholders' equity. Unrealized losses on securities that, in the judgment of management, are other than temporary are charged against earnings as a loss on the
consolidated statements of operations. In November 2007, subsequent to financing the Company's CMBS investments in its CDOs, the Company redesignated all of its
available-for-sale CMBS investments with a book value of approximately $43,600 to held to maturity. As of March 31, 2009 and December 31, 2008, the unrealized
loss on the redesignated CMBS investments included in other comprehensive income (loss) was $4,844 and $4,986, respectively.

The
Company accounts for CMBS (other than those of high credit quality or sufficiently collateralized to ensure that the possibility of credit loss is remote) under Emerging Issues Task
Force 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," or EITF 99-20.
Accordingly, on a quarterly basis, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience, and the present
value of the revised cash flow is less than the

13

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

present
value previously estimated, an other-than-temporary impairment is deemed to have occurred. The security is written down to fair value with the resulting charge against
earnings and a new cost basis is established. The Company calculates a revised yield based on the current amortized cost of the investment (including any other-than-temporary
impairments recognized to date) and the revised yield is then applied prospectively to recognize interest income.

In
January 2009, the FASB issued FSP EITF 99-20-1. This FSP amends the impairment guidance in EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to align it with the impairment
guidance within SFAS 115 by removing from EITF 99-20 the requirement to place exclusive reliance on market participants' assumptions about future cash flows when evaluating
an asset for other-than-temporary impairment. The standard now requires that assumptions about future cash flows consider reasonable management judgment about the probability
that the holder of an asset will be unable to collect all amounts due.

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

In
accordance with SFAS No. 115, when the estimated fair value of the security classified as available-for-sale has been below amortized cost for a
significant period of time and the Company concludes that it no longer has the ability or intent to hold the security for the period of time over which the Company expects the values to recover to
amortized cost, the investment is written down to its fair value, and this loss is realized and charged against earnings. The determination of other-than-temporary impairment
is a subjective process, and different judgments and assumptions could affect the timing of loss realization. In addition, it is possible that the Company in the future, may need to recognize an
other-than-temporary impairment not withstanding its continued determination that no credit loss has occurred and estimated cash flows remain stable, due to the duration that
the estimated fair value remains below book value.

Pledged Government Securities

The Company maintains a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt
previously collateralized by properties in its real estate portfolio. These securities are carried at amortized cost because the Company has both positive intent and the

14

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

ability
to hold the securities to maturity. These securities had a carrying value of $100,483, a fair value of $104,408 and unrealized gains of $3,925 at March 31, 2009, and have maturities
that extend through November 2013.

Tenant and Other Receivables

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

Tenant
and other receivables are recorded net of the allowances for doubtful accounts, which as of March 31, 2009 and December 31, 2008, were $6,816 and $6,361,
respectively. The Company continually reviews receivables related to rent, tenant reimbursements and unbilled rent receivables and determines collectability by taking into consideration the tenant's
payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the
event that the collectability of a receivable is in doubt, the Company increases the allowance for doubtful accounts or records a direct write-off of the receivable in the consolidated
statements of operations.

Intangible Assets

Pursuant to SFAS No. 141, the Company follows the purchase method of accounting for business combinations. The Company allocates
the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an
as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary
methods, including data from appraisals, comparable sales, discounted cash flow analyses and other methods. Identifiable intangible assets include amounts allocated to acquired leases for above- and
below-market lease rates and the value of in-place leases.

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

15

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

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

The
value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from one to 22 years. In no event does the
amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value is
charged to expense.

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

Intangible
assets and acquired lease obligations consist of the following:

March 31,
2009

December 31,
2008Intangible assets:In-place leases, net of accumulated amortization of $33,607 and $22,284

$
405,922

$
428,977Above-market leases, net of accumulated amortization of $11,721 and $8,864


97,702


110,489Amounts related to assets held for sale, net of accumulated amortization of $477 and $388


(3,972
)

(3,254
)Total intangible assets

$
499,652

$
536,212Intangible liabilities:Below-market leases, net of accumulated amortization of $74,844 and $53,597

$
847,450

$
847,528Amounts related to assets held for sale, net of accumulated amortization of $205 and $228


(1,681
)

(1,177
)$
845,769

$
846,351


16

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

Deferred Costs

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

Deferred
costs also consist of fees and direct costs incurred to originate new investments and are amortized using the effective yield method over the related term of the investment and
also consist of fees and direct costs incurred to initiate or renew operating leases and are amortized on a straight-line basis over the related lease term.

Other Assets

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

Valuation of Financial Instruments

The Company measures derivatives at fair value. Investments in loans and other lending investments held for sale are held at the lower
of cost or fair value less cost to sell. Pledged government securities and CMBS are classified as held to maturity and therefore recorded at the fair value at the date of designation. FASB Statement
No. 157, or SFAS No. 157, "Fair Value Measurements," which among other things, requires additional disclosures about financial instruments carried at fair value. SFAS No. 157
establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. Considerable judgment is necessary to
interpret market data and develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.
Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and
will require a lesser degree of judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability
and will require a higher degree of judgment to be utilized in measuring fair value. Pricing observability is generally affected by such items as the type of financial instrument, whether the
financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions. The use of different market assumptions and/or
estimation methodologies may have a material effect on estimated fair value amounts.

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

SFAS
No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date, or an exit price. The level of pricing observability generally correlates to the degree of judgment utilized in measuring the fair value of financial instruments. The less judgment
utilized in measuring fair value financial instruments such as with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets
generally have more pricing observability. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation models that require more
judgment. Impacted by a number of factors, pricing observability is generally affected by such items as including the type of financial instrument, whether the financial instrument is new to the
market and not yet established, the characteristics specific to the transaction and overall market conditions.

The
three broad levels defined by the SFAS No. 157 hierarchy are:



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

Revenue Recognition



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

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

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

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

The
Company recognizes sales of real estate properties only upon closing, in accordance with SFAS No. 66, "Accounting for Sales of Real Estate." Payments received from purchasers
prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sale price is reasonably assured and the
Company is not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate
under SFAS No. 66.



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

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

The
Company designates loans as non-performing at such time as: (1) the loan becomes 90 days delinquent or (2) the loan has a maturity default. All
non-performing loans are placed on non-accrual status and income is recognized only upon actual cash receipt. At March 31, 2009, the Company had five first mortgage
loans with an aggregate carrying value of $160,142, one second lien loan with a carrying value of $0 and one third lien loan with a carrying value of $0, which were classified as
non-performing loans. At December 31, 2008, the Company had three first mortgage loans with an aggregate carrying value of $164,809, one second lien loan with a carrying value of $0
and one third lien loan with a carrying value of $0, which were classified as non-performing loans.

The
Company classifies loans as sub-performing if they are not performing in material accordance with their terms, but they do not qualify as non-performing
loans. The specific facts and circumstances of these loans may cause them to develop into non-performing loans should certain events occur in the

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

normal
passage of time, which we consider to be 90 days from the measurement date. At March 31, 2009, five first mortgage loans with an aggregate carrying value of $116,911 and one
mezzanine loan with a carrying value of $35,013 were classified as sub-performing. At December, 2008, five first mortgage loans with a total carrying value of $216,597 were classified as
sub-performing.

In
some instances, the Company may sell all or a portion of its investments to a third party. To the extent the fair value received for an investment exceeds the amortized cost of that
investment and the SFAS No.140 criteria are met, under which control of the asset that is sold is surrendered making it a "true sale," a gain on the sale will be recorded through earnings as other
income. To the extent an investment that is sold has a discount or fees, which were deferred at the time the investment was made and were being recognized over the term of the investment, the
unamortized portion of the discount or fees are recognized at the time of sale and recorded as a gain on the sale of the investment through other income. For the three months ended March 31,
2009 and 2008, the Company recognized $0 and $10, respectively, in net gains (losses) from the sale of debt investments or commitments.

Rent Expense

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

Reserve for Possible Loan Losses

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

If,
upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created
with a corresponding charge to the provision for possible loan losses. The allowance for each loan is maintained at a level

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

the
Company believes is adequate to absorb possible losses. Impairment losses are recognized as a direct write-down of the loan investment with a corresponding charge-off to
the allowance. As of March 31, 2009, the Company incurred charge-offs totaling $9,771 relating to realized losses on two loans. The Company maintained a reserve for possible loan
losses of $131,992 against 18 separate investments with a carrying value of $602,300 as of March 31, 2009 and a reserve for possible loan losses of $88,992 against 13 separate investments with
a carrying value of $424,177 as of December 31, 2008.

Stock Based Compensation Plans

The Company has a stock-based compensation plan, described more fully in Note 14. The Company accounts for this plan using the
fair value recognition provisions of FASB Statement No. 123(R), "Share-Based Payment, a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation."

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

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

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

21

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

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

2009

2008Dividend yield


14.0
%

9.0
%Expected life of option


5.0 years


6.0 yearsRisk-free interest rate


1.72
%

2.97
%Expected stock price volatility


90.0
%

67.0
%


Incentive Distribution (Class B Limited Partner Interest)

Prior to the internalization the Class B limited partner interests were entitled to receive an incentive return equal to 25% of
the amount by which funds from operations, or FFO, plus certain accounting gains (as defined in the partnership agreement of the Operating Partnership) exceed the product of the Company's weighted
average stockholders equity (as defined in the partnership agreement of the Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). The Company recorded any
distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payment of such amounts has become probable and reasonably
estimable in accordance with the partnership agreement. These cash distributions reduced the amount of cash available for distribution to the common unit holders in the Operating Partnership and to
the Company's common stockholders. In October 2008, the Company entered into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise
been earned for the period July 1, 2008 through December 31, 2008 and provide that the starting January 1, 2009, the incentive distribution can be paid, at our option, in cash or
shares of common stock. In December 2008, the Company entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and
SL Green transferred to the Company, 1.9 million shares of the Company's common stock, in full satisfaction of all potential obligations that the holders of the Class B limited
partner interests may have had to the Operating Partnership, and the Operating Partnership may have to the holders, each in accordance with the amended operating partnership agreement of the Operating
Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year. No incentive distribution was earned for the three months ended
March 31, 2009. The Company incurred approximately $2,496 with respect to such Class B limited partner interests for the three months ended March 31, 2008. In April 2009, the
Company completed the internalization of the management through the direct acquisition of the Manager. Accordingly, beginning in May 2009, management and incentive fees payable by the Company to the
Manager ceased and the Company owns all of the Class B partner interests (which have been cancelled) and all of the interests in the Manager.

Derivative Instruments

In the normal course of business, the Company uses a variety of commonly used derivative instruments that are considered conventional,
or "plain vanilla" derivatives, including interest rate

22

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

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

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

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

FASB
Statement No. 133, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FASB No. 149, requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. SFAS No. 133 may
increase or decrease reported net income and stockholders' equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting
the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

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

Income Taxes

The Company elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with its
taxable year ended December 31, 2004. To qualify as a REIT, the

23

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

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

The
Company's taxable REIT subsidiaries individually referred to as a TRS, are subject to U.S. federal, state and local taxes.

For
the three months ended March 31, 2009 and 2008, the Company recorded $2,267 and $11 of income tax expense, respectively. Included in tax expense for the three months ended
March 31, 2009 is $2,100 of state income taxes on the gain of extinguishment of debt of $107,299. Under federal tax law, the Company is allowed to defer this gain until 2014, but not all states
follow this federal rule.

Earnings Per Share

The Company presents both basic and diluted earnings per share, or EPS. Basic EPS excludes dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.

Use of Estimates

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

Concentrations of Credit Risk

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

24

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

Six
investments accounted for more than 23.6% of the total carrying value of our debt investments as of March 31, 2009 compared to five investments which accounted for more than
20% of the total carrying value of our debt investments as of December 31, 2008. Six investments accounted for approximately 20.5% of the revenue earned on the Company's loan and other lending
investments for the three months ended March 31, 2009, compared to four investments which accounted for
approximately 20% of the revenue earned on the Company's loan and other lending investments for the three months ended March 31, 2008. The largest sponsor accounted for approximately 5.1% of
the revenue earned on the Company's loan and other lending investments for the three months ended March 31, 2009, compared to approximately 4.2% of the revenue earned on the Company's loan and
other lending investments for the three months ended March 31, 2008.

Additionally,
two tenants, Bank of America, and Wachovia Bank, (now owned by Wells Fargo), accounted for approximately 40.9% and 15.3% of Gramercy Realty's rental revenue for the three
months ended March 31, 2009, respectively.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141 (revised), "Business Combinations," or SFAS No. 141(R), which
attempts to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its
effects. This Statement replaces SFAS No. 141, "Business Combinations." SFAS No. 141(R) retains the fundamental requirements in Statement No. 141 that the acquisition method of
accounting (which Statement No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also
retains the guidance in SFAS No. 141 for identifying and recognizing intangible assets separately from goodwill. The most significant changes in SFAS No. 141(R) are:
(1) acquisition and restructuring costs would be now expensed; (2) stock consideration will be measured based on the quoted market price as of the acquisition date instead of the date
the deal is announced; (3) contingent consideration arising from contractual and non contractual contingencies that meet the more-likely-than-not recognition
threshold will be measured and recognized as an asset or liability at fair value at the acquisition date using a probability-weighted discounted cash flows model, with subsequent changes in fair value
reflected in earnings while non contractual contingencies that do not meet the more-likely-than-not criteria will continue to be recognized when they are probable
and reasonably estimable; and (4) acquirer records 100% step-up to fair value for all assets and liabilities, including the minority interest portion and goodwill which is recorded
as if a 100% interest was acquired. The Company adopted SFAS No. 141(R) on January 1, 2009. The Company recorded an expense of $2,826 in connection with costs incurred with the
internalization of the management and acquisition of the Manager as of March 31, 2009.

In
December 2007, the FASB issued Statement No. 160, "Non-Controlling Interest on Consolidated Financial Statements"an amendment of Accounting Research
Bulletin, or ARB No. 51. This Statement amends ARB No. 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be

25

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

reported
as equity in the consolidated financial statements. Additionally, this Statement requires that consolidated net income include the amount attributable to both the parent and the
non-controlling interest. The Company adopted SFAS No. 160 on January 1, 2009. As required, SFAS No. 160 was applied retrospectively for all periods presented.

In
February 2008, the FASB issued Staff Position No. 140-3, or FSP No. 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions." FSP No. 140-3 provides guidance on the accounting for a purchase of a financial asset from a counterparty and contemporaneous financing of the acquisition through
repurchase agreements with the same counterparty. Under this guidance, the purchase and related financing are linked, unless all of the following conditions are met at the inception of the
transaction: (1) the purchase and corresponding financing are not contractually contingent; (2) the repurchase financing provides recourse; (3) the financial asset and repurchase
financing are readily obtainable in the marketplace and are executed at market rates; and (4) the maturity of financial asset and repurchase are not coterminous. A linked transaction would
require a determination under FAS No. 140 to conclude if the transaction meets the requirements for sale accounting. If the linked transaction does not meet sale accounting requirements, the
net investment in the linked transaction is to be recorded as a derivative with the corresponding change in fair value of the derivative being recorded through earnings. The value of the derivative
would reflect changes in the value of the underlying debt investments and changes in the value of the underlying credit provided by the counterparty. The Company currently presents these transactions
gross, with the acquisition of the financial assets in total assets and the related repurchase agreements as financing in total liabilities on the consolidated balance sheet and the interest income
earned on the debt investments and interest expense incurred on the repurchase obligations are reported gross on the consolidated income statements. As SFAS 140-3 is to be applied
prospectively and as the Company has not acquired and simultaneously financed any transactions with the same counterparty subsequent to January 1, 2009, SFAS 140-3 did not
have a material effect on the Company's consolidated financial statements.

In
February 2008, the FASB issued FASB Staff Position 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" ("FSP 157-1") and FSP 157-2, "Effective Date of FASB
Statement No. 157" ("FSP 157-2"). FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2
provides a one-year deferral of the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis. These non-financial items include assets and liabilities such as reporting units measured at fair
value in a goodwill impairment test and non-financial assets acquired and liabilities assumed in a business combination. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and was adopted by the Company, as it applies to its financial instruments, effective January 1, 2008. The adoption of SFAS
No. 157 as it relates to financial instruments did not have a significant impact on the Company's consolidated financial statements. The Company adopted the provisions of SFAS No. 157 as
it relates to its non-financial assets and non-financial liabilities on January 1, 2009. The adoption of SFAS No. 157 as it relates to non-financial

26

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

assets
and non-financial liabilities did not have a significant effect on the Company's consolidated financial statements.

In
March 2008, the FASB issued Statement No. 161, or SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities," an amendment of FASB Statement
No. 133. SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better
understand how and why an entity uses derivative instruments and their effects on an entity's financial position, financial performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008 with early adoption encouraged. The Company adopted SFAS No. 161 on January 1, 2009. The
adoption of SFAS no. 161 did not have a material effect on the Company's consolidated financial statements.

In
April 2008, the FASB directed the FASB Staff to issue FSP No. FAS 142-3, "Determination of the Useful Life of Intangible Assets." FSP FAS
No. 142-3 amends the factors that should be considered in developing a renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible
asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets," or SFAS No. 142. FSP FAS No. 142-3 is intended to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other U.S.
generally accepted accounting principles. FSP FAS No. 142-3 is effective for fiscal years beginning after December 15, 2008. The Company adopted FSP FAS
No. 142-3 on January 1, 2009. The adoption of FSP FAS no. 142-3 did not have a material effect on the Company's consolidated financial statements.

In
April 2008, the FASB voted to eliminate QSPEs from the guidance in SFAS No.140 and to remove the scope exception for QSPEs from FIN 46R. This will require that VIEs previously
accounted for as QSPEs will need to be analyzed for consolidation according to FIN 46R. While the revised standards have not been finalized and deferred for potential application until 2010,
this change may affect the Company's consolidated financial statements.

In
October 2008, the FASB issued Staff Position 157-3, "Determining the Fair Value of a Financial Asset in a Market That Is Not Active", or FSP 157-3,
which clarifies the application of SFAS 157 in an inactive market and provides an illustrative example to demonstrate how the fair value of a financial asset is determined when the market for
that financial asset is not active. The adoption of FSP FAS No. 157-3 did not have a material effect on the consolidated financial statements.

In
December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8 ("FSP FAS 140-4 and
FIN 46(R)-8"), "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities" which increases disclosure requirements
for public companies and is effective for reporting periods that end after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8 amends SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" to require public entities to provide additional disclosures about a transferor's continuing involvement
with transferred financial assets. It also amends FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" to require public enterprises, including
sponsors that have a variable interest in a variable interest entity,

27

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

to
provide additional disclosures about their involvement with variable interest entities. The Company has adopted FSP FAS 140-4 and FIN 46(R)-8.

In
January 2009, the FASB issued FSP EITF 99-20-1. This FSP amends the impairment guidance in EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to align it with the impairment
guidance within SFAS 115 by removing from EITF 99-20 the requirement to place exclusive reliance on market participants' assumptions about future cash flows when evaluating
an asset for other-than-temporary impairment. The standard now requires that assumptions about future cash flows consider reasonable management judgment about the probability
that the holder of an asset will be unable to collect all amounts due. FSP EITF 99-20-1 is effective for interim and annual reporting periods ending after
December 15, 2008. The Company has adopted EITF 99-20-1 and it did not have a material impact on the Company's consolidated financial statements.

In
April 2009, the FASB issued FASB Staff Position on FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" (FSP
FAS 107-1 and APB 28-1). This FSP requires that the fair value disclosures required by SFAS 107 "Disclosures about Fair Value of Financial Instruments" be
included for interim reporting periods. The Company will adopt this new accounting standard effective April 1, 2009. Adoption of FSP FAS 107-1 and APB 28-1
is not expected to have a material impact on the Company's consolidated financial statements.

In
April 2009, the FASB issued FASB Staff Position on FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments" (FSP FAS 115-2 and FAS 124-2). This FSP amends the impairment guidance relating to certain debt
securities and will require a company to assess the likelihood of selling the security prior to recovering its cost basis. Additionally, when a company meets the criteria for impairment, the
impairment charges related to credit losses would be recognized in earnings, while non-credit losses would be reflected in other comprehensive income. The Company will adopt this new
accounting standard effective April 1, 2009. Adoption of FSP FAS 115-2 and FAS 124-2 is not expected to have a material impact on the Company's
consolidated financial statements.

In
April 2009, the FASB issued FASB Staff Position on FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP FAS 157-4). FSP FAS 157-4 provides guidance on determining when the trading volume
and activity for an asset or liability has significantly decreased, which may indicate an inactive market, and on measuring the fair value of an asset or liability in inactive markets. The Company
will adopt this new accounting standard effective April 1, 2009. Adoption of FSP FAS 157-4 is not expected to have a material impact on the Company's consolidated financial
statements.

In
April 2009, the FASB issued FASB Staff Position on FAS 141R-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies" (FSP FAS 141R-1). FSP FAS 141R-1 requires that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability
assumed in a business combination that arises from a contingency if the

28

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

2. Significant Accounting Policies (Continued)

acquisition-date
fair value of the asset or liability can be determined during the measurement period. The Company adopted this new accounting standard on January 1, 2009. Adoption
of FSP FAS 140R-1 did not have a material impact on the consolidated financial statements.

