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



FORM 10-Q



(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2008o

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 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 51,297,517 as of August 4, 2008.



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GRAMERCY CAPITAL CORP.    INDEX

PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

PAGECondensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007

1Condensed Consolidated Statements of Income for the three and six months ended June 30, 2008 and 2007 (unaudited)

2Condensed Consolidated Statement of Stockholders' Equity and Comprehensive Income for the six months ended June 30, 2008 (unaudited)

3Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)

4Notes to Consolidated Financial Statements (unaudited)

6ITEM 2.

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

67ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

109ITEM 4.

CONTROLS AND PROCEDURES

112PART II.

OTHER INFORMATION

114ITEM 1.

LEGAL PROCEEDINGS

114ITEM 1A.

RISK FACTORS

114ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

120ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

120ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

120ITEM 5.

OTHER INFORMATION

120ITEM 6.

EXHIBITS

121SIGNATURES

123


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PART I. FINANCIAL INFORMATION

ITEM 1.    Financial Statements

Gramercy Capital Corp.

Condensed Consolidated Balance Sheets

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

June 30,
2008

December 31,
2007Assets:Real estate investments, at cost:Land

$
741,619

$
88,720Building and improvements


2,642,437


79,549Less: accumulated depreciation


(19,170
)

(2,015
)Total real estate investments, net


3,364,886


166,254Cash and cash equivalents


55,201


293,126Restricted cash


229,119


135,957Pledged government securities, net


103,527


Loans and other lending investments, net


2,179,311


2,441,747Commercial mortgage-backed securities


855,815


791,983Investments in joint ventures


68,799


49,440Assets held for sale


397,030


194,998Tenant and other receivables, net


52,565


Derivative instruments, at fair value


786


Accrued interest


33,040


32,587Intangibles, net of accumulated amortization of $7,847 and $0


412,634


Deferred costs, net of accumulated amortization of $25,830 and $16,962


78,441


56,109Other assets


51,705


42,877Total assets

$
7,882,859

$
4,205,078Liabilities and Stockholders' Equity:Mortgage notes payable

$
2,557,181

$
153,624Credit facilities


168,917


Repurchase agreements


94,915


200,197Collateralized debt obligations


2,683,955


2,735,145Total secured and other debt


5,504,968


3,088,966Accounts payable and accrued expenses


117,299


35,188Management and incentive fees payable


6,065


5,617Dividends payable


34,675


93,992Accrued interest payable


12,677


Deferred revenue


83,622


Below-market lease liabilities, net of accumulated amortization of $16,581 and $0


746,146


Leasehold interests, net of accumulated amortization of $704 and $0


21,895


Liabilities related to real estate held for sale


7,274


Derivative instruments, at fair value


63,902


72,495Other liabilities


14,995


10,085Junior subordinated deferrable interest debentures held by trusts that issued trust preferred securities


150,000


150,000Total liabilities


6,763,518


3,456,343Commitments and contingencies





Minority interest


2,386


Stockholders' Equity:Common stock, par value $0.001, 100,000,000 shares authorized, 51,295,294 and 34,850,577 shares issued and outstanding at June 30, 2008 and December 31,
2007, respectively


51


34Series A cumulative redeemable preferred stock, par value $0.001, liquidation preference $115,000, 4,600,000 shares authorized, issued and outstanding at
June 30, 2008 and December 31, 2007


111,205


111,205Additional paid-in-capital


1,079,851


685,958Accumulated other comprehensive loss


(58,627
)

(65,658
)(Accumulated deficit) retained earnings


(15,525
)

17,196Total stockholders' equity


1,116,955


748,735Total liabilities and stockholders' equity

$
7,882,859

$
4,205,078


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

1

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Gramercy Capital Corp.

Condensed Consolidated Statements of Income

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

Three Months Ended
June 30,

Six Months Ended
June 30,2008

2007

2008

2007RevenuesRental revenue

$
79,580

$
1,850

$
83,279

$
3,586Investment income


63,003


72,828


137,598


132,797Operating expense reimbursements


32,014





32,014


Gain on sales and other income


22,756


3,625


30,553


10,054Total revenues


197,353


78,303


283,444


146,437Property Operating ExpensesOther property operating expenses


20,293





20,293


Real estate taxes


10,265





10,265


Utilities


9,903





9,903


Ground rents and leasehold obligations


4,094





4,094


Direct billable expenses


1,747





1,747


Total property operating expenses


46,302





46,302


Net operating income


151,051


78,303


237,142


146,437Other ExpensesInterest expense


77,678


39,209


119,121


75,670Provision for loan losses


23,214


2,900


31,214


4,148Depreciation and amortization


22,232


1,088


24,062


1,759Management fees


9,106


5,414


16,251


10,253Incentive fee


2,604


3,784


5,100


6,601Marketing, general and administrative


4,067


4,103


6,872


7,923Total expenses


138,901


56,498


202,620


106,354Income before equity in net income (loss) of joint ventures, provision for taxes, minority interest and discontinued operations


12,150


21,805


34,522


40,083Equity in net income(loss) from joint ventures


1,591


484


4,700


(211
)Income before provision for taxes, minority interest and discontinued operations


13,741


22,289


39,222


39,872Provision for taxes





(429
)

(11
)

(963
)Net income from continuing operations before minority interests


13,741


21,860


39,211


38,909Minority interest


(241
)




(241
)

Net income from continuing operations


13,500


21,860


38,970


38,909Net loss from discontinued operations


(1,104
)




(1,104
)

Net Income


12,396


21,860


37,866


38,909Preferred stock dividends


(2,336
)

(1,895
)

(4,672
)

(1,895
)Net income available to common stockholders

$
10,060

$
19,965

$
33,194

$
37,014Basic earnings per share:Net income from continuing operations

$
0.22

$
0.77

$
0.80

$
1.42Net loss from discontinued operations


(0.02
)




(0.03
)

Net income available to common stockholders

$
0.20

$
0.77

$
0.77

$
1.42Diluted earnings per share:Net income from continuing operations

$
0.22

$
0.73

$
0.80

$
1.35Net loss from discontinued operations


(0.02
)




(0.03
)

Net income available to common stockholders

$
0.20

$
0.73

$
0.77

$
1.35Dividends per common share

$
0.63

$
0.63

$
1.26

$
1.19Basic weighted average common shares outstanding


51,166


26,049


42,966


26,037Diluted weighted average common shares and common share equivalents outstanding


51,291


27,462


43,167


27,467


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

2

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Gramercy Capital Corp.