3. Loans and Other Lending Investments

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

Carrying Value(1)

Allocation by
Investment
Type

Fixed Rate:
Average Yield(2)

Floating Rate:
Average Spread over
LIBOR(3)2009

2008

2009

2008

2009

2008

2009

2008Whole loans, floating rate

$
1,154,882

$
1,222,991


55.9
%

55.3
%







422 bps


418 bpsWhole loans, fixed rate


178,904


189,946


8.5
%

8.6
%

7.14
%

7.17
%




Subordinate interests in whole loans, floating rate


80,299


80,608


3.9
%

3.6
%







242 bps


564 bpsSubordinate interests in whole loans, fixed rate


63,464


63,179


3.1
%

2.9
%

9.16
%

9.22
%




Mezzanine loans, floating rate


340,413


396,190


16.4
%

17.9
%







646 bps


654 bpsMezzanine loans, fixed rate


237,082


248,558


11.4
%

11.2
%

10.11
%

10.21
%




Preferred equity, fixed rate


12,012


12,001


0.6
%

0.5
%

10.22
%

10.22
%




Subtotal/ Weighted average


2,067,056


2,213,473


100.0
%

100.0
%

8.91
%

8.96
%

461 bps


480 bpsCMBS, floating rate


71,948


70,893


8.1
%

8.1
%







987 bps


945 bpsCMBS, fixed rate


815,637


799,080


91.9
%

91.9
%

6.25
%

6.26
%




Subtotal/ Weighted average


887,585


869,973


100.0
%

100.0
%

6.25
%

6.26
%

987 bps


945 bpsTotal

$
2,954,641

$
3,083,446


100.0
%

100.0
%

7.25
%

7.32
%

484 bps


498 bps


---

29

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

3. Loans and Other Lending Investments (Continued)

As of March 31, 2009, the Company's loans and other lending investments, excluding CMBS investments, had the following maturity characteristics:

Year of Maturity

Number of
Investments
Maturing

Current
Carrying Value
(In thousands)

% of
Total2009 (April 1  December 31)(1)


36

$
1,012,165


49.0
%2010


15


497,806


24.1
%2011


7


185,235


9.0
%2012


2


63,190


3.1
%2013








Thereafter


11


308,660


14.8
%Total


71

$
2,067,056


100.0
%Weighted average maturity(2)





1.8 years


---

For
the three months ended March 31, 2009 and 2008, the Company's investment income from loan and other lending investments and CMBS investments, including loans held for sale,
was generated by the following investment types:

For the
three months ended
March 31, 2009

For the
three months ended
March 31, 2008Investment Type

Investment
Income

% of
Total

Investment
Income

% of
TotalWhole loans

$
23,026


43.5
%
$
41,721


55.9
%Subordinate interests in whole loans


941


1.8
%

2,712


3.7
%Mezzanine loans


13,858


26.2
%

16,562


22.2
%Preferred equity


332


0.6
%

313


0.4
%CMBS


14,777


27.9
%

13,287


17.8
%Total

$
52,934


100.0
%
$
74,595


100.0
%


30

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

3. Loans and Other Lending Investments (Continued)

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

March 31, 2009

December 31, 2008Region

Carrying
Value

% of
Total

Carrying
Value

% of
TotalNortheast

$
960,330


46.5
%
$
1,023,718


46.2
%West


584,807


28.3
%

626,180


28.3
%South


210,581


10.2
%

225,674


10.2
%Mid-Atlantic


122,144


5.9
%

121,515


5.5
%Southwest


103,906


5.0
%

107,735


4.9
%Midwest


22,296


1.1
%

22,358


1.0
%Various


62,992


3.0
%

86,293


3.9
%Total

$
2,067,056


100.0
%
$
2,213,473


100.0
%


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

March 31, 2009

December 31, 2008Property Type

Carrying
Value

% of
Total

Carrying
Value

% of
TotalOffice

$
856,362


41.4
%
$
874,682


39.5
%Hotel(1)


311,487


15.1
%

345,615


15.6
%Multifamily


251,202


12.1
%

272,950


12.4
%Land-commercial


202,203


9.8
%

209,572


9.5
%Retail(2)


180,419


8.7
%

218,763


9.9
%Condominium


94,231


4.6
%

91,418


4.1
%Mixed-use


59,103


2.9
%

78,107


3.5
%Land-residential(3)


54,958


2.7
%

65,973


3.0
%Industrial


47,879


2.3
%

47,229


2.1
%Other


9,212


0.4
%

9,164


0.4
%Total

$
2,067,056


100.0
%
$
2,213,473


100.0
%


---

31

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

3. Loans and Other Lending Investments (Continued)



The
Company recorded provisions for loan losses of $52,771 and $8,000 for the three months ended March 31, 2009 and March 31, 2008, respectively. These provisions represent
increases in loan loss reserves based on management's estimates considering delinquencies, loss experience and collateral quality by individual asset or category of asset.

For
the three months ended March 31, 2009, the Company incurred charge-offs of $9,771 related to realized losses on two loan investments. During the year ended
December 31, 2008, the Company incurred charge-offs totaling $17,519 related to two defaulted loans the Company foreclosed upon which had a carrying value totaling $31,760 and three
additional loans, two of which were sold at a loss and the other was a negotiated payoff below par.

32

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

3. Loans and Other Lending Investments (Continued)

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

Reserve for possible loan losses, December 31, 2007

$
8,658Additional provision for loan losses


97,853Charge-offs


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


88,992Additional provision for loan losses


52,771Charge-offs


(9,771
)Reserve for possible loan losses, March 31, 2009

$
131,992


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

Description

Number of
Securities

Face Value

Book Value

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Fair
ValueHeld to maturity:Floating rate CMBS


8

$
73,664

$
71,947

$


$
(41,710
)
$
30,237Fixed rate CMBS


67


858,110


815,638





(548,504
)

267,134Total


75

$
931,774

$
887,585

$


$
(590,214
)
$
297,371


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

Description

Number of
Securities

Face Value

Book Value

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Fair
ValueHeld to maturity:Floating rate CMBS


8

$
73,664

$
70,894

$


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


66


835,578


799,079





(536,392
)

262,687Total


74

$
909,242

$
869,973

$


$
(569,988
)
$
299,985


33

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

3. Loans and Other Lending Investments (Continued)

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

March 31, 2009

December 31, 2008Book Value

Percentage

Book Value

PercentageAAA

$
816,600


92.0
%
$
799,440


91.9
%AA


26,299


3.0
%

26,689


3.4
%AA-


3,501


0.4
%




BBB-








13,229


1.5
%BB+








7,442


0.9
%BB


6,238


0.7
%

4,901


0.6
%BB-


5,013


0.6
%




B+


8,100


0.9
%

7,659


0.5
%B


4,393


0.5
%

4,309


0.5
%B-


7,301


0.8
%




CCC+


3,600


0.4
%




CCC


5,444


0.6
%

5,241


0.6
%Not rated


1,095


0.1
%

1,063


0.1
%Total

$
887,585


100.0
%
$
869,973


100.0
%


The
Company evaluates CMBS investments to determine if there has been an other-than-temporary impairment. As of March 31, 2009 and December 31,
2008, all of the Company's CMBS investments have an unrealized loss (the carrying value is in excess of the market value) which has existed longer than twelve months. The Company's unrealized losses
are primarily the result of market factors other than credit impairment which is generally indicated by significant change in estimated cash flows from the cash flows previously estimated based on
actual prepayments and credit loss experience. The carrying values of all CMBS investments is in excess of their market values. Unrealized losses can be caused by changes in interest rates, changes in
credit spreads, realized losses in the underlying collateral, or general market conditions. The Company evaluates CMBS investments on a quarterly basis and has determined that there have been no
changes in expected cash flows. The Company's assessment of cash flows, which is supplemented by third-party research reports and dialogue with market participants, combined with the Company's ability
and intent to hold its CMBS investments to maturity, at which point the Company expects to recover book value,
is the basis for its conclusion that these investments are not other-than-temporarily impaired, despite the difference between the carrying value the and fair value. The
Company attributes the current difference between carrying value and market value to current market conditions. The Company believes the carrying value of the securities are fully recoverable over
their expected holding period. The Company possesses both the intent and the ability to hold the securities until it has recovered the amortized costs. Accordingly, the Company does not believe any of
the securities are other-than-temporarily impaired.

In
connection with a preferred equity investment, which was repaid in October 2006, the Company has guaranteed a portion of the outstanding principal balance of the first mortgage loan
that is a

34

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

3. Loans and Other Lending Investments (Continued)

financial
obligation of the entity in which the Company has invested in the event of a borrower default under such loan. The loan matures in 2032. This guarantee is considered to be an
off-balance-sheet arrangement and will survive until the repayment of the first mortgage loan. As compensation, the Company received a credit enhancement fee of $125 from the borrower,
which is recognized as the fair value of the guarantee and has been recorded on its consolidated Balance Sheet as a liability. The liability is amortized over the life of the guarantee using the
straight-line method and corresponding fee income will be recorded. The Company's maximum exposure under this guarantee is approximately $1,401 and $1,406 as of March 31, 2009 and
December 31, 2008, respectively. Under the terms of the guarantee, the investment sponsor is required to reimburse the Company for the entire amount paid under the guarantee until the guarantee
expires.

4. Property Acquisitions



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

Cash consideration ($5.50 per share)

$
710,910Common stock consideration(1)


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


31,271Purchase of minority interest in American Financial


14,497Merger costs


150,396Total consideration


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


707,650Assumption of American Financial's liabilities


1,316,004Total purchase price

$
3,309,400






35

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

4. Property Acquisitions (Continued)



Pro Forma

The following table summarizes, on an unaudited pro forma basis, the Company's combined results of operations for the three months
ended March 31, 2008 as though the acquisition of American Financial was completed on January 1, 2008. The supplemental pro forma operating data is not necessarily indicative of what the
actual results of operations would have been assuming the transaction had been completed as set forth above, nor do they purport to represent the Company's results of operations for future periods. In
addition, the following supplement pro forma operating data does not present the sale of assets through March 31, 2009. The Company accounted for the acquisition of assets utilizing the
purchase method of accounting.

2008Pro forma revenues

$
190,473Pro forma net income available to common stockholders

$
29,454Pro forma earnings per common share-basic

$
0.58Pro forma earnings per common share-diluted

$
0.57Pro forma common shares-basic


51,134Pro forma common share-diluted


51,296


5. Dispositions and Assets Held for Sale

During the three months ended March 31, 2009, the Company sold or disposed of 25 properties, for net sales proceeds of $39,707. No properties were sold during the three months
ended March 31, 2008. The sales transactions resulted in gains totaling $573 for the three months ended March 31, 2009.

In
January 2009, the Company sold to a third party its 49.75% TIC interest in 55 Corporate Drive, an office complex located in Bridgewater, New Jersey, at a gain of $215 for the quarter
ended March 31, 2009. As part of the transaction, the purchaser assumed the outstanding mortgage debt on the property.

36

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

5. Dispositions and Assets Held for Sale (Continued)

In
accordance with the provisions of SFAS No. 144, the Company classified 88 and 104 properties as held for sale as of March 31, 2009 and December 31, 2008,
respectively. The following table summarizes information for these properties:

March 31,
2009

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

$
18,854

$
34,560Buildings and improvements


86,129


140,685Total real estate investments, at cost


104,983


175,245Less accumulated depreciation


(1,597
)

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


103,386


170,616Accrued interest and receivables


1,796


10,656Loans and other lending investments, net


152,451


Acquired lease assets, net of accumulated amortization


3,972


Deferred costs


318


59Investment in joint venture


(3,178
)

(2,858
)Other assets


2,809


11,449Total assets held for sale:

$
261,554

$
189,922Liabilities related to assets held for sale:Mortgages payable

$
53,115

$
104,262Accrued expenses


3,292


4,628Deferred revenue


2,284


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


1,681


Other liabilities





248Total liabilities related to assets held for sale


60,372


110,543Net assets held for sale

$
201,182

$
79,379


37

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

5. Dispositions and Assets Held for Sale (Continued)

The
following operating results of the assets held for sale as of March 31, 2009 and 2008, and the assets sold, are included in discontinued operations for all periods presented:

Three months
ended
March 31,2009

2008Operating results:Revenues

$
6,662

$
2,005Operating expenses


(11,522
)

Interest expense


(777
)

(1,375
)Depreciation and amortization


(636
)

(713
)Equity in net income from unconsolidated joint venture


(364
)

(214
)Net loss from operations


(6,637
)

(297
)Yield maintenance fees


(91
)

Net gains from disposals


358


Net loss from discontinued operations

$
(6,370
)
$
(297
)


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

6. Investments in Unconsolidated Joint Ventures



The Company owns a 25% interest in an equity owner and a fee interest in 200 Franklin Square Drive, a 200,000 square foot building
located in Somerset, New Jersey which is 100% net leased to Philips Holdings, USA Inc, a wholly-owned subsidiary of Royal Phillips Electronics through December 2021. As of March 31, 2009 and
December 31, 2008, the investment had a carrying value of $1,193 and $2,142, respectively. The Company recorded its pro rata share of net income of the joint venture of $30 and $31 for the
three months ended March 31, 2009 and 2008, respectively.



In November 2005, the Company closed on the purchase of a 50% interest in an office building in Pasadena, CA. The Company also acquired
an interest in certain related assets as part of the transaction. The 345,000 square foot office property, which is net leased to Bank of America through September 2015, assuming the exercise of
options, and related collateral were acquired for $52,000 plus closing costs, using a non-recourse, $50,000, ten-year fixed-rate first mortgage loan. For the three
months ended March 31, 2009 and 2008, the Company recorded its pro rata share of net losses of the joint venture of $364 and $357, respectively. The Company sold its 50% interest in April 2009
for a gain.

38

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

6. Investments in Unconsolidated Joint Ventures (Continued)



In April 2007, the Company purchased for $103,200 a 45% Tenant-In-Common, or TIC, interest to acquire the fee
interest in a parcel of land located at 2 Herald Square, located along 34th Street in New York, New York. The acquisition was financed with a $86,063 ten-year fixed rate mortgage
loan. The property is subject to a long-term ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary
of SL Green. The TIC interests are pari-passu. As of March 31, 2009 and December 31, 2008, the investment had a carrying value of $27,381 and $26,118, respectively.
For the three months ended March 31, 2009 and 2008, the Company recorded its pro rata share of net income of $1,263 and $1,504, respectively.



In July 2007, the Company purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold
interest in the fee position in a parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 ten-year
fixed-rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned
subsidiary of SL Green. The TIC interests are pari-passu. As of March 31, 2009 and December 31, 2008, the investment had a carrying value of $39,226 and $37,070
respectively. The Company recorded its pro rata share of net income of $1,519 and $1,931 for the three months ended March 31, 2009 and 2008, respectively.



The Company, through its acquisition of American Financial on April 1, 2008, obtained an interest in a joint venture with UBS.
The joint venture, as of March 31, 2009, owns and manages 76 bank branches totaling approximately 380,000 square feet. These branches are fully occupied, on a triple-net basis, by
Citizens Bank, N.A. and Charter One Bank, N.A., two
bank subsidiaries of Citizens Financial Group, Inc. The investment had a carrying value of $9,311 and $10,495 at March 31, 2009 and December 31, 2008, respectively. The Company
recorded its pro rata share of net loss of $641 for the three months ended March 31, 2009 and 2008, respectively.



In April 2008, the Company acquired via a deed-in-lieu of foreclosure, a 40% interest in the Whiteface Lodge, a hotel and condominium
located in Lake Placid, New York. As of March 31, 2009 and December 31, 2008, the investment had a carrying value of $22,646 and $22,161, respectively. The Company recorded its pro rata
share of net income of $41 for the three months ended March 31, 2009.

7. Collateralized Debt Obligations

During 2005, the Company issued approximately $1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO 2005-1 Ltd., or the 2005 Issuer, and
Gramercy Real Estate CDO 2005-1 LLC, or the 2005 Co-Issuer. The CDO consists of $810,500 of investment grade notes,

39

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

7. Collateralized Debt Obligations (Continued)

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

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

In
August 2007, the Company issued $1,100,000 of CDO bonds through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 Issuer,
together with the 2005 Issuer and the 2006 Issuer, the Issuers, and Gramercy Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer, together with the 2005
Co-Issuer and the 2006 Co-Issuer, the Co-Issuers. The CDO consists of $1,045,550 of investment grade notes, $22,000 of non-investment grade notes, which
were co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32,450 of preferred shares, which were issued by the 2007 Issuer. The investment grade notes were issued with
floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.46%. The Company incurred approximately $16,816 of costs related to Gramercy Real Estate CDO 2007-1,
which are amortized on a level-yield basis over the average life of the CDO.

The
Company retained all non-investment grade securities, the preferred shares and the common shares in the Issuers and Co-Issuers of each CDO. The Issuer in each
CDO holds assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity investments and CMBS, which serve as collateral for the CDO. Each CDO may
be replenished, pursuant to certain rating agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid during the first five years of the
CDO. Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as loans are repaid. The financial statements of the Issuer of each CDO
are consolidated in the Company's financial statements. The investment grade notes are treated as a secured financing, and are non-recourse to the Company. Proceeds from the sale of the
investment grade notes issued in each CDO were used to repay substantially all outstanding debt under the Company's repurchase agreements and to fund additional investments. Loans and other
investments owned by the CDO Issuers and Co. Issuers, which loans and other investments serve as collateral for the CDO bonds, and the income generated from these investments is used to fund
interest obligations of the CDO bonds and the remaining income, if any, is retained by the Company. The CDO bonds contain interest coverage and asset over collateralization covenants that must be met
in order for the Company to receive such payments. If the Company fails these covenants in any of its CDOs, some or all cash flows from the applicable CDO would be diverted

40

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

7. Collateralized Debt Obligations (Continued)

to
repay principal and interest on the outstanding CDO bonds and the Company may not receive some or all residual payments until that CDO regained compliance with such tests. The Company was in
compliance with all such covenants as of March 31, 2009.

During
the three months ended March 31, 2008, the Company repurchased, at a discount, $13,500 of investment grade notes previously issued by two of our three CDOs. The Company
recorded a net gain on the early extinguishment of debt of $3,690 for the three months ended March 31, 2008 in connection with the repurchase of notes of such Issuers.

8. Debt Obligations

Term Loan, Credit Facility and Repurchase Facility

The facility with Wachovia Capital Markets, LLC or one or more of its affiliates, or Wachovia, was initially established as a
$250,000 facility in 2004, and was subsequently increased to $500,000 effective April 2005. In July 2008, the original facility was terminated and a new facility was executed with Wachovia to provide
for a total credit availability of $215,680, comprised of a term loan equal to $115,680 and a revolving credit facility equal to $100,000 with a credit spread of 242.5 basis points (which would have
been increased to 267.5 basis points upon an extension of the maturity of the credit facility). The term of the credit facility was two years and the borrowers were able to extend the term for an
additional twelve-month period if certain conditions were met. Advance rates for assets acquired pursuant to the credit facility varied from 50% to 80% of purchase price, depending on the type and
structure of the asset. In April 2009, the Company entered into an amendment with Wachovia, pursuant to which the maturity date of the credit facility was extended to March 31, 2011 and the
interest rate remained unchanged. The amendment also eliminated all financial covenants, eliminated Wachovia's right to impose future margin calls, reduced the recourse guarantee to be no more than
$10,000, and eliminated cross default provisions with respect to the Company's other indebtedness. The Company made a $13,000 deposit and provided other credit support to backstop letters of credit of
Wachovia issued in connection with the Company's mortgage debt obligations of certain of the Company's subsidiaries. The Company also agreed to attempt to divest of certain loan investments in the
future in order to further deleverage the credit facility and to forego additional borrowing under the facility. At March 31, 2009, the Company designated four of the loan investments which
secure the facility with a carrying value of $85,608 as held-for-sale and recorded an impairment charge of $21,460. The Company had accrued interest of $114 and borrowings of
$60,870 at a weighted average spread to LIBOR of 2.05% as of March 31, 2009, and no accrued interest and borrowings of $72,254 on the repurchase facility at a weighted average spread to LIBOR
of 2.68% as of December 31, 2008.

41

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

8. Debt Obligations (Continued)

Borrowings under the Wachovia facility at March 31, 2009 and December 31, 2008 were secured by the following investments:

Carrying ValueInvestment Type

2009

2008Mezzanine loans

$
134,589

$
202,823Total

$
134,589

$
202,823


Subsidiaries
of the Company also have entered into a repurchase facility with Goldman Sachs Mortgage Company, or Goldman. In October 2006, this facility was increased from $200,000 to
$400,000 and its maturity date extended until September 2009. In August 2008, the facility was amended to reduce the borrowing capacity to $200,000 and to provide for an extension of the maturity to
December 2010 for a fee, provided that no event of default has occurred. The facility bears interest at spreads of 2.00% to 2.30% over one-month LIBOR and, based on its expected investment
activities, provides for advance rates that vary from 65% to 75% based upon the collateral provided under a borrowing base calculation. The lender has a consent right to the inclusion of investments
in this facility, determines periodically the market value of the investments, and has the right to require additional collateral, a partial repayment of the facility (margin call), or a reduction in
unused availability under the facility, sufficient to rebalance the facility if the estimated market value of the included investments declines. In April 2009, the Company entered into an amendment to
the amended and restated master repurchase agreement and amended guaranty with Goldman, pursuant to which all financial covenants in the amended and restated repurchase agreement and the amended
guaranty were eliminated and certain other provisions of the amended and restated repurchase agreement and the amended guaranty were amended or deleted, including, among other things, the elimination
of the existing recourse liability and a relaxation of certain affirmative and negative covenants. The Company made a cash payment to Goldman in the amount of $4,000 to reduce the borrowings under the
repurchase agreement. The Company had accrued interest of $48 and borrowings of $18,731 at a weighted average spread to LIBOR of 2.50% as of March 31, 2009, and no accrued interest and
borrowings of $23,643 at a weighted average spread to LIBOR of 2.50% under this facility at December 31, 2008.

Borrowings
under the Goldman repurchase facility at March 31, 2009 and December 31, 2008 were secured by the following investments:

Carrying ValueInvestment Type

2009

2008Mezzanine loans

$
50,589

$
64,960Total

$
50,589

$
64,960


The
Goldman repurchase facility and the Wachovia credit facility require that borrowings under these facilities be repaid as principal payments on the loans and investments pledged to
these facilities

42

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

8. Debt Obligations (Continued)

are
received. Assets pledged as collateral under these facilities may include stabilized and transitional whole loans, subordinate interests in whole loans and mezzanine loans.

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

Unsecured Credit Facility

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

Mortgage Loans

Certain real estate assets are subject to mortgage liens. As of March 31, 2009, 720 of the Company's real estate assets were
encumbered with mortgages and mezzanine loans
with a cumulative outstanding balance of $2,378,623. The Company's mortgage notes payable typically require that specified loan-to-value and debt service coverage ratios be
maintained with respect to the financed properties before the Company can exercise certain rights under the loan agreements relating to such properties. The Company is in compliance with these ratios
as of March 31, 2009. If the specified criteria are not satisfied, in addition to other conditions that the Company may have to observe, the Company's ability to release properties from the
financing may be restricted and the lender may be able to "trap" portfolio cash flow until the required ratios are met on an ongoing basis.



On April 1, 2008, certain subsidiaries of the Company, collectively, the Goldman Loan Borrowers, entered into a mortgage loan
agreement, or the Goldman Mortgage Loan, with Goldman Sachs

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

8. Debt Obligations (Continued)

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

The
Goldman Mortgage Loan requires an environmental escrow reserve for the remediation of environmental conditions in the combined amount of $700. Since August 2008, $625 of this reserve
was released to the Goldman Loan Borrowers, leaving a balance of $75 reserved with the lender as of March 31, 2009. The lenders may upon the Company's request disburse funds from the reserve on
a monthly basis for the reimbursement of reasonable costs and expenses incurred to correct the environmental conditions.

The
Company had accrued interest of $290 and borrowings of $241,324 as of March 31, 2009.



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

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

The
Company had accrued interest of $429 as of March 31, 2009.

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

8. Debt Obligations (Continued)

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

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

Goldman Senior and Junior Mezzanine Loans

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

The
Goldman Mezzanine Loan required and the Senior Mezzanine loan requires an environmental escrow reserve for the remediation of environmental conditions in the combined amount of $850.
Since August 2008, $575 of this reserve was released to the Mezzanine Borrowers, leaving a balance of $275 reserved with the lender as of March 31, 2009. The lender may upon the Company's
request disburse funds from the reserve on a monthly basis for the reimbursement of reasonable costs and expenses incurred to correct the environmental conditions.

The
Company had accrued interest of $1,599 and borrowings of $573,464 as of March 31, 2009.

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

8. Debt Obligations (Continued)

Junior Subordinated Notes

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

In
January 2009, the Operating Partnership entered into an exchange agreement with the holders of the securities, pursuant to which the Operating Partnership and the holders agreed to
exchange all of the previously issued trust preferred securities for newly issued unsecured junior subordinated notes, or the Junior Notes, in the aggregate principal amount of $150,000. The Junior
Notes will mature on June 30, 2035, or the Maturity Date, and will bear (i) a fixed interest rate of 0.50% per annum for the period beginning on January 30, 2009 and ending on
January 29, 2012 and (ii) a fixed interest rate of 7.50% per annum for the period commencing on January 30, 2012 through and including the Maturity Date. The Company, at its
option, may redeem the Junior Notes in whole at any time, or in part from time to time, at a redemption price equal to 100% of the principal amount of the Junior Notes. The optional redemption of the
Junior Notes in part must be made in at least $25,000 increments. The Junior Notes also contain additional covenants restricting, among other things, the Company's ability to declare or pay any
dividends during the calendar year 2009 (except to maintain its REIT status), or make any payment or redeem any debt securities ranked pari passu or junior to the Junior Notes. In connection with the
exchange agreement, the final payment on the trust preferred securities for the period October 30, 2008 through January 29, 2009 was revised to be at a reduced interest rate of 0.50% per
annum.

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

8. Debt Obligations (Continued)

The
following is a summary of mortgage notes payable, mezzanine loan and acquisition loan facilities as of March 31, 2009:

Encumbered
Properties

Balance

Interest
Rates

Maturity DatesFixed-rate mortgages


477

$
1,323,835
(1)
4.5% to 8.3%

7/1/09 to 9/1/23Variable-rate mortgages


243


1,054,788

2.1% to 6.6%

3/9/10 to 4/1/13Total mortgage notes payable


720


2,378,623Above/below market interest





19,468Mortgage notes payable related to assets held for sale


(1
)

(53,115
)Balance, March 31, 2009


719

$
2,344,976


---

Combined
aggregate principal maturities of the Company's consolidated CDOs, Goldman repurchase facility and Wachovia credit facility, term loan, junior subordinated notes, mortgage loans
and mezzanine loans (including the Goldman Mortgage, Senior Mezzanine Loan and Junior Mezzanine loan) as of March 31, 2009 are as follows:

CDOs

Term Loan,
Credit
Facility and
Repurchase
Facility

Junior
Subordinated
Notes

Mortgage and
Mezzanine Loans

Total2009 (April 1  December 31)

$


$


$


$
69,791

$
69,7912010





18,731





852,281


871,0122011





60,870





25,121


85,9912012











80,275


80,2752013











682,067


682,067Thereafter


2,607,759





150,000


669,088


3,426,847Above/Below Market Interest











19,468


19,468Total

$
2,607,759

$
79,601

$
150,000

$
2,398,091

$
5,235,451


9. Lease Agreements

The Company's properties are leased and subleased to tenants under operating leases with expiration dates extending through the year 2031. These leases generally contain rent increases
and

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

9. Lease Agreements (Continued)

renewal
options. Future minimum rental payments under non-cancelable leases, excluding reimbursements for operating expenses, as of March 31, 2009 are as follows:

Operating
Lease2009 (April 1  December 31)

$
203,7002010


261,7152011


204,1172012


187,0982013


176,384Thereafter


1,323,224Total minimum lease payments

$
2,356,238


10. Operating Partnership Agreement/Manager

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

11. Related Party Transactions

On April 24, 2009, in connection with the internalization, the Company and the Operating Partnership entered into that certain securities transfer agreement with SL Green
Operating Partnership, L.P., GKK Manager Member Corp. and SL Green, pursuant to which (i) SL Green Operating Partnership, L.P. and GKK Manager Member Corp. agreed to
transfer to the Operating Partnership membership interests in the Manager and (ii) SL Green Operating Partnership, L.P. agreed to transfer to the Operating Partnership its
Class B limited partner interests in the Operating Partnership, in exchange for certain de minimis cash consideration. The securities transfer agreement contains standard representations,
warranties, covenants and indemnities. No distributions were due on the Class B limited partner interests for the period ended March 31, 2009 or otherwise in connection with the
internalization.

Concurrently
with the execution of the securities transfer agreement, the Company also entered into that certain special rights agreement with SL Green Operating
Partnership, L.P. and SL Green, pursuant to which SL Green and SL Green Operating Partnership, L.P. agreed to provide the Company certain management information systems
services from April 24, 2009 through the date that is 90 days thereafter and the Company agreed to pay SL Green Operating Partnership, L.P. a monthly cash fee of

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

11. Related Party Transactions (Continued)

$25
in connection therewith. The Company also agreed to use its best efforts to operate as a REIT during each taxable year and to cause the Company's tax counsel to provide legal opinions to
SL Green relating to the Company's REIT status. Other than with respect to the transitional services provisions of the special rights agreement as set forth therein, the special rights
agreement will terminate when SL Green Operating Partnership, L.P. ceases to own at least 7.5% of the shares of the Company's common stock.

In
connection with its initial public offering, the Company entered into a management agreement with the Manager, which was subsequently amended and restated in April 2006. The
management agreement was further amended in September 2007, and amended and restated in October 2008 and was subsequently terminated in connection with the internalization. The management agreement
provided for a term through December 2009 with automatic one-year extension options
and was subject to certain termination rights. The Company paid the Manager an annual management fee equal to 1.75% of the Company's gross stockholders equity (as defined in the management agreement)
inclusive of the Company's trust preferred securities. In October 2008, the Company entered into the second amended and restated management agreement with the Manager which generally contained the
same terms and conditions as the amended and restated management agreement, as amended, except for the following material changes: (1) reduced the annual base management fee to 1.50% of the
Company's gross stockholders equity; (2) reduces the termination fee to an amount equal to the management fee earned by the Manager during the 12 months preceding the termination date;
and (3) commencing July 2008, all fees in connection with collateral management agreements were to be remitted by the Manager to the Company. The Company incurred expense to the Manager under
this agreement of an aggregate of $5,672 and $7,145 for the three months ended March 31, 2009 and 2008, respectively.

Prior
to the internalization, to provide an incentive to enhance the value of the Company's common stock, the holders of the Class B limited partner interests of the Operating
Partnership were entitled to an incentive return equal to 25% of the amount by which FFO plus certain accounting gains and losses (as defined in the partnership agreement of the Operating Partnership)
exceed the product of the weighted average stockholders equity (as defined in the partnership agreement of the Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly
calculations). The Company recorded any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payments of such became
probable and reasonably estimable in accordance with the partnership agreement. In October 2008, the Company entered into a letter agreement with the Class B limited partners to waive the
incentive distribution that would have otherwise been earned for the period July 1, 2008 through December 31, 2008 and provided that the starting January 1, 2009, the incentive
distribution can be paid, at the Company's option, in cash or shares of common stock. In December 2008, the Company entered into a letter agreement with the Manager and SL Green, pursuant to
which the Manager agreed to pay $2,750 in cash and SL Green transferred to the Company, 1.9 million shares of the Company's common stock, in full satisfaction of all potential
obligations that the holders of the Class B limited partner interests of the Operating Partnership may have had to the Operating Partnership, and the Operating Partnership may have to the
holders, each in accordance with the amended operating partnership agreement of the Operating Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

11. Related Party Transactions (Continued)

2008
calendar year. The Company incurred approximately $2,496 with respect to such Class B limited partner interests for the three months ended March 31, 2008. No incentive distribution
was earned by the Class B limited partner interests for the three months ended March 31, 2009.

Prior
to the internalization, the Company was obligated to reimburse the Manager for its costs incurred under an asset servicing agreement between the Manager and an affiliate of
SL Green Operating Partnership, L.P. and a separate outsource agreement between the Manager and SL Green Operating Partnership, L.P. The asset servicing agreement, which
was amended and restated in April 2006, provided for an annual fee payable to SL Green Operating Partnership, L.P. by the Company of 0.05% of the book value of all credit tenant lease
assets and non-investment grade bonds and 0.15% of the book value of all other assets. The asset servicing fee could have been reduced by SL Green Operating Partnership, L.P.
for fees paid directly to outside servicers by the Company. The
outsource agreement provided for an annual fee payable by the Company, which became $2,814 per year subsequent to the closing of the American Financial merger to reflect higher costs resulting from
the increased size and number of assets of the combined company, increasing 3% annually over the prior year on the anniversary date of the outsource agreement in August of each year. For the three
months ended March 31, 2008, the Company realized expense of $341, to the Manager under the outsource agreement. For the three months ended March 31, 2008, the Company realized expense
of $1,324, to the Manager under the asset servicing agreement. In October 2008, each of the asset servicing agreement and outsource agreement was terminated, effective as of September 30, 2008.
In October 2008, the outsource agreement was terminated and the asset servicing agreement was replaced with that certain interim asset servicing agreement between the Manager and an affiliate of SL
Green, pursuant to which the Company was obligated to reimburse the Manager for its costs incurred there under from October 2008 until April 24, 2009 when such agreement was terminated in
connection with the internalization. Pursuant to that agreement, the SL Green affiliate acted as the rated special servicer to the Company's CDOs, for a fee equal to two basis points per year
on the carrying value of the specially serviced loans assigned to it. Concurrent with the internalization, the interim asset servicing agreement was terminated and the Manager entered into a special
servicing agreement with an affiliate of SL Green, pursuant to which the SL Green affiliate agreed to act as the rated special servicer to the Company's CDOs for a period beginning on
April 24, 2009 through the date that is the earlier of (i) 60 days thereafter and (ii) a date on which a new special servicing agreement is entered into between the Manager
and a rated third-party special servicer. The SL Green affiliate will be entitled to a servicing fee equal to (i) 25 basis points per year on the outstanding principal balance of assets
with respect to certain specially serviced assets and (ii) two basis points per year on the outstanding principal balance of assets with respect to certain other assets.

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

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

11. Related Party Transactions (Continued)

consideration
for the consulting services, the Company paid a fee to SL Green of $200 per month, payable, at its option, in cash or, if permissible under applicable law or the requirements of
the exchange on which the shares of the Company's common stock trade, shares of its common stock. SL Green also provided the Company with certain other services described in the services
agreement for a fee of $100 per month in cash and for a period terminating at the earlier of (i) three months after the date of the services agreement, subject to a one-time
30-day extension, or (ii) the termination of the management agreement. By a separate agreement and a separate fee, SL Green and SL Green Operating
Partnership, L.P. agreed to perform special servicer activities for the Company through one of their rated special serving affiliates for a period beginning on April 24, 2009 through the
date that is the earlier of (i) 60 days thereafter or (ii) a date on which a new special servicer agreement is entered into between the Manager a rated third-party servicer.

In
connection with the closing of the Company's first CDO in July 2005, the 2005 Issuer, entered into a collateral management agreement with the Manager. Pursuant to the collateral
management agreement,
the Manager has agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The collateral
management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the net
outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the
net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities,
(ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation
amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under the first CDO, the Board of Directors had allocated to the Manager the
subordinate collateral management fee paid on the CDO notes not held by the Company. In October 2008, pursuant to the second amended and restated management agreement, the Manager had, commencing
July 1, 2008, agreed to remit this amount to the Company. At March 31, 2009 and December 31, 2008, the Company owned all of the non-investment grade bonds, preferred
equity and equity in the 2005 CDO. The senior collateral management fee and balance of the subordinate collateral management fee is allocated to the Company. For the three months ended
March 31, 2008, the Company realized expense of $512 to the Manager under such collateral management agreement.

Prior
to the internalization, fees payable in connection with CDOs or other securitization vehicles, except for the 2005 CDO, were governed by the management agreement. Pursuant to the
management agreement, if a collateral manager is retained as part of the formation of a CDO or other securitization vehicle, the Manager or an affiliates will be the collateral manager and will
receive the following fees: (i) 0.25% per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with the
Company or the Manager, which CDO is structured to own loans secured by transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a
managed non-transitional CDO that are owned by third-party investors unaffiliated with the Company or the Manager, which CDOs structured

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Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

11. Related Party Transactions (Continued)

to
own loans secured by non-transitional properties, (iii) 0.10% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party
investors unaffiliated with the Company or the Manager, which CDO is structured to own non-investment grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of
bonds issued by a static CDO that are owned by third-party investors unaffiliated the Company or the Manager, which CDO is structured to own investment grade bonds. For the purposes of the management
agreement, a "managed transitional" CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by non-stabilized real
estate assets that are expected to experience substantial net operating income growth, and a "managed non-transitional" CDO means a CDO that is actively managed, has a reinvestment period
and is structured to own debt collateral secured primarily by stabilized real estate assets that are not expected to experience substantial net operating income growth. Both "managed transitional" and
"managed non-transitional" CDOs may at any given time during the reinvestment period of the respective vehicles invest in and own non-debt collateral (in limited quantity) as
defined by the respective indentures. If any fees are paid to the collateral manager in excess of the fee structure provided for above, such fees are paid to the Company. In October 2008, pursuant to
the second amended and restated management
agreement, the Manager, commencing July 1, 2008, agreed to remit this amount to the Company. For the three months ended March 31, 2008, the Company realized expense of approximately $571
to the Manager under this agreement. With respect to the CDO which closed in August, 2007, the Company realized expense to the Manager of $216 for the three months ended March 31, 2008.

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

Commencing
in May 2005, the Company is party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for the Company's corporate offices at 420
Lexington Avenue, New York, New York. The lease is for approximately 7,300 square feet and carries a term of 10 years

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

11. Related Party Transactions (Continued)

with
rents of approximately $249 per annum for year one rising to $315 per annum in year ten. The Company leases approximately 5,200 additional square feet, on a month-to-month
basis pursuant to amendments to the prime lease, for approximately $271 per annum. For the three months ended March 31, 2009 and 2008, the Company paid $100 and $62, under this lease,
respectively.

In
July 2005, the Company closed on the purchase from an SL Green affiliate of a $40,000 mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained
an interest-only participation. The mezzanine loan is secured by the equity interests in an office property in New York, New York. As of March 31, 2009 and December 31, 2008,
the loan had a book value of $39,450 and $39,520, respectively.

In
March 2006, the Company closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green
is an equity
holder. The mezzanine loan was repaid in full on May 9, 2006, when the Company originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint
venture. The whole loan is secured by office and industrial properties in northern New Jersey and had a book value of $86,617 and $90,595 as of March 31, 2009 and December 31, 2008,
respectively.

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

In
December 2006, the Company acquired from a financial institution a pari-passu interest of $125,000 in a $200,000 mezzanine loan, which bears interest at 6.384% and is
secured by a multi-family portfolio in New York, New York. An affiliate of SL Green simultaneously acquired the remaining $75,000 pari-passu interest in the mezzanine loan. As of
March 31, 2009 and December 31, 2008, the loan had a book value of $104,949 and $118,703, respectively.

In
January 2007, the Company originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a
portfolio of multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an
office property. On March 8, 2007 the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event the Company's loan became secured by a
first mortgage lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and
one-month LIBOR plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from the Company and held a 15.15% pari-passu interest in the
mezzanine loan and the whole loan. As of March 31, 2009 and December 31, 2008, the Company's interest in the whole loan had a carrying value of $62,512 and $66,707, respectively. The
investment in the mezzanine loan was repaid in full in September 2007.

53

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

11. Related Party Transactions (Continued)

In
April 2007, the Company purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along
34th Street in New York, New York. The acquisition was financed with a $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term
ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC
interests are pari-passu. As of March 31, 2009 and December 31, 2008, the investment had a carrying value of $27,381 and $26,118, respectively. The Company recorded its pro
rata share of net income of $1,263 and $1,504 for the three months ended March 31, 2009 and 2008, respectively.

In
July 2007, the Company purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land
located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a
70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. As
of March 31, 2009 and December 31, 2008, the investment had a carrying value of $39,226 and $37,070, respectively. The Company recorded its pro rata share of net income of $1,519 and
$1,931 for the three months ended March 31, 2009 and 2008, respectively.

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

In
July 2007, the Company acquired for $71,871 a 100% fee interest in the property located at 292 Madison Avenue, New York, New York, purchased from SL Green. The Company entered
into a 70-year ground lease with an unaffiliated third party which simultaneously purchased from SL Green the Class B office building situated on the property. The Company's
acquisition of the fee interest was financed with a $59,099 10-year fixed rate mortgage loan.

In
August 2007, the Company closed on the purchase from a financial institution of a $12,500 mezzanine loan on a substantially complete residential condominium project in the upper east
side of Manhattan. The investment bore interest at the current pay rate of 11% over LIBOR, and a 19% look-back internal rate of return at maturity. At closing, an affiliate of
SL Green simultaneously acquired a $12,500 pari-passu interest in the same tranche of the capital structure. The loan matured in August 2008 and was retired by a negotiated payoff
below par.

In
September 2007, the Company acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter the Company, along with SL Green, sold all of its
interests in the loan to an unaffiliated third party. Additionally, the Company acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same properties as
the preceding senior mezzanine loan. Immediately thereafter the Company participated 50% of its interest in the loan back to SL Green. As of March 31, 2009 and December 31, 2008,
the loan has a book value of $8,951 and

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

11. Related Party Transactions (Continued)

$11,925,
respectively. In October 2007, the Company acquired a 50% pari-passu interest in $57,795 of two additional tranches in the senior mezzanine loan from an unaffiliated third party.
At closing, an affiliate of SL Green simultaneously acquired the other 50% pari-passu interest in the two tranches. As of March 31, 2009 and December 31, 2008 the loan
had a book value of $22,836 and $28,026, respectively.