Condensed Consolidated Statement of Stockholders' Equity and Comprehensive Income

(Unaudited, amounts in thousands)

Common Stock





Accumulated
Other
Comprehensive
Income (Loss)

(Accumulated
Deficit)/
Retained
EarningsSeries A
Preferred
Stock

Additional
Paid-
In-Capital



Comprehensive
IncomeShares

Par Value

TotalBalance at December 31, 2007


34,850

$
34

$
111,205

$
685,958

$
(65,658
)
$
17,196

$
748,735Net income

















37,866


37,866

$
37,866Change in net unrealized loss on derivative instruments














9,446





9,446


9,446Reclassification adjustments from cash flow hedges included in net income














(2,709
)




(2,709
)

(2,709
)Change in net unrealized loss on commercial mortgage-backed securities previously available for sale














294





294


294Issuance of common stock in connection with American Financial Realty Trust acquisition


16,280


16





389,869








389,885Issuance of stockstock purchase plan


2








46








46Proceeds from stock option exercises


86


1





1,305








1,306Stock-based compensationfair value











2,056








2,056Deferred compensation plan, net


77








617








617Dividends declared on common stock

















(65,915
)

(65,915
)Dividends declared on preferred stock

















(4,672
)

(4,672
)Balance at June 30, 2008


51,295

$
51

$
111,205

$
1,079,851

$
(58,627
)
$
(15,525
)
$
1,116,955

$
44,897


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)

Six Months Ended June 30,2008

2007Operating ActivitiesNet income

$
37,866

$
38,909Adjustments to net cash provided by operating activities:Depreciation and amortization


27,405


6,220Minority Interest


251


Amortization of acquired leases to rental income


(13,477
)

Amortization of deferred costs


5,446


Amortization of discount, net, and other fees


(12,706
)

(15,588
)Deferred revenue


(8,069
)

(3,586
)Straight line rent adjustment


5,052


Equity in net (income) loss of joint ventures


(4,700
)

211Gain on extinguishment of debt


(21,697
)

Amortization of stock compensation


2,672


3,140Provision for loan loss


31,214


4,148Unrealized gain on derivative instruments


(2,653
)

33Net realized gain on loans held for sale


(10
)

(4,354
)Changes in operating assets and liabilities:Restricted cash


39,855


Tenant and other receivables


(3,720
)

New investments in loans held for sale





(151,638
)Proceeds from sale of loans and loan commitments and loans held for sale





177,414Accrued interest


(1,731
)

(3,154
)Other assets


25,087


2,021Management and incentive fees payable


448


2,797Settlement of derivative instruments





(460
)Accounts payable, accrued expenses and other liabilities


11,465


(2,051
)Net cash provided by operating activities


117,998


54,062Investing ActivitiesTransaction costs of business combination


(108,199
)

Cash consideration paid for business combination net of cash acquired of $155,356


(586,825
)

Capital expenditures and leasehold costs


(5,010
)

Proceeds from sale of real estate


44,546


New investment originations and funded commitments


(165,107
)

(1,218,083
)Principal collections on investments


273,274


550,909Proceeds from loan syndications


85,132


15,139Investment in commercial real estate





151Investment in commercial mortgage-backed securities


(61,736
)

(25,160
)Investment in joint venture


(1,134
)

(16,946
)Decrease in accrued interest income


106


Purchase of marketable investments


(5,345
)

Sale of marketable investments


1,880


Change in restricted cash from investing activities


(56,010
)

7,283Deferred investment costs


(1,499
)

(1,257
)Net cash used in investing activities


(585,927
)

(687,964
)


4

---



Gramercy Capital Corp.

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

Six Months Ended June 30,2008

2007Financing ActivitiesProceeds from repurchase facilities


22,867


1,067,114Repayments of repurchase facilities


(128,149
)

(787,867
)Proceeds from unsecured revolving credit facility


75,000


75,000Change in restricted cash from financing activities


51,476


198,374Repurchase of collateralized debt obligations


(29,603
)

Proceeds from stock options exercised


1,306


1,050Proceeds from acquisition financing


1,114,743


Repayment of mortgage notes and credit facilities


(716,525
)

Payment for deferred financing and derivative instruments


(31,253
)

(2,017
)Net proceeds from sale of common stock


46


Net proceeds from sale of preferred stock





111,205Dividends paid


(129,903
)

(28,868
)Net cash provided by financing activities


230,005


633,991Net (decrease) increase in cash and cash equivalents


(237,925
)

89Cash and cash equivalents at beginning of period


293,126


19,314Cash and cash equivalents at end of period

$
55,201

$
19,403Non-cash activityDeferred losses and other non-cash activity related to derivatives

$
(6,737
)
$
Issuance of common stock for acquisition advisory costs

$
11,213

$
Issuance of common stock in business combination

$
378,672

$Assumptions of mortgage loans

$
1,316,004

$
SFAS 141 mark-to-market of debt assumed

$
24,743

$
Supplemental cash flow disclosuresInterest paid

$
111,046

$
71,539Income taxes paid

$
393

$
850


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

5

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements

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

June 30, 2008

1. Business and Organization

Gramercy Capital Corp. (the "Company" or "Gramercy") is an integrated commercial real estate specialty 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 $7.9 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, subordinate
interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. The Company's property investment business, which
operates under the name Gramercy Realty, focuses on the acquisition and management of commercial properties leased primarily to 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., Wachovia Bank, National Association, Regions Financial Corporation and Citizens Financial
Group, Inc. 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 is externally managed and advised by GKK Manager LLC, or the Manager, a majority-owned subsidiary of SL Green Realty Corp., or SL Green. At June 30, 2008, SL
Green Operating Partnership, L.P. owned approximately 15.8% of the outstanding shares of the Company's common
stock. The Company qualified as a real estate investment trust, or REIT, under 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 tax status as a REIT, the Company plans to distribute at least 90% of taxable income.