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

In
December 2007, the Company acquired a $52,000 interest in a senior mezzanine loan from a financial institution. Immediately thereafter the Company participated 50% of its interest in
the loan to an affiliate of SL Green. The investment, which is secured by a retail property in New York, New York, was purchased at a discount and bears interest at an effective spread to
one-month LIBOR of 5.00%. As of March 31, 2009 and December 31, 2008, the loan had a book value of $17,144 and $24,599, respectively.

In
December 2007, the Company acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter the Company participated 50% of the
Company's interest in the loan to an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%. As of
March 31, 2009 and December 31, 2008, the loan had a book value of $47,335 and $46,488, respectively.

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

In
August 2008, the Company closed on the purchase from an SL Green affiliate of a $9,375 pari-passu participation interest in a $18,750 first mortgage. The loan is
secured by a retail shopping center located in Staten Island, New York. The investment bears interest at a fixed rate of 6.50%. As of March 31, 2009 and December 31, 2008, the loan had a
book value of $9,283 and $9,324, respectively.

In
September 2008, the Company closed on the purchase from an SL Green affiliate of a $30,000 interest in a $135,000 mezzanine loan. The loan is secured by the borrower's
interests in a retail condominium located New York, New York. The investment bears interest at an effective spread to one-month LIBOR of 10.00%. As of March 31, 2009 and
December 31, 2008, the loan had a book value of $30,821 and $30,367, respectively.

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

11. Related Party Transactions (Continued)

Bright Star Couriers LLC, or Bright Star, provides messenger services to the Company. Bright Star is owned by Gary Green, a son of Stephen L. Green, the Company's Chairman. The
aggregate amount of fees paid by the Company for such services was less than $2 for each of the three months ended March 31, 2009 and 2008.

12. Deferred Costs

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

2009

2008Deferred financing

$
76,739

$
77,102Deferred acquisition


1,612


1,600Deferred leasing


1,372


1,05679,723


79,758Less accumulated amortization


(32,389
)

(26,451
)47,334


53,307Less held for sale


(318
)

(59
)$
47,016

$
53,248


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

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

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

13. Fair Value of Financial Instruments

The Company adopted SFAS 157 which, among other things, requires additional disclosures about financial instruments, carried at fair value. SFAS 157 establishes a
hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The following discussion of fair value was determined by
the Manager, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair
values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. Financial instruments with readily available active quoted prices or for
which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely,
financial instruments rarely traded or not quoted

56

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

13. Fair Value of Financial Instruments (Continued)

will
generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value. The use of different market assumptions and/or estimation methodologies may
have a material effect on estimated fair value amounts.

Fair Value on a Recurring Basis

The Company uses fair value measurements on a recurring basis in its assessment of assets classified as loans and other lending
investments held for sale, which are reported at the lower of cost or market value using available market information obtained through consultation with dealers or other originators of such
investments.

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

At March 31, 2009

Total

Level I

Level II

Level IIIFinancial Assets:Lending investments held for sale

$
152,451

$


$


$
152,451Financial Liabilities:Derivative instruments

$
206,529

$


$


$
206,529


Fair Value on a Non-Recurring Basis

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

At March 31, 2009

Total

Level I

Level II

Level IIIFinancial Assets:Lending investments

$
273,192

$


$


$
273,192


The
total change in fair value of financial instruments for which a fair value adjustment has been included in the condensed consolidated statements of operations for the three months
ended March 31, 2009 was $137,199.

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

57

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

13. Fair Value of Financial Instruments (Continued)

measured
at fair value would also consider such an adjustment in pricing that same financial instrument.

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

14. Stockholders' Equity

The Company's authorized capital stock consists of 125,000,000 shares, $0.001 par value, of which the Company has authorized the issuance of up to 100,000,000 shares of common stock,
$0.001 par value per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. As of March 31, 2009, 49,863,831 shares of common stock and 4,600,000 shares of preferred stock
were issued and outstanding.

Preferred Stock

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

Common Stock

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

In
December 2008, the Company entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and SL Green
transferred to the Company, 1.9 million shares of the Company's common stock, in full satisfaction of all potential obligations that the holders of Class B limited partner interests may
have in respect of the recalculation

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

14. Stockholders' Equity (Continued)

of
the distribution amount to the holders at the end of 2008 calendar year. The shares of common stock were cancelled upon receipt by the Company. Subsequent to the letter agreement, SL Green
Operating Partnership L.P. owned approximately 12.5% of the outstanding shares of the Company's common stock.

Equity Incentive Plan

As part of the Company's initial public offering, the Company instituted its Equity Incentive Plan. The Equity Incentive Plan, as
amended, authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or ISOs, (ii) the
grant of stock options that do not qualify, or NQSOs, (iii) the grant of stock options in lieu of cash directors' fees and (iv) grants of shares of restricted and unrestricted common
stock. The exercise price of stock options will be determined by the compensation committee, but may not be less than 100% of the fair market value of the shares of common stock on the date of grant.
At March 31, 2009, 1,016,765 shares of common stock were available for issuance under the Equity Incentive Plan.

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

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

March 31, 2009

December 31, 2008Options
Outstanding

Weighted
Average
Exercise
Price

Options
Outstanding

Weighted
Average
Exercise
PriceBalance at beginning of period


1,691,336

$
17.61


1,428,169

$
22.82Modification




$



110,716

$
Granted


30,000

$
1.25


385,000

$
5.30Exercised




$



(85,547
)
$
14.83Lapsed or cancelled




$



(147,002
)
$
25.52Balance at end of period


1,721,336

$
17.32


1,691,336

$
17.61


59

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

14. Stockholders' Equity (Continued)

For
the three months ended March 31, 2009, all options were granted at a price of $1.25. The remaining weighted average contractual life of the options was 7.5 years.
Compensation expense of $14 and $263 was recorded for the three months ended March 31, 2009 and 2008, respectively, related to the issuance of stock options.

Through
March 31, 2009, 1,135,004 restricted shares had been issued under the Equity Incentive Plan, of which 48% have vested. The vested and unvested shares are currently
entitled to receive distributions on common stock if declared by the Company. Holders of restricted shares are prohibited from selling such shares until they vest but are provided the ability to vote
such shares beginning on the date of grant. Compensation expense of $45 and $599 was recorded for the three months ended March 31, 2009 and 2008, respectively, related to the issuance of
restricted shares.

Employee Stock Purchase Plan

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

Outperformance Plan

In June 2005, the compensation committee of the board of directors approved a long-term incentive compensation program, the
2005 Outperformance Plan. Participants in the 2005 Outperformance Plan, were to share in a "performance pool" if the Company's total return to stockholders for the period from June 1, 2005
through May 31, 2008 exceeded a cumulative total return to stockholders of 30% during the measurement period over a base share price of $20.21 per share. The Company recorded the expense of the
plan award in accordance with FASB Statement No. 123(R). Compensation expense of $308 was recorded for the three months ended March 31, 2008, related to the 2005 Outperformance Plan.
Based on the Company's total return to stockholders as of the May 31, 2008 measurement period conclusion date, the Company did not meet the minimum 30% return threshold and accordingly, the
plan participants automatically forfeited the LTIP Units and the 2005 Outperformance Plan expired as of that date.

60

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

14. Stockholders' Equity (Continued)

Deferred Stock Compensation Plan for Directors

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

As
of March 31, 2009, there were approximately 112,756 phantom stock units outstanding, of which 100,759 units are vested.

Earnings per Share

Earnings per share for the three months ended March 31, 2009 and 2008 is computed as follows:

Three Months Ended
March 31,2009

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

$
(27,291
)
$
23,135Effect of dilutive securities





Diluted Earnings:Net income available to common stockholders

$
(27,291
)
$
23,135Denominator (Weighted Average Shares)BasicShares available to common stockholders


49,860


34,854Effect of Diluted Securities:Stock-based compensation plans


58


122Phantom stock units


112


39Diluted Shares


50,030


35,015


15. Benefit Plans

At March 31, 2009, the Company did not maintain a defined benefit pension plan, post-retirement health and welfare plan, 401(k) plan or other benefits plans. As an
affiliate of SL Green, the Company's employees are covered by a 401(K) Savings/Retirement Plan implemented by SL Green.

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

15. Benefit Plans (Continued)

The
401(K) Plan permits eligible employees to defer up to 15% of their annual compensation, subject to certain limitations imposed by the Code. The employees' elective deferrals are immediately vested
and non-forfeitable upon contribution to the 401(K) Plan. The plan provides for discretionary matching contributions only.

16. Commitments and Contingencies

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

The
Company's corporate offices at 420 Lexington Avenue, New York, New York are subject to an operating lease agreement with SLG Graybar Sublease LLC, an affiliate of
SL Green, effective May 1, 2005. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to
$315 per annum in year ten. The Company leases an additional 5,200 square feet on a month to month basis for approximately $271 per annum.

As
of March 31, 2009, the Company leased certain of its commercial properties from third parties with expiration dates extending to the year 2085 and has various ground leases
with expiration dates extending through 2101. These lease obligations generally contain rent increases and renewal options.

Future
minimum lease payments under non-cancelable operating leases as of March 31, 2009 are as follows:

2009 (April 1  December 31)

$
14,2222010


18,8172011


18,7052012


18,3482013


18,285Thereafter


150,333Total

$
238,710


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

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

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Table of Contents

Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

17. Financial Instruments: Derivatives and Hedging

FASB No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which became effective January 1, 2001, requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. SFAS 133 may increase or decrease reported net income and stockholders'
equity prospectively, depending on future levels of LIBOR interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash
flows, provided the contract is carried through to full term.

The
following table summarizes the notional and fair value of the Company's derivative financial instruments at March 31, 2009. The notional value is an indication of the extent
of the Company's involvement in this instrument at that time, but does not represent exposure to credit, interest rate or market risks:

Benchmark Rate

Notional Value

Strike
Rate

Effective
Date

Expiration
Date

Fair
ValueInterest Rate Swap

1 month LIBOR

$
3,465


4.280
%

7/2005


12/2009

$
(81
)Interest Rate Swap

3 month LIBOR


3,465


5.178
%

4/2006


3/2010


(121
)Interest Rate Swap

3 month LIBOR


14,650


4.425
%

11/2007


7/2015


(1,299
)Interest Rate Swap

3 month LIBOR


12,000


3.063
%

1/2008


7/2010


(270
)Interest Rate Swap

3 month LIBOR


12,000


9.850
%

8/2006


8/2011


(937
)Interest Rate Swap

3 month LIBOR


2,000


3.073
%

1/2008


7/2010


(44
)Interest Rate Swap

3 month LIBOR


347,908


5.408
%

8/2007


5/2017


(50,901
)Interest Rate Swap

3 month LIBOR


699,441


5.331
%

8/2007


1/2018


(137,279
)Interest Rate Swap

1 month LIBOR


42,718


4.990
%

1/2007


1/2017


(7,829
)Interest Rate Swap

3 month LIBOR


24,143


5.114
%

2/2008


1/2017


(2,926
)Interest Rate Swap

3 month LIBOR


16,412


5.203
%

2/2008


5/2017


(2,065
)Interest Rate Swap

3 month LIBOR


4,700


3.170
%

4/2008


4/2012


(183
)Interest Rate Swap

1 month LIBOR


9,375


4.260
%

8/2008


1/2015


(784
)Interest Rate Cap

1 month LIBOR


250,000


5.250
%

4/2008


3/2010


Interest Rate Cap

1 month LIBOR


600,000


5.250
%

8/2008


3/2010


Interest Rate Cap

3 month LIBOR


10,000


3.920
%

10/2008


10/2013


(658
)Interest Rate Cap

3 month LIBOR


17,500


3.920
%

10/2008


10/2013


(1,152
)Total



$
2,069,777










$
(206,529
)


At
March 31, 2009, derivative instruments were reported at their fair value as a net liability of $206,529. Offsetting adjustments are represented as deferred losses in
Accumulated Other Comprehensive Income of $48,925. For the three months ended March 31, 2009, the Company recognized a decrease to interest expense of $9 attributable to any ineffective
component of its derivative instruments designated as cash flow hedges. Currently, all derivative instruments are

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Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

17. Financial Instruments: Derivatives and Hedging (Continued)

designated
as cash flow hedging instruments. Over time, the realized and unrealized gains and losses held in Accumulated Other Comprehensive Income will be reclassified into earnings in the same
periods in which the hedged interest payments affect earnings.

18. Income Taxes

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

For
the three months ended March 31, 2009 and 2008, the Company recorded $2,267 and $11 of income tax expense, respectively, in net income (loss) from continuing operations.
Included in tax expense for the three months ended March 31, 2009 is $2,100 of state income taxes on the gain of extinguishment of debt of $107,299. Under federal tax law, we are allowed to
defer this gain until 2014, but not all states follow this federal rule.

19. Environmental Matters

The Company's management believes the Company is in compliance in all material respects with applicable Federal, state and local ordinances and regulations regarding environmental
issues. It's management is not aware of any environmental liability that it believes would have a materially adverse impact on the Company's financial position, results of operations or cash flows.

20. Segment Reporting

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

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Gramercy Capital Corp.

Notes To Condensed Consolidated Financial Statements (Continued)

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

March 31, 2009

20. Segment Reporting (Continued)

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

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

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

Finance

Real Estate

Corporate/
Other(1)

Total CompanyThree months ended March 31, 2009Total revenues(2)

$
55,173

$
109,022

$


$
164,195Earnings (loss) from unconsolidated joint ventures


2,853


(641
)




2,212Total operating and interest expense(3)


(71,021
)

(105,187
)

(8,784
)

(184,992
)Net income (loss) from continuing operations(4)

$
(12,995
)
$
3,194

$
(8,784
)
$
(18,585
)Total Assets

$
4,120,552

$
4,083,506

$
(716,094
)
$
7,487,964


---

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

Overview

Gramercy Capital Corp. is a self-managed, integrated commercial real estate finance and property investment company. We
were formed in April 2004 and commenced operations upon the completion of our initial public offering in August 2004. On April 1, 2008, we completed the acquisition of American Financial Realty
Trust (NYSE: AFR), or American Financial, in a transaction with a total value of approximately $3.3 billion, including the assumption of approximately $1.3 billion of American
Financial's secured debt. The acquisition transformed our
company from a pure specialty finance company into a $7.8 billion diversified enterprise with complementary business lines consisting of commercial real estate finance and property investments.

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

We
conduct substantially all of our operations through our operating partnership, GKK Capital LP, or our Operating Partnership. We are the sole general partner of our Operating
Partnership. We were externally managed and advised by GKK Manager LLC, or the Manager, a wholly-owned subsidiary of SL Green Realty Corp. (NYSE: SLG), or SL Green. In April 2009,
we completed the internalization of the management through the direct acquisition of the Manager. As a self-managed integrated commercial real estate finance and property investment
company, beginning in May 2009, management and incentive fees payable by us to our external manager have ceased and we added 77 former employees of the Manager to our own staff. We expensed $2,826 for
acquisition costs incurred through March 31, 2009 in connection with the internalization.

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

In
each debt investment transaction we undertake, we seek to control as much of the capital structure as possible in order to be able to identify and retain that portion that provides
the best risk-adjusted returns. This is generally achieved through the direct origination of whole loans, the ownership of which permits a wide variety of financing, syndication, and
securitization executions to achieve excess returns for the risks being taken. By providing a single source of financing for developers and sponsors, we streamline the lending process, provide greater
certainty for borrowers, and retain the high yield debt instruments that we manufacture. By originating, rather than buying,

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whole
loans, subordinate interests in whole loans, mezzanine debt and preferred equity, we strive to deliver superior returns to our stockholders.

Since
our inception, we have completed debt investment transactions in a variety of markets and secured by a variety of property types. Until the second half of 2007, the market for
commercial real estate debt exhibited high relative returns and significant inflows of capital. However, due to growing illiquidity in the credit markets and an overall slowing in macroeconomic
conditions, the default levels for commercial real estate have risen. The market for debt instruments had for several years, until the second half of 2007, evidenced declining yields and more flexible
credit standards and loan structures. In particular, "conduit" originators who packaged whole loans for resale to investors drove debt yields lower while maintaining substantial liquidity because of
the then-strong demand for the resulting securities. Because of reduced profits in the most liquid sectors of the mortgage finance business then existing, several large institutions began
originating large bridge loans for the purpose of generating interest income, rather than the typical focus on trading profits. In response to those developments, we focused on areas where we had
comparative advantages rather than competing for product merely on the basis of yield or structure. This had particularly included whole loan origination in markets and transactions where we had an
advantage due to (i) knowledge or relationships we have, (ii) knowledge or relationships of our largest stockholder, SL Green, and (iii) where we had an ability to better
assess and manage risks over time. When considering investment opportunities in secondary market transactions in tranched debt, we often avoided first loss risk in larger transactions due to the
then-high valuations of the underlying real estate relative to historic valuation levels. Because of the then-significant increase in the value of institutional quality assets
relative to historic norms, we focused on positions in which a property sale or conventional refinancing at loan maturity, based on normalized valuation and lending standards, would provide for a
complete return of our investment. We generally matched our assets and liabilities in terms of base interest rate (generally one-month LIBOR) and, to the extent possible, expected
duration. We raised debt and equity in several different capital markets to improve the diversity of our funding sources, maintain liquidity, and achieve our match-funding objectives.

However,
beginning in the second quarter of 2007, the sub-prime residential lending and single family housing markets in the U.S. began to experience significant default
rates, declining real estate values and increasing backlog of housing supply, and other lending markets experienced higher volatility and decreased liquidity resulting from the poor credit performance
in the residential lending markets. Concerns in the residential sector of the capital markets quickly spread more broadly into the asset-backed, commercial real estate, corporate and other credit and
equity markets. The factors described above have resulted in substantially reduced mortgage loan originations and securitizations, and caused more generalized credit market dislocations and a
significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and investors,
including us, continue to find it difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt.

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

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tightens,
many warehouse lenders have requested additional collateral or repayments with respect to their loans in order to maintain margins that are acceptable to them.

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

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

During
2008 and to date in 2009, the global capital markets continued to experience tremendous volatility and a wide-ranging lack of liquidity. The impact of the global
credit crisis on our sector has been acute. Transaction volume has declined significantly, credit spreads for all forms of mortgage debt investments have reach all-time highs, issuance
levels of CMBS have ground to a halt, and other forms of financing from the debt markets have been dramatically curtailed. Financial institutions still hold significant inventories of unsold loans and
CMBS, creating a further overhang on the markets. We believe that the continuing dislocation in the debt capital markets, coupled with a recession in the U.S., has reduced property valuations and has
adversely impacted
commercial real estate fundamentals. These developments can impact and have impacted the performance of our existing portfolio of financial and real property assets. Furthermore, the volatility in the
capital markets has caused stress to all financial institutions and, our business is dependent upon these counterparties for, among other things, financing, rental payments on the majority of our
owned properties and interest rate derivatives. We expect the general unavailability of credit to continue at least through 2009 and perhaps beyond.

It
is difficult to predict when conditions in our business will improve. We expect that the adverse circumstances and trends in our business and securities will continue through at least
the remainder of 2009, and will begin to improve thereafter only as the credit markets and overall economy improve. Continued disruption in the global credit markets or further deterioration in those
markets may have a material adverse effect on our ability to repay or refinance our borrowings and our ability to grow and operate our business.

We
have responded to these difficult conditions by sharply decreasing investment activity when we observed deteriorating market conditions, increasing our liquidity, extending debt
maturities and restructuring certain of our debt facilities. In addition, beginning with the third quarter of 2008, our board of directors elected to not pay the dividend on common stock, which for
the second quarter of 2008 was $0.63 per share. Our board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of
2008. The preferred stock dividend for the fourth quarter of 2008 and the first quarter of 2009 has been accrued for as of March 31, 2009. In January 2009, we exchanged our $150,000 of trust
preferred securities for a new $150,000 junior subordinated debenture. As part of such transaction, we agreed that we will not make any distributions on, or repurchases of, our common stock or
preferred stock for all of 2009, other than as may be required to maintain our REIT status. Our board of directors will revisit our dividend policy in 2010. We may elect to pay dividends on our common
stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements.

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In
response to these market disruptions, legislators and financial regulators implemented a number of mechanisms designed to add stability to the financial markets, including the
provision of direct and indirect assistance to distressed financial institutions, assistance by the banking authorities in arranging acquisitions of weakened banks and broker-dealers, implementation
of programs by the Federal Reserve to provide liquidity to the commercial paper markets and temporary prohibitions on short sales of certain financial institution securities. On October 3,
2008, the Emergency Economic Stabilization Act of 2008, or the EESA was enacted into law. The EESA authorized the U.S. Secretary of Treasury to create a Troubled Asset Relief Program, or TARP, to
purchase from financial institutions up to $700 billion of residential or commercial mortgages and any securities, obligations, or other instruments that are based on, or related to, such
mortgages, that in each case was originated or issued on or before March 14, 2008. The ESSA also provides for a program that would allow companies to insure their troubled assets. The U.S.
Treasury has announced the establishment of the following programs
under TARP: the Capital Purchase Program, the Targeted Investment Program, the Systemically Failing Institutions Program, the Asset Guarantee Program, the Auto Industry Financing Program and the
Homeowner Affordability and Stability Plan, which is partially financed by TARP. In addition, the American Recovery and Reinvestment Act of 2009, or ARRA, was signed into law on February 17,
2009. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. ARRA also imposes certain new executive
compensation and corporate expenditure limits on all current and future TARP recipients. The overall effects of these and other legislative and regulatory efforts on the financial markets is
uncertain, and they may not have the intended stabilization effects. Should these or other legislative or regulatory initiatives fail to stabilize and add liquidity to the financial markets, our
business, financial condition, results of operations and prospects could be materially and adversely affected.

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

All
of our term CDO liabilities are in their reinvestment periods which means when the underlying assets repay we are able to reinvest the proceeds (assuming we are in compliance in our
CDOs with certain financial covenants) in new assets without having to repay the liabilities. Because credit spreads are currently much wider than when we issued these liabilities, we currently expect
to earn a higher return on equity on capital redeployed in this market. Approximately $1.1 billion, or 49.0%, of our loans have maturity dates in 2009. However, many of these loans contain
extension options of at least six months (many subject to performance criteria) and we expect that substantially all loans that qualify will be extended, so it is difficult to estimate how much
capital from initial maturities or early pre-payments may be recycled into higher earning investments.

We
believe that in the longer term, liquidity and reasonably priced financing pricing could return to the commercial real estate finance markets but that in the near term, new financing
sources must be developed in order to attractively fund working capital, debt service and incremental new investment activity to service and refinance debt and to fund operations. We believe these
sources could include term loans from financial institutions and life companies, more restrictive commercial real estate finance structures which may not permit reinvestment from asset repayments, and
financing provided by motivated sellers of assets.

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

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

Carrying Value(1)

Allocation by
Investment Type

Fixed Rate:
Average Yield(3)

Floating Rate:
Average Spread over
LIBOR(2)2009

2008

2009

2008

2009

2008

2008

2007Whole loans, floating rate

$
1,154,882

$
1,222,991


55.9
%

55.3
%







422 bps


418 bpsWhole loans, fixed rate


178,904


189,946


8.5
%

8.6
%

7.14
%

7.17
%




Subordinate interests in whole loans, floating rate


80,299


80,608


3.9
%

3.6
%







242 bps


564 bpsSubordinate interests in whole loans, fixed rate


63,464


63,179


3.1
%

2.9
%

9.16
%

9.22
%




Mezzanine loans, floating rate


340,413


396,190


16.4
%

17.9
%







646 bps


654 bpsMezzanine loans, fixed rate


237,082


248,558


11.4
%

11.2
%

10.11
%

10.21
%




Preferred equity, fixed rate


12,012


12,001


0.6
%

0.5
%

10.22
%

10.22
%




Subtotal/ Weighted average


2,067,056


2,213,473


100.0
%

100.0
%

8.91
%

8.96
%

461 bps


480 bpsCMBS, floating rate


71,948


70,893


8.1
%

8.1
%







987 bps


945 bpsCMBS, fixed rate


815,637


799,080


91.9
%

91.9
%

6.25
%

6.26
%




Subtotal/ Weighted average


887,585


869,973


100.0
%

100.0
%

6.25
%

6.26
%

987 bps


945 bpsTotal

$
2,954,641

$
3,083,446


100.0
%

100.0
%

7.25
%

7.32
%

484 bps


498 bps


---

As
of March 31, 2009, Gramercy Finance also held interests in two credit tenant net lease investments, or CTL investments, two interests in joint ventures holding fee positions on
properties subject to long-term ground leases and a 100% fee interest in a property subject to a long-term ground lease.

As
of March 31, 2009, Gramercy Realty owned a portfolio comprised of 682 bank branches, 333 office buildings and six land parcels, of which 76 bank branches and one office
building were partially owned through joint ventures. Our wholly-owned properties aggregated approximately 26.2 million rentable square feet and our partially-owned properties aggregated
approximately 0.7 million rentable square feet, including 0.4 million rentable square feet in an unconsolidated joint venture. As of March 31, 2009, the occupancy of our
wholly-owned properties was 88.4% and the occupancy for our

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partially-owned
properties was 99.9%. Our two largest tenants are Bank of America, and Wachovia Bank, (now owned by Wells Fargo & Company), and, as of March 31, 2009, they represented
approximately 40.9% and 15.3%, respectively, of the rental income of our portfolio and occupied approximately 47.1% and 18.3%, respectively, of our total rentable square feet.

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

Number of Properties

SquareFeet

OccupancyPortfolio

At
March 31,
2009

At
December 31,
2008

At
March 31,
2009

At
December 31,
2008

At
March 31,
2009

At
December 31,
2008Core


647


644


20,053,620


20,747,772


96.3
%

96.0
%ValueAdd(1)


210


222


4,598,848


4,721,333


66.7
%

70.1
%Subtotal


857


866


24,652,468


25,469,105


90.7
%

91.2
%Held for Sale(2)


88


103


1,917,001


1,337,709


59.8
%

42.1
%Total


945


969


26,569,469


26,806,814


88.5
%

88.7
%


---

Due
to the nature of the business of our tenant base, which places a high premium on serving its customers from a well established distribution network, we typically enter into
long-term net leases with our financial institution tenants. As of March 31, 2009, the weighted average remaining term of our leases was 10.2 years and approximately 79.9% of
our base revenue was derived from triple-net and bond-net leases. With in-house capabilities in acquisitions, asset management, property management and leasing, we
are focused on maximizing the value of our portfolio through acquisitions and strategic sales and through effective and efficient property management and leasing operations.

We
rely on the credit and equity markets to finance and grow our business. Currently, nearly all capital and credit markets are experiencing decreased liquidity and greater risk premiums
as concerns about the outlook for the U.S. and world economic growth increased. These concerns continue and risk premiums in many capital and credit markets remain at or near all-time
highs with liquidity extremely low or virtually non-existent compared to historical standards. As a result, most commercial real estate finance and financial services industry
participants, including us, have reduced new investment activity until the capital and credit markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In
this environment, we are focused on actively managing portfolio credit, generating and recycling liquidity from existing assets, leasing vacant space, and reducing corporate overhead as a percentage
of our total assets and total revenues.

Liquidity
is a measurement of the ability to meet cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay dividends and
other general business needs. In addition to cash on hand, our primary sources of funds for short-term liquidity requirements, including working capital, distributions, if any, debt
service and additional investments, if any, consists of (i) cash flow from operations; (ii) proceeds from our existing CDOs; (iii) proceeds from principal and interest payments
and rents on our investments; (iv) proceeds from potential loan and asset sales; and, to a lesser extent, (v) new financings or additional securitization or CDO offerings and
(vi) proceeds from additional common or preferred equity offerings. We believe these sources of financing will be sufficient to meet our short term liquidity requirements. Due to continued
market turbulence, we do not anticipate having the ability in the near term to access new equity or debt capital through new warehouse lines, CDO issuances, term or credit facilities or trust

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preferred
issuances, although we continue to explore capital raising options. In the event we are not able to successfully secure financing, we will rely on cash at hand, cash flows from operations,
principal and lease payments on our investments and proceeds from asset and loan sales to satisfy our liquidity requirements. If we (i) are unable to renew, replace or expand our sources of
financing, (ii) are unable to execute asset and loan sales in a timely manner or to receive anticipated proceeds from them or (iii) fully utilize available cash, it may have an adverse
effect on our business, results of operations and ability to make distributions to our stockholders.

The
majority of our loan and other investments are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO
bonds and the remaining income, if any, is retained by us. Our CDO bonds contain interest coverage and asset over collateralization covenants that must be met in order for us to receive such payments.
If we fail these covenants in some or all of our CDOs, all cash flows from the applicable CDO would be diverted to repay principal and interest on the outstanding CDO bonds and we may not receive any
payments in respect of some or all CDO bonds we own, our equity in the CDOs and the subordinate management fee until that CDO regained compliance with such tests. While we were in compliance with all
such covenants as of March 31, 2009, our compliance margin was thin and relatively small declines in our performance and credit metrics could cause us to fall out of compliance in the future.

In
the event of a breach of our CDO covenants that we could not cure in the near term, we would be required to fund our non-CDO expenses, with (i) cash on hand,
(ii) income from any CDO not in default, (iii) income from our real property and unencumbered loan assets, (iv) sale of assets, (v) or accessing the equity or debt capital
markets, if available. We have the ability to cure defaults which would resume normal payments to us. However, we may not have sufficient liquidity available to do so at such time.

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

Critical Accounting Policies

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

Variable Interest Entities

Our ownership of the subordinated classes of CMBS from a single issuer may provide us with the right to control the foreclosure/workout
process on the underlying loans. There are certain exceptions to the scope of FIN 46R, one of which provides that an investor that holds a variable interest in a qualifying special-purpose
entity, or QSPE, does not consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. FASB Statement of Financial Accounting Standards No. 140, or
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides the requirements for an entity to qualify as a QSPE. To maintain the QSPE
exception, the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity's QSPE status can

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be
affected in future periods by activities by its transferors or other involved parties, including the manner in which certain servicing activities are performed. To the extent that our CMBS
investments were issued by a special-purpose entity that meets the QSPE requirements, we record those investments at the purchase price paid. To the extent the underlying special-purpose entities do
not satisfy the QSPE requirements, we follow the guidance set forth in FIN 46R as the special-purpose entities would be determined to be VIEs.

We
have analyzed the pooling and servicing agreements governing each of our controlling class CMBS investments and we believe that the terms of those agreements conform to industry
standards and are consistent with the QSPE criteria.

In
April 2008, the FASB voted to eliminate the scope exception for QSPEs from the guidance in SFAS No. 140 and to remove the scope exception for QSPEs from FIN 46R. This
will require that VIEs previously accounted for as QSPEs be analyzed for consolidation according to FIN 46R. While the revised standards have not been finalized, and deferred for potential
application until 2010, this change may affect our financial statements.

At
March 31, 2009, we owned securities of three controlling class CMBS trusts with a carrying value of $39,938. The total par amounts of CMBS issued by the three CMBS trusts was
$921,654. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not be the primary beneficiary of any of the underlying special-purpose
entities. At March 31, 2009, our maximum exposure to loss as a result of our investment in these QSPEs totaled $39,938 which equals the book value of these investments as of March 31,
2009.

The
financing structures that we offer to the borrowers on certain of our real estate loans involve the creation of entities that could be deemed VIEs and therefore, could be subject to
FIN 46R. Our management has evaluated these entities and has concluded that none of such entities are VIEs that are subject to the consolidation rules of FIN 46R.

Real Estate and CTL Investments

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

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

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Results
of operations of properties acquired are included in the consolidated statements of operations from the date of acquisition.

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

In
accordance with FASB No. 141, or SFAS No. 141, "Business Combinations," we allocate the purchase price of real estate to land, building and improvements, and
intangibles, such as the value of above-, below- and at-market leases, and origination costs associated with the in-place leases. We depreciate the amount allocated to building
and other intangible assets over their estimated useful lives, which generally range from three to 40 years. The values of the above- and below-market leases are amortized and recorded as
either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to rental income over the remaining term of the associated lease. The value associated with
in-place leases is amortized over the expected term of the respective lease. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are
being made on the lease, any unamortized balance of the related intangible will be written off. The tenant improvements and origination costs are amortized as an expense over the remaining life of the
lease (or charged against earnings if the lease is terminated prior to its contractual expiration date). We assess fair value of the leases based on estimated cash flow projections that utilize
appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known
trends, and market/economic conditions that may affect the property.

Leasehold Interests

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

Investments in Unconsolidated Joint Ventures

We account for our investments in unconsolidated joint ventures under the equity method of accounting since we exercise significant
influence, but do not unilaterally control the entities, and we are not considered to be the primary beneficiary under FIN 46R. In the joint ventures, the rights of the other investors are
protective and participating. Unless we are determined to be the primary beneficiary, these rights preclude us from consolidating the investments. The investments are recorded initially at cost as an
investment in unconsolidated joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the
investments on our balance sheet and the underlying equity in net assets is

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amortized
as an adjustment to equity in net income (loss) of unconsolidated joint ventures over the lesser of the joint venture term or 40 years. None of the joint venture debt is recourse to
us. As of March 31, 2009 and December 31, 2008, we had investments of $99,433 and $96,777 in unconsolidated joint ventures, respectively.

Assets Held for Sale



Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan
origination fees, discounts, repayments, sales of partial interests in loans, and unfunded commitments unless such loan or investment is deemed to be impaired. Loans held for sale are carried at the
lower of cost or market value using available market information obtained through consultation with dealers or other originators of such investments. As of March 31, 2009 and
December 31, 2008, we had loans and other lending investments held for sale of $152,451 and $0, respectively. At March 31, 2009, we recorded an impairment charge of $84,428 related to
the mark-to-market of the loans designated as held for sale.



In accordance with FASB No. 144, or SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," real estate investments or CTL investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less cost to sell. Once an asset is classified as held for
sale, depreciation expense is no longer recorded and current and prior periods are reclassified as Discontinued Operations. As of March 31, 2009 and December 31, 2008, we had real estate
investments held for sale of $109,103 and $189,922, respectively.

Commercial Mortgage-Backed Securities

We designate our CMBS investments pursuant to FASB No. 115, or SFAS No. 115, on the date of acquisition of the
investment. Held to maturity investments are stated at cost plus any premiums or discounts which are amortized through the consolidated statements of operations using the level yield method. CMBS
securities that we do not hold for the purpose of selling in the near-term but may dispose of prior to maturity, are designated as available-for-sale and are
carried at estimated fair value with the net unrealized gains or losses recorded as a component of accumulated other comprehensive income (loss) in stockholder's equity. Unrealized losses on
securities that in the judgment of management are other than temporary are charged against earnings as a loss on the consolidated statement of operations. In November 2007, subsequent to financing our
CMBS investments in our CDOs, we redesignated all of our available-for-sale CMBS investments with a book value of approximately $43,600 to held to maturity. As of
March 31, 2009 and December 31, 2008, the unrealized loss on the redesignated CMBS investments included in other comprehensive income was $4,844 and $4,986, respectively.

We
account for CMBS (other than those of high credit quality or sufficiently collateralized to ensure that the possibility of credit loss is remote) under Emerging Issues Task Force
99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," or EITF 99-20. Accordingly, on a
quarterly basis, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience, and the present value of the
revised cash flow is less then the present value previously estimated, an other-than-temporary impairment is deemed to have occurred. The security is written down to fair value
with the resulting charge against earnings and a new cost basis is established. We calculate a revised yield based on the current amortized cost of the investment (including any
other-than-temporary impairments recognized to date) and the revised yield is then applied prospectively to recognize interest income.

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In January 2009, the FASB issued FSP EITF 99-20-1. This FSP amends the impairment guidance in EITF Issue
No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial
Assets, to align it with the impairment guidance within SFAS 115 by removing from EITF 99-20 the requirement to place exclusive reliance on market participants' assumptions
about future cash flows when evaluating an asset for other-than-temporary impairment. The standard now requires that assumptions about future cash flows consider reasonable
management judgment about the probability that the holder of an asset will be unable to collect all amounts due.

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

In
accordance with SFAS No. 115, when the estimated fair value of the security classified as available-for-sale has been below amortized cost for a
significant period of time and we conclude that we no longer have the ability or intent to hold the security for the period of time over which we expect the values to recover to amortized cost, the
investment is written down to its fair value, and this loss is realized and charged against earnings. The determination of other-than-temporary impairment is a subjective
process, and different judgments and assumptions could affect the timing of loss realization. In addition, it is possible that we in the future may need to recognized our
other-than-temporary impairment notwithstanding our continued determination that no credit loss has occurred and estimated cash flows remain stable, due to the duration that
the estimated fair value remains below book value.

Pledged Government Securities

We maintain a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt previously
collateralized by properties in our real estate portfolio. These securities are carried at amortized cost because we have positive intent and the ability to hold the securities to maturity. These
securities had a carrying value of $100,483 a fair value of $104,408 and unrealized gains of $3,925 at March 31, 2009, and have maturities that extend through November 2013.

Tenant and Other Receivables

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

Tenant
and other receivables are recorded net of the allowances for doubtful accounts, which as of March 31, 2009 and December 31, 2008 were $6,816 and $6,361,
respectively. We continually review

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receivables
related to rent, tenant reimbursements and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the
tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is
in doubt, we increase the allowance for uncollectible accounts or record a direct write-off of the receivable in the consolidated statements of operations.

Intangible Assets

Pursuant to SFAS No. 141, we follow the purchase method of accounting for business combinations. We allocate the purchase price
of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an
as-if-vacant basis. We utilize various estimates, processes and information to determine the as-if-vacant property value. Estimates of value are made
using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Identifiable intangible assets include amounts allocated to acquired leases
for above- and below-market lease rates and the value of in-place leases.

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

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

The
value of in-place leases is amortized to expense over the initial term of the respective leases, which range primarily from one to 22 years. In no event does the
amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value is
charged to expense.

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

Deferred Costs

Deferred costs include deferred financing costs which represent commitment fees, legal and other third party costs associated with
obtaining commitments for financing which result in a closing of such financing. These costs are amortized over the terms of the respective agreements and the amortization

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is
reflected in interest expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions,
that do not close are expensed in the period in which it is determined that the financing will not close.

Deferred
costs also consist of fees and direct costs incurred to originate new investments and are amortized using the effective yield method over the related term of the investment.
Deferred costs also consist of fees and direct costs incurred to initiate and renew operating leases and are amortized on a straight-line basis over the related lease term.



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

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

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

We
recognize sales of real estate properties only upon closing, in accordance with SFAS No. 66, "Accounting for Sales of Real Estate." Payments received from purchasers prior to
closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sale price is reasonable assured and we are not
obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate under SFAS
No. 66.

Revenue Recognition



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

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

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We
designate loans as non-performing at such time as: (1) the loan becomes 90 days delinquent or (2) the loan has a maturity default. All
non-performing loans are placed on non-accrual status and income is recognized only upon actual cash receipt. At March 31, 2009, we had five first mortgage loans with an
aggregate carrying value of $160,142, one second lien of loan with a carrying value of $0 and one third lien loan with a carrying value of $0, which were classified as non-performing
loans. At December 31, 2008, we had three first mortgage loans with an aggregate carrying value of $164,809, one second lien loan with a carrying value of $0 and one third lien loan with a
carrying value of $0, which were classified as non-performing loans.

We
classify loans as sub-performing if they are not performing in material accordance with their terms, but they do not qualify as non-performing loans. The
specific facts and circumstances of these loans may cause them to develop into non-performing loans should certain events occur in the normal passage of time, which we consider to be
90 days from the measurement date. At March 31, 2009, five first mortgage loans with an aggregate carrying value of $116,911 and one mezzanine loan with a carrying value of $35,013 were
classified as sub-performing. At December 31, 2008, five first mortgage loans with a carrying value of $216,597 were classified as sub-performing.

In
some instances we may sell all or a portion of our investments to a third party. To the extent the fair value received for an investment exceeds the amortized cost of that investment
and SFAS No. 140 criteria are met, under which control of the asset that is sold is surrendered making it a "true sale," a gain on the sale will be recorded through earnings as other income. To
the extent an investment that is sold has a discount or fees, which were deferred at the time the investment was made and were being recognized over the term of the investment, the unamortized portion
of the discount or fees are recognized at the time of sale and recorded as a gain on the sale of the investment through other income. For the three months ended March 31, 2009 and 2008, we
recognized $0 and $10, respectively, in net gains (losses) from the sale of debt investments or commitments.

Rent Expense

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

Reserve for Possible Loan Losses

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

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If,
upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created
with a corresponding charge to the provision for possible loan losses. The allowance for each loan is maintained at a level we believe is adequate to absorb possible losses. Impairment losses are
recognized as a direct write-down of the loan investment with a corresponding charge-off to the allowance. As of March 31, 2009, we incurred charge offs totaling $9,771
relating to realized losses on two loans. We maintained a reserve for possible loan losses of $131,992 against 18 separate investments with a carrying value of $601,925 as of March 31, 2009 and
a reserve for possible loan loses of $88,992 against 13 separate investments with a carrying value of $424,177 as of December 31, 2008.

Stock Based Compensation Plans

We have a stock-based compensation plan, described more fully in Note 14. We account for this plan using the fair value
recognition provisions of FASB Statement No. 123(R), "Share-Based Payment, a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation."