As
of June 30, 2008, Gramercy Finance held loans and other lending investments and CMBS of $3,179,297 net of fees, discounts, and unfunded commitments with an average spread to
30 day LIBOR of 404 basis points for its floating rate investments, and an average yield of approximately 6.96% for its fixed rate investments. As of June 30, 2008, Gramercy Finance also
held interests in three credit tenant net lease investments, or CTL investments, two interests in 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.

6

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

1. Business and Organization (Continued)

As
of June 30, 2008, Gramercy Realty's portfolio consisted of 798 bank branches, 347 office buildings and 11 land parcels, of which 125 bank branches and one office building were
partially owned through joint ventures. Gramercy Realty's wholly-owned properties aggregated approximately 27.7 million rentable square feet and its partially-owned properties aggregated
approximately 1.0 million rentable square feet, including 0.6 million rentable square feet in an unconsolidated joint venture. As of June 30, 2008, the occupancy of Gramercy
Realty's wholly-owned properties was 87.5% and the occupancy for its partially-owned properties was 99.9%. Gramercy Realty's two largest tenants are Bank of America, N.A. and Wachovia Bank, National
Association and as of June 30, 2008, they represented approximately 43.0% and 14.8%, respectively, of the rental income of Gramercy Realty's portfolio and occupied approximately 45.2% and
19.2%, respectively, of Gramercy Realty's total rentable square feet.

Due
to the nature of the business of Gramercy Realty's tenant base, Gramercy Realty typically enters into long-term leases with its tenants. As of June 30, 2008, the
weighted average remaining term of Gramercy Realty's leases was 10.8 years and approximately 80.6% 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 acquisitions and strategic sales and through 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 the first half of 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, as well as the equity securities of financial
institutions and real estate companies. As the severity of residential sector issues increased, nearly all securities markets experienced 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 markets remain at or near all-time highs with liquidity extremely low compared to historical standards or virtually non-existent. As a result, most commercial
real estate finance and financial services industry participants, including the Company, have reduced new investment activity until the capital markets become more stable, the macroeconomic outlook
becomes clearer and market liquidity increases. In this environment, the Company is focused on actively managing portfolio credit, generating and recycling liquidity from existing assets, leasing up
vacant space and reducing corporate overhead as a percentage of its total assets and total revenues.

Basis of Quarterly Presentation

The accompanying unaudited condensed 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, they
do 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 2008 operating results for the periods presented are not necessarily indicative
of the results that may be expected for the year ending December 31, 2008. These financial statements should be read in

7

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

1. Business and Organization (Continued)

conjunction
with the financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007.

The
balance sheet at December 31, 2007 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 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 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 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.

8

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

In
April of 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 consolidated financial statements.

At
June 30, 2008, the Company owned securities of three controlling class CMBS trusts with a carrying value of $38,867. 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 June 30, 2008, the Company's maximum exposure to loss as a result of its investment in these QSPEs totaled $38,867, which equals the book value of these investments
as of June 30, 2008.

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.

Real Estate and CTL Investments

The Company records acquired real estate at cost. Depreciation is computed using the straight-line method over the
estimated useful life of 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 repairs expenditures are charged to expense as incurred.

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

CTL investments are recorded at cost less accumulated depreciation. 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. Capitalized items are depreciated using the straight-line method over the shorter of the useful lives
of the capitalized item or 40 years for buildings or facilities, the remaining life of the facility for facility improvements, five to ten years for personal

9

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

property
and equipment, and the shorter of the remaining lease term or the expected life for tenant improvements.

Results of operations of properties acquired are included in the Consolidated Statements of Income from the date of acquisition.

In
accordance with FASB Statement No. 144, or SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," a property to be disposed of is
reported at the lower of its carrying amount or its estimated fair value, less its cost to sell. Once an asset is classified as held for sale, depreciation expense is no longer recorded and historic
results are reclassified as Discontinued Operations.

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 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 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 Income 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 and
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.

The
Company has not yet obtained all the information necessary to finalize its estimates to complete the purchase price allocations in accordance with SFAS No. 141 related to the
American Financial acquisition. The purchase price allocations will be finalized once the information indentified has been received, which should not be longer than one year from the date of
acquisition.

10

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

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 June 30, 2008 and December 31, 2007, the Company had investments of
$68,799 and $49,440 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 June 30, 2008 consists of $44,134 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 $7,945 of interest reserves held on behalf of borrowers and $177,040 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, including the Company's proportionate share of the reserves of 55 Corporate Drive.

11

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

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. The Company may originate or acquire preferred
equity interests that allow it to participate in a percentage of the underlying property's cash flows from operations and proceeds from a sale or refinancing. Should the Company make such a preferred
equity investment, the Company must determine whether that investment should be accounted for as a loan, joint venture or as an interest in real estate.

Specific
valuation allowances are established for possible loan losses based on the fair value of collateral on an individual loan basis and the consideration of guarantees or other
recourse. The fair 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. 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 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. The Company maintained a reserve of $35,442 and $8,658 at
June 30, 2008 and December 31, 2007, relating to ten and eleven separate loans, respectively. A substantial majority of the additional loan loss reserve added after December 31,
2007 is attributable to a broadly syndicated second and third lien financing secured by residential land in Southern California. The Company has reserved against the entire $15,000 third lien and
$11,000 of the $45,000 second lien. The Company continues to work with its co-lenders, the senior lending group and the borrower for a favorable resolution, but the successful
restructuring of these loans is speculative, additional reserves are possible and any such restructuring will take longer than a more customary restructuring. During the six months ended
June 30, 2008, charge-offs totaled $4,430, relating to two loans the Company foreclosed upon. During the year ended December 31, 2007, charge-offs totaled $3,200
relating to one loan the Company foreclosed upon.

12

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)



The results of operations from real estate investments or CTL investments sold or held for sale in the current and prior periods are
classified as "Loss from discontinued operations" on the Company's consolidated statements of income.