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

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

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

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

2009

2008Dividend yield


14.0
%

9.0
%Expected life of option


5.0 years


6.0 yearsRisk-free interest rate


1.72
%

2.97
%Expected stock price volatility


90.0
%

67.0
%


Incentive Distribution (Class B Limited Partner Interest)

Prior to the internalization, the Class B limited partner interests were entitled to receive an incentive return equal to 25% of
the amount by which funds from operations, or FFO, plus certain accounting gains (as defined in the partnership agreement of our Operating Partnership) exceed the

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product
of our weighted average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). We
recorded any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payment of such amounts has become probable and
reasonably estimable in accordance with the partnership agreement. These cash distributions reduced the amount of cash available for distribution to our common unit holders in our Operating
Partnership and to our common stockholders. In October 2008, we entered into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise
been earned for the period July 1, 2008 through December 31, 2008 and provide that the starting January 1, 2009, the incentive distribution can be paid, at our option, in cash or
shares of common stock. In December 2008, we entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and SL Green
transferred 1.9 million shares of our common stock to us, in full satisfaction of all potential obligations that the holders of the Class B limited partner interests may have had to our
Operating Partnership, and our Operating Partnership may have had to the holders, each in accordance with the amended operating partnership agreement of our Operating Partnership, in respect of the
recalculation of the distribution amount to the holders at the end of the 2008 calendar year. No incentive distribution was earned for the three months ended March 31, 2009. We incurred
approximately $2,496 with respect to such Class B limited partner interests for the three months ended March 31, 2009. In April 2009, we completed the internalization of the management
through the direct acquisition of the Manager. Accordingly, beginning in May 2009, management and incentive fees payable by us to the Manager ceased and we own all of the Class B limited
partner interests (which have been cancelled) and all of the interests in the Manager.

Derivative Instruments

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

To
determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For
the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash
flow analysis, option-pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such
value may never actually be realized. We adopted FASB Statement No. 157, or SFAS No. 157, "Fair Value Measurements," which among other things requires additional disclosures about
financial instruments carried at fair value and establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair
value. For additional information regarding our implementation of FAS 157, see item 8footnote 2-significant accounting polices.

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

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

FASB
No. 133, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FASB No. 149, requires us to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. SFAS No. 133 may increase or decrease
reported net income and stockholders' equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the fair values of derivative instruments and hedged items,
but will have no effect on cash flows, provided the contract is carried through to full term.

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

Income Taxes

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

For
the three months ended March 31, 2009 and 2008, we recorded $2,267 and $11 of income tax expense, respectively. Included in tax expense for the three months ended
March 31, 2009 is $2,100 of state income taxes on the gain of extinguishment of debt of $107,299. Under federal tax law, we are allowed to defer this gain until 2014, but not all states follow
this federal rule.

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Results of Operations

Comparison of the three months ended March 31, 2009 to the three months ended March 31, 2008



2009

2008

$ ChangeInvestment income

$
52,934

$
74,595

$
(21,661
)Rental revenue


79,716


1,788


77,928Operating expense reimbursement


30,060





30,060Gain on sales and other income


1,485


4,013


(2,528
)Total revenues


164,195


80,396


83,799Equity in net income of joint ventures


2,212


3,232


(1,020
)Gain on extinguishment of debt


107,229

$
3,690

$
103,539


Investment
income is generated on our whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS. For the three months ended March 31,
2009, $9,858 was earned on fixed rate investments while the remaining $43,076 was earned on floating rate investments. The decrease of $21,661 over the prior period is primarily due to a decrease in
the size of our portfolio of loans and other lending instruments by approximately $204,804, and a decline in LIBOR interest rates in 2009 versus 2008.

Rental
revenue for the three months ended March 31, 2009 is primarily comprised of revenue earned on properties acquired as a result of the American Financial acquisition. Rental
revenue of $1,788 in 2008 was limited to revenue earned on 292 Madison Avenue.

Operating
expense reimbursement of $30,060 for the three months ended March 31, 2009 is attributed to the portfolio of operating real estate acquired by us through the American
Financial acquisition, which closed on April 1, 2008.

Gains
on sales and other income of $1,485 for the three months ended March 31, 2009 is primarily composed of interest on restricted cash balances in our three CDOs and other cash
balances held by us.

The
income on investments in unconsolidated joint ventures of $2,212 for the three months ended March 31, 2009 represents our proportionate share of the income generated by our
joint venture interests including $1,173 of real estate-related depreciation and amortization, which when added back, results in a contribution to Funds from Operations, or FFO, of $3,385. The income
on investments in unconsolidated joint ventures of $3,232 for the three months ended March 31, 2008 represents our proportionate share of income generated by our joint venture interests
including $186 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $3,295. Our use of FFO as an important non-GAAP financial
measure is discussed in more detail below.

In
March 2009, we entered into an amendment and compromise agreement with KeyBank, to settle and satisfy the existing loan obligations under the $175,000 unsecured facility at a discount
for a cash payment of $45,000 and a maximum amount of up to $15,000 from 50% of all payments from distributions after May 2009 from certain junior tranches and preferred classes of securities under
our CDOs. In connection with these debt extinguishments, we recorded a gain of $107,229. During the three months ended March 31, 2008, we repurchased at a discount, investment grade notes
issued by our three CDOs, generating net gains on early extinguishment of debt of $3,690.

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2009

2008

$ ChangeOperating expenses

$
45,464




$
45,464Interest expense


65,352

$
40,068


25,284Management fees


5,672


7,145


(1,473
)Incentive fee





2,496


(2,496
)Depreciation and amortization


27,463


1,117


26,346Marketing, general and administrative


8,784


2,804


5,980Impairment on loans held for sale


84,428





84,428Provision for loan loss


52,771


8,000


44,771Provision for taxes


2,267


11


2,256Total expenses

$
292,201

$
61,641

$
230,560


Property
operating expenses for the three months ended March 31, 2009 of $45,464 were entirely attributable to the American Financial acquisition which closed on April 1,
2008. This amount includes
ground rent and leasehold obligations, real estate and taxes, utilities, property and leasehold improvements, other property operating expenses and direct billable expenses.

Interest
expense was $65,352 for the three months ended March 31, 2009 compared to $40,068 for the three months ended March 31, 2008. The increase of $23,284 is primarily
attributed to $2.5 billion in additional debt incurred as a result of the American Financial acquisition.

Management
fees decreased $1,473 for the three months ended March 31, 2009 to $5,672 versus $7,145 for the same period in 2008 due primarily to an amendment to the management
agreement with the Manager executed in October 2008. In October 2008, we entered into the second amended and restated management agreement with the Manager which reduced the annual base management fee
from 1.75% to 1.50% of our gross stockholders equity, and provided that, commencing July 2008, all fees in connection with collateral management agreements were remitted by the Manager to us. In
October 2008, each of the asset servicing agreement and outsource agreement was terminated, effective as of September 30, 2008. Effective as of October 2008, we were obligated to reimburse the
Manager for its costs incurred under a special servicing agreement between the Manager and an affiliate of SL Green. Pursuant to that agreement, the SL Green affiliate acted as the rated
special servicer to our CDOs for a fee equal to two basis points per year on the carrying value of the specially serviced loans assigned to it.

No
incentive distribution was earned for the three months ended March 31, 2009. We recorded an incentive fee expense of $2,496 during the three months ended March 31, 2008,
respectively in accordance with requirements of the partnership agreement of our Operating Partnership which entitled owners of Class B limited partner interests in our Operating Partnership to
an incentive return equal to 25% of the amount by which FFO plus certain accounting gains (as defined in the partnership agreement of our Operating Partnership) exceed the product of our weighted
average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). In October 2008, we
entered into a letter agreement with the Class B limited partners to waive the incentive distribution that would have otherwise been earned for the period July 1, 2008 through
December 31, 2008. In December 2008, we entered into a letter agreement with the Manager and SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and SL Green
transferred 1.9 million shares of the our common stock to us, in full satisfaction of all potential obligations that the holders of Class B limited partner interests of our Operating
Partnership may have had to our Operating Partnership, and our Operating Partnership may have had to the holders, each in accordance with the amended operating partnership agreement of our Operating
Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year.

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We
recorded depreciation and amortization expenses of $27,463 for the three months ended March 31, 2009, versus $1,117 for the year ended March 31, 2008. The increase of
$26,346 is attributed primarily to the increase in size of our real estate investments as a result of the American Financial acquisition.

Marketing,
general and administrative expenses were $8,784 for the three months ended March 31, 2009, versus $2,804 for the same period in 2008. In April 2009, we completed the
internalization of our management through the purchase of the Manager from SL Green. The consideration paid to SL Green was de minimis. At March 31, 2009, we recorded an expense
of $2,826 of previously capitalized costs incurred in anticipation of the internalization in connection with FASB Statement No. 141 (revised), "Business Combinations," or SFAS
No. 141(R), which requires among other things, that acquisition costs be expensed in the period incurred. The remaining increase in marketing, general and administrative expenses was primarily
attributable to the American Financial acquisition and increased legal costs incurred in connection with non-performing loans in 2009.

Provision
for loan losses was $52,771 for the three months ended March 31, 2009, versus $8,000 for the three months ended March 31, 2008. The provision was based upon an
increase in non-performing loans, periodic credit reviews of our loan portfolio, and reflects the challenging economic conditions, severe illiquidity in the capital markets, and a
difficult operating environment.

In
April 2009, we amended our secured credit facility with Wachovia. In connection with this modification, we agreed to attempt to divest of certain loan investments in the near future
in order to further delever the credit facility. At March 31, 2009, we re-designated four of these investments with a carrying value of $85,608 to
held-for-sale and recorded an impairment charge of $21,460. We also redesignated two additional loans with a carrying value of $142,428 to held-for-sale
and recorded an impairment charge of $54,125. Additionally, we satisfied our obligations under a $9,500 master repurchase facility with JP Morgan Chase Bank, N.A. by making a cash payment of $1,880
and transferring full ownership and control of the related loan collateral and recorded an impairment charge of $8,843 relating to the collateral transferred.

Provision
for taxes was $2,267 for the year ended March 31, 2009, versus $11 for the three months ended March 31, 2008.

Liquidity and Capital Resources

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

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

Further,
our short-term liquidity requirements could be affected by a potential change in our dividend policy. Beginning with the third quarter of 2008 our board of directors
elected not to pay a dividend to common stockholders, which for the second quarter of 2008 was $0.63 per share. Additionally our board of directors elected not to pay the Series A preferred
stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The preferred stock dividend for fourth quarter 2008 and first quarter 2009 has been accrued for as of March 31,
2009. In January 2009, we exchanged our $150,000 of trust preferred securities for a new $150,000 junior subordinated debenture. As part of such transaction, we agreed that we will not make any
distributions on, or repurchases of, our common stock or preferred stock for all of 2009, other than as may be required to maintain our REIT status. Our board of directors will revisit our dividend
policy in 2010.

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

Our
current and future borrowings may require us, among other restrictive covenants to keep uninvested cash on hand to maintain a certain portion of our assets free from liens and to
secure such borrowings without assets. These conditions could limit our ability to do further borrowings. We were in compliance with all such covenants as of March 31, 2009. If we are unable to
make required payments under such borrowings, breach any representation or warranty in the loan documents or violate any covenant contained in a loan document lenders may accelerate the maturity of
our debt. If we are unable to retire our borrowings in such a situation, (i) we may need to prematurely sell the assets securing such debt, (ii) the lenders could accelerate the debt and
foreclose on our assets that pledged as collateral to such lenders, (iii) such lenders could force us into bankruptcy, (iv) such lenders could force us to take other actions to protect
the value of their collateral and/or (v) our other debt financings could become immediately due and payable. Any such event would have a material adverse effect on our liquidity, the value of
our common stock, our ability to make distributions to our stockholders and our ability to continue as a going concern.

The
majority of our loan and other investments are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO
bonds and the remaining income, if any, is retained by us. Our CDO bonds contain interest coverage and asset over collateralization covenants that must be met in order for us to receive such payments.
If we fail these covenants in some or all of our CDOs, all cash flows from the applicable CDO would be diverted to repay principal and interest on the outstanding CDO bonds and we may not receive some
or all payments in respect of any CDO bonds, our equity in the CDOs and the subordinate management fee until that CDO regained compliance with such tests. While we were in compliance with all such
covenants as of March 31, 2009, our compliance margin was thin and relatively small declines in our performance and credit metrics could cause us to fall out of compliance in the future.

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In
the event of a breach of our CDO covenants that we could not cure in the near term, we would be required to fund our non-CDO expenses, including management fees, distributions on
Class B units, debt coverage, interest on our trust preferred securities and other expenses with (i) cash on hand, (ii) income from any CDO not in default, (iii) income
from our real property and unencumbered loan assets, (iv) sale of assets, (v) or accessing the equity or debt capital markets, if available. We have the ability to cure defaults which
would resume normal payments to us. However, we may not have sufficient liquidity available to do so at such time.

To
maintain our qualification as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income. This distribution requirement limits our ability
to retain earnings and thereby replenish or increase capital for operations. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as permitted
under U.S. federal
income tax laws governing REIT distribution requirements. However, we believe that our significant capital resources and access to financing, as noted above, will provide us with financial flexibility
at levels sufficient to meet current and anticipated capital requirements, including funding new investment opportunities.

Cash Flows

Net cash used in operating activities totaled $3,387 for the three months ended March 31, 2009 compared to cash provided by
operating activities of $9,812 for same period in 2008, a decrease of $13,199. Operating cash flow is generated primarily by net interest income from our commercial real estate finance segment and net
rental income from our property investment segment. The decrease in operating cash flows for the three months ended March 31, 2009 compared to the same period in 2008 reflects lower net
investment income from our commercial real estate finance segment and the impact of annual rental income and debt service payments made on the Dana portfolio. These were partially offset by operating
cash flows generated by our property investments and changes in other working capital items.

Net
cash provided by investing activities for the three months ended March 31, 2009 was $22,691 compared to $35,785 during the same period in 2008, a decrease of $13,094. This
decline reflects the impact of the generalized credit market dislocations which have continued since 2008 and the resulting effect on our investing activities. These decreases were partially offset by
proceeds from the sale of real estate primarily acquired through our purchase of American Financial.

Net
cash used in financing activities totaled $72,933 for the three months ended March 31, 2009, an increase of $41,857 from the net cash used in financing activities in the three
months ended March 31, 2008 of $31,076. The increase in cash used for financing activities primarily reflects the extinguishment of our unsecured credit facility, a decrease in restricted cash
in connection with financing investments in our CDOs and mortgage repayments and amortization. This was partially offset by the deferral of dividend payments on our common and preferred stock, and
lower net repayments on our repurchase facilities.

Capitalization

Our authorized capital stock consists of 125,000,000 shares, $0.001 par value, of which we have authorized the issuance of up to
100,000,000 shares of common stock, $0.001 par value per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. As of March 31, 2009, 49,863,831 shares of common stock and
4,600,000 shares of preferred stock were issued and outstanding.

Preferred Stock

In April 2007, we issued 4,600,000 shares of our 8.125% Series A cumulative redeemable preferred stock (including the
underwriters' over-allotment option of 600,000 shares) with a mandatory

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liquidation
preference of $25.00 per share. Holders of the Series A cumulative redeemable preferred shares are entitled to receive annual dividends of $2.03125 per share on a quarterly basis
and dividends are cumulative, subject to certain provisions. On or after April 18, 2012, we may at our option redeem the Series A cumulative redeemable preferred stock at par for cash.
Net proceeds (after deducting underwriting fees and expenses) from the offering were approximately $111,205.

Common Stock

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

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

Outperformance Plan

In June 2005, the compensation committee of the board of directors approved a long-term incentive compensation
program, the 2005 Outperformance Plan. Participants in the 2005 Outperformance Plan, were to share in a "performance pool" if our total return to stockholders for the period from June 1, 2005
through May 31, 2008 exceeded a cumulative total return to stockholders of 30% during the measurement period over a base share price of $20.21 per share. We recorded the expense of the LTIP
Units of our Operating Partnership, or the LTIP Units, award in accordance with FASB Statement No. 123(R). Compensation expense of $308 was recorded for the three months ended March 31,
2008, related to the 2005 Outperformance Plan. Based on our total return to stockholders as of the May 31, 2008 measurement period conclusion date, we did not meet the minimum 30% return
threshold and accordingly, the plan participants automatically forfeited the LTIP Units that they had been granted and the 2005 Outperformance Plan expired as of that date.

Deferred Stock Compensation Plan for Directors

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

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As
of March 31, 2009, there were approximately 112,756 phantom stock units outstanding, of which 100,756 units are vested.

Market Capitalization

At March 31, 2009, our CDOs and borrowings under our term loan, credit facility, repurchase facility, junior subordinated notes,
and mortgage loans (including the Goldman Mortgage and Senior and Junior Mezzanine Loans), represented 97% of our consolidated market capitalization of $5.3 billion (based on a common stock
price of $.97 per share, the closing price of our common stock on the New York Stock Exchange on March 31, 2009). Market capitalization includes our consolidated debt and common and preferred
stock.

Indebtedness

The table below summarizes secured and other debt at March 31, 2009 and December 31, 2008, including our junior
subordinated debentures:

March 31,
2009

December 31,
2008Mortgage notes payable


$1,771,512


$1,833,005Mezzanine notes payable


573,464


580,462Unsecured credit facility





172,301Term loan, credit facility and repurchase facility


79,601


95,897Collateralized debt obligations


2,607,759


2,608,065Junior subordinated notes


150,000


Junior subordinated debentures





150,000Total


$5,182,336


$5,439,730Cost of debt


LIBOR+2.41
%

LIBOR+2.54
%


Term Loan, Credit Facility and Repurchase Facility

The facility with Wachovia Capital Markets, LLC or one or more of its affiliates, or Wachovia, was initially established as a
$250,000 facility in 2004, and was subsequently increased to $500,000 effective April 2005. In July 2008, the original facility was terminated and a new credit facility was executed to
provide for a total credit availability of $215,680, comprised of a term loan equal to $115,680 and a revolving credit facility equal to $100,000 with a credit spread of 242.5 basis points (which
would have been increased to 267.5 basis points upon an extension of the maturity of the credit facility). The term of the credit facility was two years and the borrowers were able to extend the term
for an additional twelve-month period if certain conditions are met. Advance rates for assets acquired pursuant to the credit facility varied from 50% to 80% of purchase price, depending on the type
and structure of the asset. In April 2009, we entered into an amendment with Wachovia, pursuant to which the maturity date of the credit facility was extended to March 31, 2011 and the
interest rate remained unchanged. The amendment also eliminated all financial covenants, eliminated Wachovia's right to impose future margin calls, reduced the recourse guarantee to be no more than
$10,000, and eliminated cross default provisions with respect to the our other indebtedness. We made a $13,000 cash deposit and provided other credit support to backstop letters of credit of Wachovia
issued in connection with our mortgage debt obligations of certain of our subsidiaries. We also agreed to attempt to divest of certain loan investments in the future in order to further deleverage the
credit facility and to forego additional borrowing under the facility. At March 31, 2009, we designated four of the loan investments which secure the facility, with a carrying value of $85,608
as held-for-sale and recorded an impairment charge of $21,460. We had accrued interest of $114 and borrowings of $60,870 at a weighted average spread to

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LIBOR
of 2.05% as of March 31, 2009, and no accrued interest and borrowings of $72,254 on the repurchase facility at a weighted average spread to LIBOR of 2.68% as of December 31, 2008.

Our
subsidiaries also have a repurchase facility with Goldman Sachs Mortgage Company, or Goldman. In October 2006 this facility was increased from $200,000 to $400,000 and its
maturity date was extended until September 2009. In August 2008, the facility was amended to reduce the borrowing capacity to $200,000 and to provide for an extension of the maturity to
December 2010, for a fee, provided that no event of default has occurred. The facility bears interest at spreads of 2.00% to 2.30% over one-month LIBOR and, based on its expected
investment activities, provides for advance rates that vary from 65% to 75% based upon the collateral provided under a borrowing base calculation. The lender has a consent right to the inclusion of
investments in this facility, determines periodically the market value of the investments, and has the right to require additional collateral, a partial repayment of the facility (margin call), or a
reduction in unused availability under the facility, sufficient to rebalance the facility if the estimated market value of the included investments declines. In April 2009, we entered into an
amendment to the amended and restated master repurchase agreement and amended guaranty with Goldman, pursuant to which all financial covenants in the amended and restated master repurchase agreement
and the amended guaranty were eliminated and certain other provisions of the amended and restated master repurchase agreement and the amended guaranty were amended or deleted, including, among other
things, the elimination of the existing recourse liability and a relaxation of certain affirmative and negative covenants. We made a cash payment to Goldman in the
amount of $4,000 to reduce the borrowings under the agreement. We had accrued interest of $48 and borrowings of $18,731 at a weighted average spread to LIBOR of 2.50% as of March 31, 2009, and
no accrued interest and borrowings of $23,643 at a weighted average spread to LIBOR of 2.5% under this facility at December 31, 2008.

The
Goldman repurchase facility and the Wachovia credit facility require that borrowings under these facilities be repaid as principal payments on the loans and investments pledged to
these facilities are received. Assets pledged as collateral under these facilities may include stabilized and transitional whole loans, subordinate interests in whole loans and mezzanine loans.

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

Unsecured Credit Facility

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

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Mortgage Loans

Certain real estate assets are subject to mortgage liens. As of March 31, 2009, 720 of our real estate assets were encumbered
with mortgage and mezzanine loans with a cumulative outstanding balance of $2,378,623. Our mortgage notes payable typically require that specified loan-to-value and debt
service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are
not satisfied, in addition to other conditions that we may have to observe, our ability to release properties from the financing may be restricted and the lender may be able to "trap" portfolio cash
flow until the required ratios are met on an ongoing basis.

Goldman Mortgage Loan

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

The
Goldman Mortgage Loan requires an environmental escrow reserve for the remediation of environmental conditions in the combined amount of $700. Since August 2008, $625 of this
reserve was released to the Goldman Loan Borrowers, leaving a balance of $75 reserved with the lender as of March 31, 2009. The lenders may upon our request disburse funds from the reserve on a
monthly basis for the reimbursement of reasonable costs and expenses incurred to correct the environmental conditions.

We
had accrued interest of $290 and borrowings of $241,324 as of March 31, 2009.

Secured Term Loan

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

The
PB Loan requires us to enter into an interest rate protection agreement within five days of the tenth consecutive LIBOR banking day on which the strike rate exceeds 6.00% per annum.
The

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interest
rate protection agreement must protect the PB Loan Borrower against upward fluctuations of interest rates in excess of 6.25% per annum.

We
had accrued interest of $429 as of March 31, 2009.

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

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

Goldman Senior and Junior Mezzanine Loans

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

The
Goldman Mezzanine Loan required and the Senior Mezzanine Loan requires an environmental escrow reserve for the remediation of environmental conditions in the combined amount of $850.
Since August 2008, $575 of this reserve was released to the Mezzanine Borrowers, leaving a balance of $275 reserved with the lender as of March 31, 2009. The lender may upon our request
disburse funds from the reserve on a monthly basis for the reimbursement of reasonable costs and expenses incurred to correct the environmental conditions.

We
had accrued interest of $1,599 and borrowings of $573,464 as of March 31, 2009.

Collateralized Debt Obligations

During 2005 we issued approximately $1,000,000 of CDO bonds through two indirect subsidiaries, Gramercy Real Estate CDO
2005-1 Ltd., or the 2005 Issuer, and Gramercy Real Estate CDO 2005-1 LLC, or the 2005 Co-Issuer. The CDO consists of $810,500 of investment grade
notes, $84,500 of non-investment grade notes, which were co-issued by the 2005 Issuer and the 2005 Co-Issuer, and $105,000 of preferred shares, which were issued by
the 2005 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus

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0.49%.
We incurred approximately $11,957 of costs related to Gramercy Real Estate CDO 2005-1, which are amortized on a level- yield basis over the average life of the CDO.

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

In
August 2007, we issued $1,100,000 of CDO bonds through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 Issuer,
together with the 2005 Issuer and the 2006 Issuer, the Issuers, and Gramercy Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer, together with 2005 Co-Issuer
and the 2006 Co-Issuer, the Co-Issuers. The CDO consists of $1,045,550 of investment grade notes, $22,000 of non-investment grade notes, which were
co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32,450 of preferred shares, which were issued by the 2007 Issuer. The investment grade notes were issued with floating
rate coupons with a combined weighted average rate of three-month LIBOR plus 0.46%. We incurred approximately $16,816 of costs related to Gramercy Real Estate CDO 2007-1, which are
amortized on a level-yield basis over the average life of the CDO.

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

During
the year ended March 31, 2008, we repurchased, at a discount, $13,500 of investment grade notes previously issued by two of our three CDOs. We recorded a net gain on the
early extinguishment of debt of $3,690 for the three months ended March 31, 2008, respectively, in connection with the repurchase of notes of such Issuers.

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Junior Subordinated Notes

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

In
January 2009, our Operating Partnership entered into an exchange agreement with the holders of the securities, pursuant to which we and the holders agreed to exchange all of
the previously issued trust preferred securities for newly issued unsecured junior subordinated notes, or the Junior Notes, in the aggregate principal amount of $150,000. The Junior Notes will mature
on June 30, 2035, or the Maturity Date, and will bear (i) a fixed interest rate of 0.50% per annum for the period beginning on January 30, 2009 and ending on January 29,
2012 and (ii) a fixed interest rate of 7.50% per annum for the period commencing on January 30, 2012 through and including the Maturity Date. We may redeem the Junior Notes in whole at
any time, or in part from time to time, at a redemption price equal to 100% of the principal amount of the Junior Notes. The optional redemption of the Junior Notes in part must be made in at least
$25,000 increments. The Junior Notes also contain additional covenants restricting, among other things, our ability to declare or pay any dividends during the calendar year 2009 (except to maintain
our REIT qualification), or make any payment or redeem any debt securities ranked pari passu or junior to the Junior Notes. In connection with the exchange agreement, the final payment on the trust
preferred securities for the period October 30, 2008 through January 29, 2009 was revised to be at a reduced interest rate of 0.50% per annum.

Contractual Obligations

Combined aggregate principal maturities of our CDOs, Wachovia credit facility and term loan and Goldman repurchase facility, junior
subordinated notes, mortgage loans (including the Goldman

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Mortgage
and Senior and Junior Mezzanine Loans), unfunded loan commitments, and operating leases as of March 31, 2009 are as follows:

CDOs

Term Loan,
Credit
Facility and
Repurchase
Facilities

Junior
Subordinated
Notes

Mortgage
and
Mezzanine
Loans(1)

Unfunded
Loan(2)
Commitments

Operating
Lease

Total2009

$


$


$


$
69,791

$
34,618

$
14,222

$
118.6312010





18,731





852,281


26,953


18,817


916,7822011





60,870





25,121





18,705


104,6962012











80,275





18,348


98,6232013











682,067





18,285


700,352Thereafter


2,607,759





150,000


669,088





150,333


3,577,180Above/ Below Market Interest











19,468








19,468Total

$
2,607,759

$
79,601

$
150,000

$
2,398,091

$
61,571

$
238,710

$
5,535,732


---

Lease Agreements

Our properties are leased and subleased to tenants under operating leases with expiration dates extending through the year 2031. These
leases generally contain rent increases and renewal options. As of March 31, 2009, we also leased bank branches and office buildings from third parties with expiration dates extending to the
year 2085 and have various ground leases with expiration dates extending through 2087. These lease obligations generally contain rent increases and renewal options.

Future
minimum rental payments under non-cancelable leases, excluding reimbursements for operating expenses, as of March 31, 2009 are as follows:

2009

$
203,7002010


261,7152011


204,1172012


187,0982012


176,3842014 and thereafter


1,323,224Total

$
2,356,238


Off-Balance-Sheet Arrangements

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

Dividends

To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income,
determined before taking into consideration the dividends paid

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

Beginning
with the third quarter of 2008 our board of directors elected not to pay a dividend to common stockholders, which for the second quarter of 2008 was $0.63 per share. Our board
of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The preferred stock dividend has been accrued for as
of March 31, 2009 and December 31, 2008. Based on current estimates of taxable income, we believe cumulative distributions made in 2008 will satisfy our REIT distribution requirements.

Inflation

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

Related Party Transactions

On April 24, 2009, in connection with the internalization, we and the Operating Partnership entered into that certain securities
transfer agreement with SL Green Operating Partnership, L.P., GKK Manager Member Corp. and SL Green, pursuant to which (i) SL Green Operating
Partnership, L.P. and GKK Manager Member Corp. agreed to transfer to our Operating Partnership membership interests in the Manager and (ii) SL Green Operating
Partnership, L.P. agreed to transfer to our Operating Partnership its Class B limited partner interests in our Operating Partnership, in exchange for certain de minimis cash
consideration. The securities transfer agreement contains standard representations, warranties, covenants and indemnities. No distributions were due on the Class B limited partner interests for
the period ended March 31, 2009 or otherwise in connection with the internalization.

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

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In connection with our initial public offering, we entered into a management agreement with the Manager, which was subsequently amended and restated in
April 2006. The management agreement was further amended in September 2007, and amended and restated in October 2008 and was subsequently terminated in connection with the
internalization. The management agreement provided for a term through December 2009 with automatic one-year extension options and is subject to certain termination rights. We paid
the Manager an annual management fee equal to 1.75% of our gross stockholders equity (as defined in the management agreement) inclusive of our trust preferred securities. In October 2008, we
entered into the second amended and restated management agreement with the manager which generally contained the same terms and conditions as the amended and restated management agreement, except for
the following material changes: (1) reduces the annual base management fee to 1.50% of our gross stockholders equity; (2) reduced the termination fee to an amount equal to the management
fee earned by the manager during the 12 months preceding the termination date; and (3) commencing July 2008, all fees in connection with collateral management agreements are to be
remitted by the Manager to us. We incurred expense to the Manager under this agreement of an aggregate of, $5,672 and $7,145 for the three months ended March 31 2009 and 2008, respectively.

Prior
to the internalization, to provide an incentive to enhance the value of our common stock, the holders of the Class B limited partner interests of our Operating Partnership
was entitled to an incentive return equal to 25% of the amount by which FFO plus certain accounting gains and losses (as defined in the partnership agreement of our Operating Partnership) exceed the
product of the weighted average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). We
recorded any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned
and when payments of such amounts became probable and reasonably estimable in accordance with the partnership agreement. In October 2008, we entered into a letter agreement with the
Class B limited partners to waive the incentive distribution that would have otherwise been earned for the period July 1, 2008 through December 31, 2008 and provided that starting
January 1, 2009, the incentive distribution can be paid, at our option, in cash or shares of common stock. In December 2008, we entered into a letter agreement with the Manager and
SL Green, pursuant to which the Manager agreed to pay $2,750 in cash and SL Green transferred 1.9 million shares of the our common stock to us, in full satisfaction of all
potential obligations that the holders of the Class B limited partner interests may have had to our Operating Partnership, and our Operating Partnership may had to the holders, each in
accordance with amended operating partnership agreement of our Operating Partnership, in respect of the recalculation of the distribution amount to the holders at the end of the 2008 calendar year. We
incurred approximately $2,496 with respect to such Class B limited partner interests for the three months ended March 31, 2008. No incentive distribution was earned by the Class B
limited partner interests for the three months ended March 31, 2009.

Prior
to the internalization, we were obligated to reimburse the Manager for its costs incurred under an asset servicing agreement between the Manager and an affiliate of SL Green
Operating Partnership, L.P. and a separate outsource agreement between the Manager and SL Green Operating Partnership, L.P. The asset servicing agreement, which was amended and
restated in April 2006, provided for an annual fee payable to SL Green Operating Partnership, L.P. by us of 0.05% of the book value of all credit tenant lease assets and
non-investment grade bonds and 0.15% of the book value of all other assets. The asset servicing fee could be reduced by SL Green Operating Partnership, L.P. for fees paid
directly to outside servicers by us. The outsource agreement provided for an annual fee payable by us, which became $2,814 per year subsequent to the closing of the American Financial merger to
reflect higher costs resulting from the increased size and number of assets of the combined company, increasing 3% annually over the prior year on the anniversary date of the outsource agreement in
August of each year. For the three months ended March 31, 2008, we realized expense of $341, to the Manager under the outsource agreement. For the three months ended

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March 31,
2008, we realized expense of $1,324 to our Manager under the asset servicing agreement. In October 2008, each of the asset servicing agreement and outsource agreement was terminated,
effective as of September 30, 2008. In October 2008, the outsource agreement was terminated and the asset servicing agreement was replaced with that certain interim asset servicing agreement
between the Manager and an affiliate of SL Green, pursuant to which we were obligated to reimburse the Manager for its costs incurred there under from October 2008 until April 24, 2009
when such agreement was terminated in connection with the internalization. Pursuant to that agreement, the SL Green affiliate acted as the rated special servicer to our CDOs, for a fee equal to
two basis points per year on the carrying value of the specially serviced loans assigned to it. Concurrent with the internalization, the interim asset servicing agreement was terminated and the
Manager entered into a special servicing agreement with an affiliate of SL Green, pursuant to which the SL Green affiliate agreed to act as the rated special servicer to our CDOs for a
period beginning on April 24, 2009 through the date that is the earlier of (i) 60 days thereafter and (ii) a date on which a new special servicing agreement is entered into
between the Manager and a rated third-party special servicer. The SL Green affiliate will be entitled to a servicing fee equal to (i) 25 basis points per year on the outstanding
principal balance of assets with respect to certain specially serviced assets and (ii) two basis points per year on the outstanding principal balance of assets with respect to certain other
assets.

On
October 27, 2008, we entered into a services agreement with SL Green and SL Green Operating Partnership, L.P. which was subsequently terminated in
connection with the internalization. Pursuant to the services agreement, SL Green agreed to provide consulting and other services to us. SL Green would make Marc Holliday, Andrew Mathias
and David Schonbraun available in connection with the provision of the services until the earliest of (i) September 30, 2009, (ii) the termination of the management agreement or
(iii) with respect to a particular executive, the termination of any such executive's employment with SL Green. In consideration for the consulting services, we paid a fee to
SL Green of $200 per month, payable, at our option, in cash or, if permissible under applicable law or the requirements of the exchange on which the shares of our common stock trade, shares of
our common stock. SL Green also provided us with certain other services described in the services agreement (including acting as a special servicer to our CDOs through an affiliate for a fee of
$100 per month in cash and for a period terminating at the earlier of (i) three months after the date of the services agreement, subject to a one-time 30-day extension,
or (ii) the termination of the management agreement. By a separate agreement and a separate fee, SL Green and SL Green Operating Partnership, L.P. agreed to perform special
servicer activities for us through one of their rated special servicing affiliates for a period beginning on April 24, 2009 through the date that is the earlier of (i) 60 days
thereafter or (ii) a date on which a new special servicing agreement is entered into between the Manager and a rated third-party special servicer.

In
connection with the closing of our first CDO in July 2005, the 2005 Issuer, entered into a collateral management agreement with the Manager. Pursuant to the collateral management
agreement, the Manager has agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The
collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum
of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per
annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted
securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the
calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under the first CDO, the Board of Directors allocated to the Manager the
subordinate collateral management fee paid on the CDO securities not held by us. In October 2008, pursuant to the second amended and restated

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management
agreement, the Manager had, commencing July 1, 2008, agreed to remit this amount to us. At March 31, 2009 and December 31, 2008 we owned all of the
non-investment grade bonds, preferred equity and equity in both CDOs. The senior collateral management fee and balance of the subordinate collateral management fee is allocated to us. For
the three months ended March 31, 2008, we realized expense of $512 to our Manager under such collateral management agreement.

Prior
to the internalization, fees payable in connection with CDOs or other securitization vehicles, except for the 2005 CDO, were governed by the management agreement. Pursuant to the
management agreement, if a collateral manager is retained as part of the formation of a CDO or other securitization vehicle, the Manager or an affiliates will be the collateral manager and will
receive the following fees:
(i) 0.25% per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with us or the Manager, which CDO is
structured to own loans secured by transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a managed non-transitional
CDO that are owned by third-party investors unaffiliated with us or the Manager, which CDOs structured to own loans secured by non-transitional properties, (iii) 0.10% per annum of
the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with us or the Manager, which CDO is structured to own non-investment
grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with us or the Manager, which CDO
is structured to own investment grade bonds. For the purposes of the management agreement, a "managed transitional" CDO means a CDO that is actively managed, has a reinvestment period and is
structured to own debt collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net operating income growth, and a "managed
non-transitional" CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by stabilized real estate assets that are
not expected to experience substantial net operating income growth. Both "managed transitional" and "managed non-transitional" CDOs may at any given time during the reinvestment period of
the respective vehicles invest in and own non-debt collateral (in limited quantity) as defined by the respective indentures. If any fees are paid to the collateral manager in excess of the
fee structure provided for above, such fees are paid to us. In October 2008, pursuant to the second amended and restated management agreement, the Manager, commencing July 1, 2008, agreed to
remit this amount to us. For the three months ended March 31, 2008, we realized expense of approximately $571 to the Manager under this agreement. With respect to the CDO which closed in
August, 2007, we realized expense to the Manager of $216 for the three months ended March 31, 2008.

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

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indenture,
equal to 0.15% per annum of the aggregate principal balance of the loans, preferred equity securities, cash and certain defaulted securities.

Commencing
in May 2005 we are party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporate offices at 420 Lexington Avenue, New
York, New York. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in year 10. We
lease approximately 5,200 additional square feet, on a month-to-month basis pursuant to amendments to the prime lease, for approximately $271 per annum. For the three months
ended March 31, 2009 and 2008, we paid $100 and $62 under this lease, respectively.

In
July 2005, we closed on the purchase from an SL Green affiliate of a $40,000 mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained an
interest-only participation. The mezzanine loan is secured by the equity interests in an office property in New York, New York. As of March 31, 2009 and December 31, 2008,
the loan had a book value of $39,450 and $39,520, respectively.

In
March 2006, we closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green is an
equity holder. The mezzanine loan was repaid in full on May 9, 2006, when we originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint
venture. The whole loan is secured by office and industrial properties in northern New Jersey and had a book value of $86,617 and $90,595 as of March 31, 2008 and December 31, 2008,
respectively.

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

In
December 2006, we acquired from a financial institution a pari-passu interest of $125,000 in a $200,000 mezzanine loan, which bears interest at 6.384% and is secured by a
multi-family portfolio in New York, New York. An affiliate of SL Green simultaneously acquired the remaining $75,000 pari-passu interest in the mezzanine loan. As of
March 31, 2009 and December 31, 2008, the loan had a book value of $104,949 and $118,703, respectively.

In
January 2007, we originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a portfolio of
multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an office
property. On March 8, 2007 the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event our loan became secured by a first mortgage
lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and one-month LIBOR
plus 1.00% for the
subsequent funding. At closing, an affiliate of SL Green acquired from us and held a 15.15% pari-passu interest in the mezzanine loan and the whole loan. As of March 31, 2009
and December 31, 2008, our interest in the whole loan had a carrying value of $62,512 and $66,707, respectively. The investment in the mezzanine loan was repaid in full in September 2007.

In
April 2007, we purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34th Street in
New York, New York. The acquisition

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was
financed with a $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated third party for a term of
70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. As of March 31, 2009 and December 31,
2008, the investment had a carrying value of $27,381 and $26,118, respectively. We recorded our pro rata share of net income of $1,263 and $1,504 for the three months ended March 31, 2009 and
December 31, 2008, respectively.

In
July 2007, we purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land located at
885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a
70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are
pari-passu. As of March 31, 2009 and December 31, 2008, the investment had a carrying value of $39,226 and $37,070, respectively. We recorded our pro rata share of net income
of $1,519 and $1,931 for the three months ended March 31, 2009 and 2008, respectively.

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

In
July 2007, we acquired for $71,871 a 100% fee interest in the property located at 292 Madison Avenue, New York, New York, purchased from SL Green. We entered into a
70-year ground lease with an unaffiliated third party which simultaneously purchased from SL Green the Class B office building situated on the property. Our acquisition of
the fee interest was financed with a $59,099 10-year fixed rate mortgage loan.

In
August 2007, we closed on the purchase from a financial institution of a $12,500 mezzanine loan on a substantially complete residential condominium project in the upper east side of
Manhattan. The investment bore interest at the current pay rate of 11% over LIBOR, and a 19%
look-back internal rate of return at maturity. At closing, an affiliate of SL Green simultaneously acquired a $12,500 pari-passu interest in the same tranche of the
capital structure. The loan matured in August 2008 and was retired by a negotiated payoff below par.

In
September 2007, we acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter we, along with SL Green, sold all of our interests in
the loan to an unaffiliated third party. Additionally, we acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same properties as the preceding senior
mezzanine loan. Immediately thereafter we participated 50% of its interest in the loan back to SL Green. As of March 31, 2009 and December 31, 2008, the loan has a book value of
$8,951 and $11,925, respectively. In October 2007, we acquired a 50% pari-passu interest in $57,795 of two additional tranches in the senior mezzanine loan from an unaffiliated third
party. At closing, an affiliate of SL Green simultaneously acquired the other 50% pari-passu interest in the two tranches. As of March 31, 2009 and December 31, 2008,
the loan had a book value of $22,836 and $28,026, respectively.

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

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In
December 2007, we acquired a $52,000 interest in a senior mezzanine loan from a financial institution. Immediately thereafter we participated 50% of our interest in the loan to an
affiliate of SL Green. The investment, which is secured by a retail property in New York, New York, was purchased at a discount and bears interest at an effective spread to
one-month LIBOR of 5.00%. As of March 31, 2009 and December 31, 2008, the loan had a book value of $17,144 and $24,599, respectively.

In
December 2007, we acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter we participated 50% of our interest in the loan to
an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%. As of December 31, 2008 and
December 31, 2007, the loan had a book value of $47,335 and $46,488, respectively.

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

In
August 2008, we closed on the purchase from an SL Green affiliate of a $9,375 pari-passu participation interest in a $18,750 first mortgage. The loan is secured by
a retail shopping center located in Staten Island, New York. The investment bears interest at a fixed rate of 6.50%. As of March 31, 2009 and December 31, 2008, the loan had a book value
of $9,283 and $9,334, respectively.

In
September 2008, we closed on the purchase from an SL Green affiliate of a $30,000 interest in a $135,000 mezzanine loan. The loan is secured by the borrower's interests in a
retail condominium located New York, New York. The investment bears interest at an effective spread to one-month LIBOR of 10.00%. As of March 31, 2009 and December 31, 2008,
the loan had a book value of $30,821 and $30,367, respectively.