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 income 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 income. 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 $43.6 million to held to maturity. As of June 30, 2008 and December 31, 2007, the unrealized loss on the redesignated CMBS
investments included in other comprehensive income (loss) was $5,281 and $5,575, 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 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.

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 and/or information obtained in consultation
with other investors in similar instruments. Because fair value estimates 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

13

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

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 notwithstanding 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 ability to hold the securities
to maturity. These securities had a carrying value of $103,527, a fair value of $99,879 and unrealized losses of $3,648 at June 30, 2008, and have maturities that extend through November 2013.
The Company did not maintain a portfolio of pledged treasury securities at December 31, 2007.

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 June 30, 2008 and December 31, 2007, were $4,461 and $0, 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
income.

14

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

Intangible Assets

Pursuant to SFAS No. 141, the Company follows the purchase method of accounting for all business combinations. To ensure that
intangible assets acquired and liabilities assumed in a purchase method business combination are recognized and reported apart from goodwill, the Company applies criteria specified in SFAS
No. 141.

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

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

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

In
making estimates of fair values for purposes of allocating purchase price, management utilizes a number of sources, including independent appraisals that may be obtained in connection
with the acquisition or financing of the respective property and other market data. Management also considers information obtained about each property as a result of its pre-acquisition
due diligence, as well as subsequent marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed. The allocation
presented in the accompanying consolidated balance sheet as of June 30, 2008 is substantially complete; however, there are certain items that the Company will finalize once additional
information is received. Accordingly, this

15

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

allocation
is subject to revision when final information is available, although future revisions are not expected to have a significant impact on the financial position or results of operations.

Intangible
assets and acquired lease obligations consist of the following:

June 30,
2008Intangible assets:In-place leases, net of accumulated amortization of $4,825

$
279,008Above-market leases, net of accumulated amortization of $3,186


143,356Amounts reclassed to assets held for sale, net of accumulated amortization of $164


(9,730
)Total intangible assets

$
412,634Intangible liabilities:Below-market leases, net of accumulated amortization of $16,581

$
746,146Total intangible liabilities

$
746,146


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. Prepaid acquisition costs represent a portion of the total purchase price of a property and are reclassified
into real estate investments and related intangible assets, as appropriate, at the time the acquisition is completed. If such costs are related to an acquisition that will not be consummated and the
deposit is not recoverable, the respective amounts are recorded as broken deal costs in the accompanying consolidated statements of income. Costs prepaid in connection with securing financing for a
property are reclassified into deferred financing costs at the time the transaction is completed.

16

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

Valuation of Financial Instruments

The Company measures derivatives at fair value. Investments in loans and other lending investments and loans held for sale are held at
lower of cost or fair value and 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 redesignation.

Effective
January 1, 2008, the Company 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. 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.

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 as follows:



17

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)



For
a further discussion regarding the measurement of financial instruments see Note 14, "Fair Value of Financial Instruments."

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 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 June 30, 2008, the Company had three first mortgage
loans with an aggregate carrying value of $171,809, one second lien loan with a carrying value of $33,900 and one third lien loan with a carrying value of $0, which were classified as
non-performing loans. In April 2008, the first lien lenders commenced a foreclosure action with respect to the collateral supporting the second lien and third lien loans referenced above
and such loans changed from being classified as sub-performing loans as of March 31, 2008 to non-performing loans as of June 30, 2008. The first and second lien
loans are secured by land, which is intended primarily for residential development. Given the significant deterioration in the United States residential real estate markets, the Company believes that
the successful restructuring of these loans is speculative, additional loan loss reserves are possible and will take longer than a more customary restructuring. Therefore, there is more uncertainty
surrounding the possible outcome of these loans. The Company and its co-lenders are currently evaluating their options to protect their interests. In May 2008, the borrowers (controlled by
the same sponsor) under two of the non-performing first mortgage loans referenced above with an aggregate value of $69,755 filed a petition in bankruptcy under
Chapter 11. The Company is currently evaluating its options to protect its interest, including foreclosure and the pursuit of a guaranty provided by the sponsor for all principal due. At
December 31, 2007, the Company had one non-performing loan with a carrying value of $29,058, which was subsequently repaid in full on March 14, 2008, along with accrued
interest and substantially all other fees and charges due to the Company.

18

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

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. At June 30, 2008, one first mortgage loan
with a total carrying value of $26,927, two subordinate interests in whole loans with a carrying value totaling $26,749 and one mezzanine loan with a carrying value of $46,299 were classified as
sub-performing. At December 31, 2007, one first mortgage loan with a carrying value of $10,403, and one 40% participation interest in a first mortgage loan with a carrying value of
$22,000, 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 and six months ended
June 30, 2008 and 2007, the Company recognized $0 and $10 and $1,688 and $4,354, respectively, in net gains from the sale of debt investments or commitments.



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

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

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

The
Company recognizes sales of real estate properties only upon closing, 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

19

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

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.

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 June 30, 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 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. During the six months ended June 30, 2008, the
Company incurred charge-offs totaling $4,430 related to two defaulted loans the Company foreclosed upon which had a carrying value totaling $31,760 and are recorded in assets held for
sale. During the year ended December 31, 2007, the Company incurred a charge-off totaling $3,200 related to a defaulted loan the Company foreclosed upon which had a carrying value
of $19,899 and $19,155 at June 30, 2008 and December 31, 2007, respectively, and is recorded in other assets. The Company maintained a reserve for possible loan losses of $35,442 against
ten separate investments with a carrying value of $218,679 as of June 30, 2008, and a reserve for possible loan losses of $8,658 against eleven investments with a carrying value of $264,612 as
of December 31, 2007. A substantial majority of the additional loan loss reserve is attributable to a broadly syndicated second and third lien financing, secured by residential land in Southern
California.

20

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

The
Company has reserved against the entire $15,000 third lien and $11,000 of the $45,000 second lien. The Company continues to work with its co-lenders, the senior lending group and the
borrower for a favorable resolution, but the successful restructuring of these loans is speculative, additional reserves are possible and any such restructuring will take longer than a more customary
restructuring.