Bright
Star Couriers LLC, or Bright Star, provides messenger services to us. Bright Star is owned by Gary Green, a son of Stephen L. Green, our Chairman. The aggregate amount of
fees paid by us for such services was less than $2 for each of the three months ended March 31, 2009 and 2008.

Funds from Operations

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

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FFO
for the three months ended March 31, 2009 and 2008 are as follows:

For the three
months Ended
March 31, 2009

For the three
months Ended
March 31, 2008Net income available to common stockholders

$
(27,291
)
$
23,135Add:Depreciation and amortization


30,698


4,589FFO adjustment for unconsolidated joint ventures


1,173


186Less:Gain in sale of unconsolidated joint venture interest





Non real estate depreciation and amortization


(2,989
)

(3,877
)Gain on sale of properties


(358
)

Funds from operations

$
1,233

$
24,033Funds from operations per sharebasic

$
0.02

$
0.69Funds from operations per sharediluted

$
0.02

$
0.69


Cautionary Note Regarding Forward-Looking Information

This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E
of the Securities Exchange Act of 1934, as amended, or the Exchange Act. You can identify forward-looking statements by the use of forward-looking expressions such as "may," "will," "should,"
"expect," "believe," "anticipate," "estimate," "intend," "plan," "project," "continue," or any negative or other variations on such expressions. Forward-looking statements include information
concerning possible or assumed future results of our operations, including any forecasts, projections, plans and objectives for future operations. Although we believe that our plans, intentions and
expectations as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions or expectations will be achieved. We have listed below
some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from the forward-looking statements we make in this
report. These risks, uncertainties and contingencies include, but are not limited to, the following:



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

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

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141 (revised), or SFAS No. 141(R), "Business Combination", which attempts
to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.
This Statement replaces SFAS No. 141, "Business Combinations." SFAS No. 141(R) retains the fundamental requirements in Statement No. 141 that the acquisition method of accounting
(which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also retains the guidance in
SFAS No. 141 for identifying and recognizing intangible assets separately from goodwill. The most significant changes in SFAS No. 141(R) are: (1) acquisition and restructuring
costs would be now expensed; (2) stock consideration will be measured based on the quoted market price as of the acquisition date instead of the date the deal is announced;
(3) contingent consideration arising from contractual and non-contractual contingencies that meet the more-likely-than-not recognition threshold
will be measured and recognized as an asset or liability at fair value at the acquisition date using a probability-weighted discounted cash flows model, with subsequent changes in fair value reflected
in earnings, while non-contractual contingencies that do not meet the more-likely-than-not criteria will continue to be recognized when they are
probable and reasonably estimable; and (4) acquirer records 100% step-up to fair value for all assets and liabilities, including the minority interest portion and goodwill which is
recorded as if a 100% interest was acquired. We adopted SFAS No. 141(R) on January 1, 2009. We
recorded an expense of $2,826 in connection with costs incurred with the internalization of the management and acquisition of the Manager as of March 31, 2009.

In
December 2007, the FASB issued Statement No. 160, Non-Controlling Interest on Consolidated Financial Statementsan amendment of Accounting Research
Bulletin, or ARB No. 51. This Statement amends ARB No. 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. Additionally, this Statement requires that consolidated net income include the amount attributable to both the parent and the non-controlling interest.
We adopted SFAS No. 160 on January 1, 2009. As required, SFAS No. 160 was applied retrospectively for all periods presented.

In
February 2008, the FASB issued Staff Position No. 140-3, or FSP 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions." FSP 140-3 provides guidance on the accounting for a purchase of a financial asset from a counterparty and contemporaneous financing of the acquisition through
repurchase agreements with the same counterparty. Under this guidance, the purchase and related financing are linked, unless all of the following conditions are met at the inception of the
transaction: (1) the purchase and corresponding financing are not contractually contingent; (2) the repurchase financing provides recourse; (3) the financial asset and repurchase
financing are readily obtainable in the marketplace and are executed at market rates; and (4) the maturity of financial asset and repurchase are not coterminous. A linked transaction would
require a determination under FAS No. 140 to conclude if the transaction meets the requirements for sale

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accounting.
If the linked transaction does not meet sale accounting requirements, the net investment in the linked transaction is to be recorded as a derivative with the corresponding change in fair
value of the derivative being recorded through earnings. The value of the derivative would reflect changes in the value of the underlying debt investments and changes in the value of the underlying
credit provided by the counterparty. We currently present these transactions gross, with the acquisition of the financial assets in total assets and the related repurchase agreements as financing in
total liabilities on the consolidated balance sheet and the interest income earned on the debt investments and interest expense incurred on the repurchase obligations are reported gross on the
consolidated income statements. As SFAS 140-3 is to be applied prospectively and as we have not acquired and simultaneously financed any transactions with the same counterparty
subsequent to January 1, 2009, SFAS 140-3 did not have a material effect on our consolidated financial statements.

In
February 2008, the FASB issued FASB Staff Position 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" ("FSP 157-1") and FSP 157-2, "Effective Date of FASB
Statement No. 157" ("FSP 157-2"). FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2
provides a one-year deferral of the effective date of SFAS No. 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. These non-financial items include
assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and non-financial assets acquired and liabilities assumed in a business combination.
SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and was adopted by us, as it applies to our financial instruments, effective
January 1, 2008. The adoption of SFAS No. 157 as it relates to financial instruments did not have a significant impact on our Consolidated Financial Statements. We adopted the provisions
of SFAS No. 157 as it relates to our non-financial assets and non-financial liabilities on January 1, 2009. The adoption of SFAS No. 157 as it relates to
non-financial assets and non-financial liabilities did not have a significant effect on our consolidated financial statements.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities," an amendment of FASB Statement No. 133, or SFAS
No. 161. SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better
understand how and why an entity uses derivative instruments and their effects on an entity's financial position, financial performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008 with early adoption encouraged. We adopted SFAS No. 161 on January 1, 2009. The adoption
of SFAS no. 161 did not have a material effect on our consolidated financial statements.

In
April 2008, the FASB directed the FASB Staff to issue FSP No. FAS 142-3. "Determination of the Useful Life of Intangible Assets." FSP FAS
No. 142-3 amends the factors that should be considered in developing a renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible
asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets," or SFAS No. 142. FSP FAS No. 142-3 is intended to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other U.S.
generally accepted accounting principles. FSP FAS No. 142-3 is effective for fiscal years beginning after December 15, 2008. We adopted FSP FAS No. 142-3
on January 1, 2009. The adoption of FSP FAS no. 142-3 did not have a material effect on our consolidated financial statements.

In
April of 2008, the FASB voted to eliminate QSPEs from the guidance in SFAS No.140 and to remove the scope exception for QSPEs from FIN 46R. This will require that VIEs
previously accounted for as QSPEs will need to be analyzed for consolidation according to FIN 46R. While the

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revised
standards have not been finalized, and deferred for potential application until 2010, this change may affect our consolidated financial statements.

In
October 2008, the FASB issued Staff Position 157-3, "Determining the Fair Value of a Financial Asset in a Market That Is Not Active", or FSP 157-3,
which clarifies the application of SFAS 157 in an inactive market and provides an illustrative example to demonstrate how the fair value of a financial asset is determined when the market for
that financial asset is not active. The guidance provided by FSP 157-3 is consistent with our approach to valuing financial assets for which there are no active markets. The
adoption of FSP FAS No. 157-3 did not have a material effect on our consolidated financial statements.

In
December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8 ("FSP FAS 140-4 and
FIN 46(R)-8"), "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities" which increases disclosure requirements
for public companies and is effective for reporting periods that end after December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8 amends SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" to require public entities to provide additional disclosures about a transferor's continuing involvement
with transferred financial assets. It also amends FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" to require public enterprises, including
sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. We have adopted FSP
FAS 140-4 and FIN 46(R)-8.

In
January 2009, the FASB issued FSP EITF 99-20-1. This FSP amends the impairment guidance in EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to align it with the impairment
guidance within SFAS 115 by removing from EITF 99-20 the requirement to place exclusive reliance on market participants' assumptions about future cash flows when evaluating
an asset for other-than-temporary impairment. The standard now requires that assumptions about future cash flows consider reasonable management judgment about the probability
that the holder of an asset will be unable to collect all amounts due. FSP EITF 99-20-1 is effective for interim and annual reporting periods ending after
December 15, 2008. We have adopted EITF 99-20-1 and it did not have a material impact on our consolidated financial statements.

In
April 2009, the FASB issued FASB Staff Position on FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" (FSP
FAS 107-1 and APB 28-1). This FSP requires that the fair value disclosures required by SFAS 107 "Disclosures about Fair Value of Financial Instruments" be
included for interim reporting periods. We will adopt this new accounting standard effective April 1, 2009. Adoption of FSP FAS 107-1 and APB 28-1 is not
expected to have a material impact on our consolidated financial statements.

In
April 2009, the FASB issued FASB Staff Position on FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments" (FSP FAS 115-2 and FAS 124-2). This FSP amends the impairment guidance relating to certain debt
securities
and will require a company to assess the likelihood of selling the security prior to recovering its cost basis. Additionally, when a company meets the criteria for impairment, the impairment charges
related to credit losses would be recognized in earnings, while non-credit losses would be reflected in other comprehensive income. We will adopt this new accounting standard effective
April 1, 2009. Adoption of FSP FAS 115-2 and FAS 124-2 is not expected to have a material impact on our consolidated financial statements.

In
April 2009, the FASB issued FASB Staff Position on FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP FAS 157-4). FSP FAS 157-4 provides guidance on determining when the trading volume
and activity for an asset or liability has significantly decreased,

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which
may indicate an inactive market, and on measuring the fair value of an asset or liability in inactive markets. We will adopt this new accounting standard effective April 1, 2009. Adoption
of FSP FAS 157-4 is not expected to have a material impact on our consolidated financial statements.

In
April 2009, the FASB issued FASB Staff Position on FAS 141R-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies" (FSP FAS 141R-1). FSP FAS 141R-1 requires that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability
assumed in a business combination that arises from a contingency if the acquisition-date fair value of the asset or liability can be determined during the measurement period. We adopted
this new accounting standard on January 1, 2009. Adoption of FSP FAS 140R-1 did not have a material impact on our consolidated financial statements.

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ITEM 3.    Quantitative and Qualitative Disclosure About Market Risk

Market Risk

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

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

Real Estate Risk

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

Interest Rate Risk

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

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

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cost
of funds. We enter into hedging transactions with respect to all liabilities relating to fixed rate assets. If we were to finance fixed rate assets with variable rate debt and the benchmark for
our variable rate debt increased, our net income would decrease. Some of our loans are subject to various interest rate floors. As a result, if interest rates fall below the floor rates, the spread
between the yield on our assets and our cost of funds will increase, which will generally increase our returns. Because we generate income principally from the spread between the yields on our assets
and the cost of our borrowing and hedging activities, our net income will generally increase if LIBOR increases and decreases if LIBOR decreases, but this may not always be true in the future. A
hypothetical 100 basis point increase in interest rates along the entire interest rate curve for the three months ended March 31, 2009 would have increased our interest cost by approximately
$4,685 offset by an increase in our investment income of approximately $6,697.

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

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

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

Carrying Value(1)

Allocation by
Investment Type

Fixed Rate:
Average Yield(3)

Floating Rate:
Average Spread over
LIBOR(2)2009

2008

2009

2008

2009

2008

2009

2008Whole loans, floating rate

$
1,154,882

$
1,222,991


55.9
%

55.3
%







422 bps


418 bpsWhole loans, fixed rate


178,904


189,946


8.5
%

8.6
%

7.14
%

7.17
%




Subordinate interests in whole loans, floating rate


80,299


80,608


3.9
%

3.6
%







242 bps


564 bpsSubordinate interests in whole loans, fixed rate


63,464


63,179


3.1
%

2.9
%

9.16
%

9.22
%




Mezzanine loans, floating rate


340,413


396,190


16.4
%

17.9
%







646 bps


654 bpsMezzanine loans, fixed rate


237,082


248,558


11.4
%

11.2
%

10.11
%

10.21
%




Preferred equity, fixed rate


12,012


12,001


0.6
%

0.5
%

10.22
%

10.22
%




Subtotal/ Weighted average


2,067,056


2,213,473


100.0
%

100.0
%

8.91
%

8.96
%

461 bps


480 bpsCMBS, floating rate


71,948


70,893


8.1
%

8.1
%







987 bps


945 bpsCMBS, fixed rate


815,637


799,080


91.9
%

91.9
%

6.25
%

6.26
%




Subtotal/ Weighted average


887,585


869,973


100.0
%

100.0
%

6.25
%

6.26
%

987 bps


945 bpsTotal

$
2,954,641

$
3,083,446


100.0
%

100.0
%

7.25
%

7.32
%

484 bps


498 bps


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Table of Contents



As of March 31, 2009, our loans and other lending investments, excluding CMBS investments, had the following maturity characteristics:

Year of Maturity

Number of
Investments
Maturing

Current
Carrying Value
(In thousands)

% of Total2009(April 1  December 31)(1)


36

$
1,012,165


49.0
%2010


15


497,806


24.1
%2011


7


185,235


9.0
%2012


2


63,190


3.1
%2013








Thereafter


11


308,660


14.8
%Total


71

$
2,067,056


100
%Weighted average maturity(2)





1.8 years


---

Combined
aggregate principal maturities of our CDOs, Wachovia credit facility and term loan, Goldman repurchase facility, junior subordinated loans and mortgage and mezzanine loans
(including the Goldman Mortgage and Senior and Junior Mezzanine Loans), as of March 31, 2009 are as follows:

CDOs

Term Loan,
Credit Facility
and
Repurchase
Facility

Junior
Subordinated
Notes

Mortgage
And
Mezzanine
Loans

Total2009 (April 1  December 31)

$


$


$


$
69,791

$
69,7912010





18,731





852,281


871,0122011





60,870





25,121


85,9912012











80,275


80,2752013











682,067


682,067Thereafter


2,607,759





150,000


669,088


3,426,847Above/ Below Market Interest











19,468


19,468Total

$
2,607,759

$
79,601

$
150,000

$
2,398,091

$
5,235,451


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Table of Contents

The
following table summarizes the notional and fair value of our derivative financial instruments at March 31, 2009. The notional value is an indication of the extent of
involvement in this instrument at that time, but does not represent exposure to credit, interest rate or market risks:

Benchmark Rate

Notional Value

Strike
Rate

Effective
Date

Expiration
Date

Fair
ValueInterest Rate Swap

1 month LIBOR

$
3,465


4.280
%

7/2005


12/2009

$
(81
)Interest Rate Swap

3 month LIBOR


3,465


5.178
%

4/2006


3/2010


(121
)Interest Rate Swap

3 month LIBOR


14,650


4.425
%

11/2007


7/2015


(1,299
)Interest Rate Swap

3 month LIBOR


12,000


3.063
%

1/2008


7/2010


(270
)Interest Rate Swap

3 month LIBOR


12,000


9.850
%

8/2006


8/2011


(937
)Interest Rate Swap

3 month LIBOR


2,000


3.073
%

1/2008


7/2010


(44
)Interest Rate Swap

3 month LIBOR


347,908


5.408
%

8/2007


5/2017


(50,901
)Interest Rate Swap

3 month LIBOR


699,441


5.331
%

8/2007


1/2018


(137,279
)Interest Rate Swap

1 month LIBOR


42,718


4.990
%

1/2007


1/2017


(7,829
)Interest Rate Swap

3 month LIBOR


24,143


5.114
%

2/2008


1/2017


(2,926
)Interest Rate Swap

3 month LIBOR


16,412


5.203
%

2/2008


5/2017


(2,065
)Interest Rate Swap

3 month LIBOR


4,700


3.170
%

4/2008


4/2012


(183
)Interest Rate Swap

1 month LIBOR


9,375


4.260
%

8/2008


1/2015


(784
)Interest Rate Cap

1 month LIBOR


250,000


5.250
%

4/2008


3/2010


Interest Rate Cap

1 month LIBOR


600,000


5.250
%

8/2008


3/2010


Interest Rate Cap

3 month LIBOR


10,000


3.920
%

10/2008


10/2013


(658
)Interest Rate Cap

3 month LIBOR


17,500


3.920
%

10/2008


10/2013


(1,152
)Total



$
2,069,777










$
(206,529
)


ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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

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Table of Contents

PART II OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

None

ITEM 1A.    RISK FACTORS

Other than the risk factors set forth herein, there have been no material changes to the risk factors set forth in Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2008, except to the extent the risk factors therein are inconsistent with the fact that (i) we are now
an internally-managed company as a result of the internalization of the Manager, which we refer to herein as the "internalization," and (ii) we have restructured certain of our debt facilities
and eliminated various financial covenants thereunder, such risk factors would be deemed to be inapplicable to us. As used in this Item 1A., unless the context otherwise requires, the terms
"we," "us," "our" and "our company" refer to all entities owned or controlled by Gramercy Capital Corp., including GKK Capital LP, its operating partnership, and American Financial.

We have limited experience operating as an internally-managed REIT,which makes our future performance difficult to predict.
As a result of the internalization, we may be exposed to risks which we have not historically encountered.

We have limited operating history as an internally-managed company. Prior to the internalization, we were externally managed and
advised by the Manager, a wholly-owned subsidiary of SL Green. As a result, our future performance is more difficult to predict.

As
a result of the internalization, we may encounter risks to which have not historically been exposed. Excluding the effect of the eliminated base and incentive management fees, our
direct overhead, on a consolidated basis, may increase as a result of becoming internally-managed. Prior to the internalization, the responsibility for such overhead was borne by the Manager. No
assurance can be given that the cost to us of internalizing the Manager will not exceed the fees that would have been payable to the Manager under the management agreement.

We
currently employ a staff of approximately 148 people. As their employer, we will be subject to those potential liabilities that are commonly faced by employers, such as workers'
disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, and we will bear the costs of the establishment and maintenance of such plans.

We may not have uncovered all risks associated with acquiring the Manager, and significant liabilities may arise after the internalization.

There may be risks that we failed or were unable to discover in the course of performing our due diligence in connection with the
internalization. All of the Manager's liabilities remain intact, whether pre-existing or contingent, as a matter of law. While we tried to minimize this risk by conducting due diligence,
there could be numerous liabilities that we failed to identify. Any significant liability that may arise or be discovered after the internalization may harm our business, financial condition and
results of operations. Further, any right to indemnification we have are limited in amount and by time.

We are dependent on key personnel whose continued service is not guaranteed.

We rely on a small number of persons who comprise our existing senior management team to implement our business and investment
strategies. While we have entered into employment agreements with each member of our senior management team, they may nevertheless cease to provide services to us at any time. The loss of services of
any of our key management personnel, or our inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial

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Table of Contents

results.
As we adjust to being an internally-managed company, we will continue to try to attract and retain qualified additional senior management, but may not be able to do so on acceptable terms.

We are dependent on SL Green as the special servicer to our CDOs and may not find a suitable replacement if SL Green terminates the special servicing
agreement.

Currently, SL Green acts as the rated special servicer to our CDOs. If SL Green terminates the special servicing
agreement with respect to any of our CDOs, we will be required to replace SL Green with another rated special servicer and may be unable to do so on similar or more beneficial economic and
other terms. Pursuant to the special servicing agreement, SL Green will remain as the rated special servicer to our CDOs until the earlier of June 23, 2009 or the date the Manager enters
into a new special servicing agreement with a rated third-party special servicer.

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Table of Contents

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

None

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5.    OTHER INFORMATION

None

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Table of Contents

ITEM 6.

Exhibit No.

Description3.1

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

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

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

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

Form of stock certificate evidencing the 8.125% Series A Cumulative Redeemable Preferred Stock of the Company, liquidation preference $25.00 per share, par value $0.001 per share (incorporated by reference to
Exhibit 4.2 of the Company's Current Report on Form 8-K which was filed with the Commission on April 18, 2007).10.1

Junior Subordinated Indenture, dated as of January 30, 2009, by and between GKK Capital LP and The Bank of New York Mellon Trust Company, National Association, as Trustee (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K which filed with the SEC on February 5, 2009).10.2

Exchange Agreement, dated as of January 30, 2009, by and among GKK Capital LP, Taberna Preferred Funding II, Ltd., Taberna Preferred Funding III, Ltd., Taberna Preferred Funding IV, Ltd.,
Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VII, Ltd. and Taberna Preferred Funding VIII, Ltd., filed herewith.10.3

Amendment and Compromise Agreement, dated as of March 31, 2009, by and among GKK Capital LP, KeyBank, National Association, as administrative agent and a bank, Raymond James Bank, FSB, Citicorp North
America, Inc., Deutsche Bank Trust Company Americas, Morgan Stanley Senior Funding, Inc. and Wells Fargo Bank, N.A., as banks, and certain other parties identified on the signature pages thereof (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K which was filed with the SEC on April 2, 2009).31.1

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

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

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

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


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SIGNATURES

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

GRAMERCY CAPITAL CORP.By:

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


Dated:
May 11, 2009

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