Income
recognition is generally suspended for loans at the earlier of the date at which payment becomes 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 suspended loan becomes contractually current and performance is demonstrated to be resumed.

Stock Based Compensation Plans

The Company has a stock-based compensation plan, described more fully in Note 15. 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.

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

The
fair value of each stock option granted is estimated on the date of grant for options issued to co-leased employees, and quarterly awards to non-employees,
using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2008 and 2007.

2008

2007Dividend yield


8.8%


7.9%Expected life of option


5.8 years


5.9 yearsRisk-free interest rate


3.2%


4.32%Expected stock price volatility


35.0%


28.0%


Incentive Distribution (Class B Limited Partner Interest)

The Class B limited partner interests are 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

21

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

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 records 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 will reduce the amount of cash available for distribution to the common unit holders in the Operating Partnership and
to the Company's common stockholders. The Company incurred approximately $2,604 and $3,784 and $5,100 and $6,601 with respect to such Class B limited partner interests for the three and six
months ended June 30, 2008 and 2007, respectively.

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 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.
Some derivative instruments are associated with an anticipated transaction. In those cases, hedge effectiveness criteria also require that it be probable that the underlying transaction will occur.
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 mark-to-market risk of its liabilities with respect
to certain of the Company's assets. The Company may also use derivatives to hedge variability in sales proceeds to be received upon the sale of loans held for sale.

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

22

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

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.

The
Company may employ swaps, forwards or purchased options to hedge qualifying forecasted transactions. Gains and losses related to these transactions are deferred and recognized in net
income as interest expense or other income in the same period or periods that the underlying transaction occurs expires or is otherwise terminated.

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 18.

Income Taxes

The Company elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with its
taxable year ended December 31, 2004. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its
ordinary taxable income to stockholders. As a REIT, the Company generally will not be subject to 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 federal income taxes on taxable income at regular corporate rates and will not be permitted to qualify for treatment as a
REIT for 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 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 federal, state and local taxes.

For
the three and six months ended June 30, 2008 and 2007, the Company recorded $0 and $429 and $11 and $963 of income tax expense, respectively, in net income from continuing
operations for income attributable to the Company's wholly-owned TRSs. The Company has assumed an effective tax rate for the three and six months ended June 30, 2008 of 44% taking into
consideration the anticipated applicable U.S. federal statutory tax rate at June 30, 2008 of 34% and state and local taxes.

Underwriting Commissions and Costs

Underwriting commissions and costs incurred in connection with the Company's stock offerings are reflected as a reduction of additional
paid-in-capital.

23

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

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 Manager 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. Six investments, including a non-performing loan with a carrying value of $102,054, accounted for more than 22% of the total carrying value of the Company's loan and other
lending investments as of June 30, 2008 and December 31, 2007. Six and eight investments, including a non-performing loan with a carrying value of $102,054, accounted for
approximately 16.6% and 23.3% of the revenue earned on the Gramercy Finance's loan and other lending investments for the three and six months ended June 30, 2008, respectively, compared to four
investments which accounted for approximately 20% and 19% of the revenue earned on the Company's loan and other lending investments for the three and six months ended June 30, 2007,
respectively. The largest sponsor accounted for approximately 4.5% and 4.3% of the revenue earned on the Gramercy Finance's loan and other lending investments for the three and six months ended
June 30, 2008 respectively, compared to approximately 5.6% and 4.8% of the revenue earned on the Company's loan and other lending investments for the three and six months ended June 30,
2007.

Additionally,
two tenants, Bank of America, N.A. and Wachovia Bank, National Association, accounted for approximately 43.0% and 14.8% and 41.2% and 14.1% of Gramercy Real Estate's rental
revenue for the three and six months ended June 30, 2008, respectively.

Recently Issued Accounting Pronouncements

In February 2007, the FASB issued Statement No. 159, or SFAS No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities." SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 applies

24

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

to
reporting periods beginning after November 15, 2007. The Company did not elect FAS No. 159 for any of its financial assets and financial liabilities as of June 30, 2008.

In
June 2007, the American Institute of Certified Public Accountants, or AICPA, issued Statement of Position ("SOP") 07-01 "Clarification of the Scope of the Audit and
Accounting Guide for Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies." SOP 07-1 clarifies the scope of
accounting for investment companies and provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide for Investment Companies or the Guide. For those
entities that are investment companies under SOP 07-1, the specialized industry accounting principles of the Guide (referred to as Investment Company accounting) should be retained
by a parent company when it consolidates its interest in the investment company or by an equity method investor when it records its interest in the investment company. The SOP also provides for
certain disclosure requirements for parent companies and equity method investors in investment companies that continue investment company accounting in the parent's consolidated financial statements
or the financial statements of the equity method investor. The SOP was to be effective for fiscal years beginning on or after December 15, 2007; however in a meeting on October 17, 2007,
the FASB voted to indefinitely defer the effective date and add to the FASB's technical agenda, consideration of amending certain provisions of the SOP. The Company maintains an exemption from the
Investment Company Act of 1940, as amended, and is therefore not regulated as an investment company and as a REIT, the Company is not subject to the AICPA's Investment Company Accounting and Auditing
Guide. The Company continues to monitor the AICPA's developments with respect to SOP 07-1.

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 noncontractual 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 (noncontractual 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. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the effect, if any, that this pronouncement will have on its future financial position and
results of operations.

25

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

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. This Statement is effective for interim periods beginning on or after December 15, 2008.
The Company is currently evaluating the impact, if any, that the adoption of this Statement will have on the consolidated financial statements of the Company.

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. FSP No. 140-3 is effective for financial statements issued for fiscal years beginning after
November 15, 2008. The Company is currently evaluating the effect, if any, that this pronouncement will have on its future financial position and results of operations.

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 is currently evaluating the effect, if any, that this
pronouncement will have on its future financial position and results of operations.

26

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

2. Significant Accounting Policies (Continued)

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. Earlier application is not permitted. The Company
believes the impact of adopting FSP FAS No. 142-3 will not have a material effect on the 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 revised standards have not been finalized, and deferred for potential application
until 2010, this change may affect the Company's consolidated financial statements.

27

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

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 June 30,
2008 and December 31, 2007, including loans held for sale, were as follows:

Carrying Value(1)

Allocation by
Investment Type

Fixed Rate:
Average Yield

Floating Rate:
Average Spread over
LIBOR(2)2008

2007

2008

2007

2008

2007

2008

2007Whole loans, floating rate

$
1,392,185

$
1,594,338


59.9
%

60.5
%







335 bps


332 bpsWhole loans, fixed rate


155,254


204,192


6.7
%

7.7
%

7.15
%

7.79
%




Subordinate interests in whole loans, floating rate


132,023


146,901


5.7
%

5.6
%







451 bps


447 bpsSubordinate interests in whole loans, fixed rate


43,584


61,890


1.9
%

2.3
%

8.32
%

8.78
%




Mezzanine loans, floating rate


361,164


413,813


15.5
%

15.7
%







568 bps


607 bpsMezzanine loans, fixed rate


227,393


203,753


9.8
%

7.7
%

8.99
%

8.91
%




Preferred equity, fixed rate


11,879


11,858


0.5
%

0.5
%

10.09
%

10.09
%




Subtotal/ Weighted average


2,323,482


2,636,745


100.0
%

100.0
%

8.30
%

8.45
%

389 bps


395 bpsCMBS, floating rate


68,643


23,817


8.0
%

3.0
%







854 bps


593 bpsCMBS, fixed rate


787,172


768,166


92.0
%

97.0
%

6.22
%

6.13
%




Subtotal/ Weighted average


855,815


791,983


100.0
%

100.0
%

6.22
%

6.13
%

854 bps


593 bpsTotal

$
3,179,297

$
3,428,728


100.0
%

100.0
%

6.96
%

7.02
%

404 bps


397 bps


---

28

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

3. Loans and Other Lending Investments (Continued)

As of June 30, 2008, the Company's loans and other lending investments and CMBS investments, including loans held for sale had the
following maturity characteristics:

Year of Maturity

Number of
Investments
Maturing

Current
Carrying Value
(In thousands)

% of
Total2008


15

$
406,191


12.8
%2009


38


1,189,852


37.4
%2010


15


359,755


11.3
%2011


2


45,880


1.4
%2012


4


91,567


2.9
%Thereafter


25


1,086,052


34.2
%Total


99

$
3,179,297


100.0
%Weighted-average maturity(1)





3.6 years


---

For
the three and six months ended June 30, 2008 and 2007, 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:

Three months ended
June 30, 2008

Three months ended
June 30, 2007Investment Type

Investment
Income

% of
Total

Investment
Income

% of
TotalWhole loans

$
29,831


47.3
%
$
44,294


60.8
%Subordinate interests in whole loans


2,683


4.3
%

8,778


12.0
%Mezzanine loans


16,354


26.0
%

18,114


24.9
%Preferred equity


313


0.5
%

1,218


1.7
%CMBS


13,822


21.9
%

424


0.6
%Total

$
63,003


100.0
%
$
72,828


100.0
%


29

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

3. Loans and Other Lending Investments (Continued)



Six months ended
June 30, 2008

Six months ended
June 30, 2007Investment Type

Investment
Income

% of
Total

Investment
Income

% of
TotalWhole loans

$
71,552


52.0
%
$
77,611


58.5
%Subordinate interests in whole loans


5,395


3.9
%

15,039


11.3
%Mezzanine loans


32,916


23.9
%

37,306


28.1
%Preferred equity


626


0.5
%

2,417


1.8
%CMBS


27,109


19.7
%

424


0.3
%Total

$
137,598


100.0
%
$
132,797


100.0
%


At
June 30, 2008 and December 31, 2007, the Company's loans and other lending investments, including loans held for sale (excluding the CMBS investments), had the following
geographic diversification:

June 30, 2008

December 31, 2007Region

Carrying
Value

% of
Total

Carrying
Value

% of
TotalNortheast

$
1,039,447


44.7
%
$
1,130,799


42.9
%West


629,634


27.1
%

714,045


27.1
%South


337,231


14.5
%

405,410


15.4
%Midwest


50,775


2.2
%

79,750


3.0
%Southwest


81,763


3.5
%

103,217


3.9
%Mid-Atlantic


131,354


5.7
%

150,300


5.7
%Various


53,278


2.3
%

53,224


2.0
%Total

$
2,323,482


100.0
%
$
2,636,745


100.0
%


30

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

3. Loans and Other Lending Investments (Continued)

At
June 30, 2008 and December 31, 2007, the Company's loans and other lending investments, including loans held for sale (excluding the CMBS investments), by property type
are as follows:

June 30, 2008

December 31, 2007Property Type

Carrying
Value

% of
Total

Carrying
Value

% of
TotalOffice

$
928,839


40.0
%
$
970,362


36.8
%Hotel(1)


391,866


16.9
%

468,604


17.8
%Multifamily


322,955


13.9
%

366,665


13.9
%Retail(3)


217,254


9.3
%

217,223


8.2
%Land-commercial


203,640


8.8
%

200,445


7.6
%Land-residential(2)


95,978


4.1
%

138,771


5.3
%Condominium


69,711


3.0
%

126,771


4.8
%Mixed-use


22,751


1.0
%

80,784


3.1
%Industrial


51,983


2.2
%

50,730


1.9
%Other


18,505


0.8
%

16,390


0.6
%Total

$
2,323,482


100.0
%
$
2,636,745


100.0
%


---

31

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

3. Loans and Other Lending Investments (Continued)



The
following is a summary of the Company's CMBS investments at June 30, 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

$
68,643

$
24

$
(9,415
)
$
59,252Fixed rate CMBS


63


815,578


787,172


820


(117,282
)

670,710Total


71

$
889,242

$
855,815

$
844

$
(126,697
)
$
729,962


The following is a summary of the underlying credit ratings of the Company's CMBS investments at June 30, 2008:

Book Value

PercentageAAA

$
787,476


92.0
%AA


29,473


3.4BBB-


11,832


1.4BB+


7,421


0.9BB


4,728


0.6B+


4,645


0.5B


4,142


0.5B-


5,102


0.6Not rated


996


0.1Total

$
855,815


100.0
%


The
Company recorded provisions for loan losses of $23,214 and $31,214 and $2,900 and $4,148 for the three and six months ended June 30, 2008, and 2007,
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.

During
the six months ended June 30, 2008, the Company incurred charge-offs totaling $4,430 related to two defaulted loans which the Company foreclosed upon which had
a carrying value totaling $31,760 and are recorded in assets held for sale. During the year ended December 31, 2007, the
Company incurred a charge-off totaling $3,200, relating to one defaulted loan which the Company foreclosed upon which had a carrying value of $19,899 and $19,155 at June 30, 2008
and December 31, 2007, respectively.

32

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

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, 2006

$
2,460Additional provision for loan losses


9,398Charge-offs


(3,200
)Reserve for possible loan losses, December 31, 2007


8,658Additional provision for loan losses


31,214Charge-offs


(4,430
)Reserve for possible loan losses, June 30, 2008

$
35,442


The
Company evaluates CMBS investments to determine if there has been an other-than-temporary impairment. Certain of the Company's CMBS investments have an
unrealized loss as the carrying value is in excess of the market value which have existed greater than twelve months. These 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 due to actual prepayments and credit loss experience. The carrying
value of all CMBS investments is in excess of their market values. This difference 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 and
the 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 the future, certain interpretations of the accounting rules may require the Company, notwithstanding these determinations, to
recognize an other-than-temporary impairment due solely to the duration of time that the carrying values are less than book value.

In
connection with a preferred equity investment, which was repaid in October 2006, the Company has guaranteed a portion of the outstanding principal balance of the first mortgage loan
that is a financial obligation of the entity in which the Company has invested in the event of a borrower default under such loan. The loan matures in 2032. This guarantee is considered to be an
off-balance-sheet arrangement and will survive until the repayment of the first mortgage loan. As compensation, the Company received a credit enhancement fee of $125 from the borrower,
which is recognized as the fair value of the guarantee and has been recorded on its condensed consolidated Balance Sheet as a liability. The liability will be 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 $1,416 as of June 30, 2008. Under
the terms of the guarantee, the investment sponsor is

33

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

3. Loans and Other Lending Investments (Continued)

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


14,497Estimated merger 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






The
Company has not yet obtained all the information necessary to finalize its estimates to complete the purchase price allocations in accordance with SFAS No. 141 related to the
American Financial acquisition. The purchase price allocations will be finalized once the information identified has been received, which should not be longer than one year from the date of
acquisition.

Pro Forma

The following table summarizes, on an unaudited pro forma basis, the Company's combined results of operations for the six months ended
June 30, 2008 and 2007 as though the acquisition of American Financial was completed on January 1, 2007. The supplemental pro forma operating data is not

34

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

4. Property Acquisitions (Continued)

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 June 30, 2008. The Company accounted for the
acquisition of assets utilizing the purchase method of accounting.

2008

2007Pro forma revenues

$
399,287

$
364,873Pro forma net income

$
40,978

$
61,241Pro forma earnings per common sharebasic

$
0.80

$
1.45Pro forma earnings per common sharediluted

$
0.80

$
1.40Pro forma common sharesbasic


51,186


42,318Pro forma common sharediluted


51,387


43,844


5. Dispositions and Assets Held for Sale

During the three months ended June 30, 2008, the Company sold 20 properties for net sales proceeds of $44,546. The sales transactions resulted in no gains or losses for the three
months ended June 30, 2008.

In
accordance with the provisions of SFAS No. 144, the Company classified 83 properties as held for sale as of June 30, 2008. The following table summarizes information for
these properties:

June 30,
2008Assets held for sale:Real estate investments, at cost:Land

$
41,806Buildings and improvements


167,226Total real estate investments, at cost


209,032Less accumulated depreciation


209,032Intangible assets, net


9,730Other assets, net


2,336Real estate held for sale


221,098Loans held for sale


144,172Real estate owned


31,760Total assets held for sale:


397,030Liabilities related to assets held for sale:Accrued expenses


4,542Deferred revenue


2,680Tenant security deposits


52Total liabilities related to assets held for sale


7,274Net assets held for sale

$
389,756


35

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

5. Dispositions and Assets Held for Sale (Continued)

The
following operating results of the properties held for sale as of June 30, 2008, and the properties sold during the three and six months ended June 30, 2008 are
included in discontinued operations for all periods presented:

Three and
Six Months Ended
June 30, 2008Operating results:Revenues

$
6,113Operating expenses


6,288Interest expense


81Depreciation and amortization


268Loss from operations before minority interest


(524
)Minority interest


(10
)Loss from operations, net


(534
)Yield maintenance fees


(570
)Net loss from discontinued operations

$
(1,104
)


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

6. Investments in Unconsolidated Joint Ventures



In April 2005, the Company closed on a $57,503 initial investment in a joint venture with SL Green to acquire, own and operate
the South Building located at One Madison Avenue, New York, New York, or the South Building. The joint venture was owned 45% by a wholly-owned subsidiary of the Company and 55% by a wholly-owned
subsidiary of SL Green. The joint venture interests are pari-passu. The joint venture completed the acquisition of the South Building from Metropolitan Life Insurance Company for
the purchase price of approximately $802,800 plus closing costs, financed in part through a $690,000 first mortgage loan on the South Building. The first mortgage was non-recourse to the
Company. The South Building comprises approximately 1.2 million square feet and is almost entirely net leased to Credit Suisse Securities (USA) LLC, or CS, pursuant to a lease with a
15-year remaining term. In July 2007, the Company entered into an agreement to sell its entire investment in the One Madison Avenue joint venture to SL Green for approximately
$147,000,subject to an external appraisal, which was to be approved by the board of directors of both parties. In August 2007, an affiliate of SL Green loaned approximately $147,000 to
the Operating Partnership. This loan was to be repaid, with interest at an annual rate of 5.80%, on the earlier of September 1, 2007 or the closing of the sale of the Company's 45% interest in
One Madison Avenue to SL Green. The sale transaction closed on August 17, 2007, at which time the Company realized a gain of $92,235 and simultaneously repaid the entire loan amount with
interest due through such date. As of June 30, 2007 the investment had a carrying value of $54,539. The Company recorded its pro rata share of net losses of the joint venture of $293 and $628
for the three and six months ended June 30, 2007.

36

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

6. Investments in Unconsolidated Joint Ventures (Continued)



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
June 30, 2008 and Decembe  31, 2007, the investment has a carrying value of $2,243 and $2,269, respectively. The Company recorded its pro rata share of net income of the joint
venture of $5 and $36 for the three and six months ended June 30, 2008 and 2007, 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
and six months ended June 30, 2008 and 2007, the Company recorded its pro rata share of net losses of the joint ventures of $343 and $700 and $350 and $741, respectively.



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 June 30, 2008 and December 31, 2007, the investment had a carrying value of $23,324 and $20,390 respectively. For
the three and six months ended June 30, 2008 and 2007 the Company recorded its pro rata share of net income of $1,250 and $2,756 and $1,099 and $1,099, 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 June 30, 2008 and December 31, 2007, the investment had a carrying
value of $32,712 and $28,332 respectively. The Company recorded its pro rata share of net income of $1,408 and $3,340 for the three and six months ended June 30, 2008, respectively.

37

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

6. Investments in Unconsolidated Joint Ventures (Continued)



The Company, through its acquisition of American Financial on April 1, 2008, obtained an interest in a joint venture with UBS.
The joint venture owns and manages 125 bank branches totaling 609,000 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 $12,795 at June 30, 2008. The Company recorded its pro rata share of net loss of $729 for
the three months ended June 30, 2008.

7. Junior Subordinated Debentures

In January 2006, May 2005 and August 2005, 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 are also wholly-owned subsidiaries of the Operating Partnership. The
securities issued in January 2006 bear 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 will float based on the three-month LIBOR plus 270 basis points. The securities issued in May 2005 bear interest at a
fixed rate of 7.57% for the first ten years ending June 2015 and the securities issued in August 2005 bear interest at a fixed rate of 7.75% for the first ten years ending October 2015.
Thereafter, the rates will float based on the three-month LIBOR plus 300 basis points.

All
issuances of trust preferred securities require quarterly interest distributions; however, payments may be deferred while the interest expense is accrued for a period of up to four
consecutive quarters if the Operating Partnership exercises its right to defer such payments, which it may elect to do on more than one occasion. The trust preferred securities are redeemable, at the
option of the Operating Partnership, in whole or in part, with no prepayment premium any time after June 30, 2010, October 30, 2010 or January 30, 2011 for the securities issued
by GCTI, GCTII and GCTIII, respectively.

GCTI,
GCTII and GCTIII each issued $1,550 aggregate liquidation amount of common securities, representing 100% of the voting common stock of those entities to the Operating Partnership
for a total purchase price of $4,650. GCTI, GCTII and GCTIII used the proceeds from the sale of the trust preferred securities and the common securities to purchase the Operating Partnership's junior
subordinated notes. The terms of the junior subordinated notes match the terms of the trust preferred securities. The notes are subordinate and junior in right of payment to all present and future
senior indebtedness and certain other of the Company's financial obligations. The Company realized net proceeds from each offering of approximately $48,956.

The
Company's interests in GCTI, GCTII and GCTIII are accounted for using the equity method and the assets and liabilities of those entities are not consolidated into its financial
statements. Interest on the junior subordinated notes is included in interest expense on the Company's consolidated statements of income while the value of the junior subordinated notes, net of the
Company's investment in the trusts that issued the securities, are presented on the consolidated balance sheet.

38

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

8. Collateralized Debt Obligations

During 2005, the Company issued approximately $1,000,000 of CDOs 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 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 an additional approximately $1,000,000 of CDOs 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 CDOs through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 Issuer, and
together with the 2005 Issuer and the 2006 Issuer, the Issuers, and Gramercy Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer, and 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 and 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.

39

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

8. Collateralized Debt Obligations (Continued)

During
the three months ended June 30, 2008, the Company repurchased, at a discount, $12,900 of investment grade notes of the 2005 issuer, $12,000 of investment grade notes of the
2006 Issuer and of $12,900 investment grade notes of the 2007 Issuer. During the three months ended March 31, 2008, the Company repurchased, at a discount, $4,000 of investment grade notes of
the 2005 Issuer and $9,500 of investment grade notes of the 2007 Issuer. The Company recorded a net gain of $17,597 and $21,096 for the three and six months ended June 30, 2008, respectively,
in connection with the repurchase of notes of such Issuers.

9. Debt Obligations

Repurchase Facilities

Subsidiaries of the Company have entered into two repurchase facilities, one with Wachovia Capital Markets, LLC or one or more
of its affiliates, or Wachovia, and one with Goldman Sachs Mortgage Company, or Goldman.

The
repurchase facility with Wachovia is a $500,000 facility. This facility was initially established as a $250,000 facility, was increased to $350,000 from $250,000 effective January
2005, and was subsequently increased to $500,000 effective April 2005. In June 2007, the facility was modified further by reducing the credit spreads. As a result of the modifications, the $500,000
facility bears interest at spreads of 0.65% to 2.50% over one-month LIBOR and, based on its expected investment activities, provides for advance rates that vary from 60% to 95% based upon
the collateral provided under a borrowing base calculation. In October 2006, the facility's maturity date was extended to October 2009. The lender has a consent right with respect 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. The Company had no accrued interest and
borrowings of $78,911 at a weighted average spread to LIBOR of 1.33% as of June 30, 2008, and no accrued interest and borrowings of $165,286 at a weighted average spread to LIBOR of 1.33% as of
December 31, 2007. The Company has guaranteed a portion of its consolidated subsidiaries' obligations under this facility under certain specified circumstances.

Borrowings
under the Wachovia facility at June 30, 2008 and December 31, 2007 were secured by the following investments:

Carrying ValueInvestment Type

2008

2007Whole loans

$
38,740

$
276,869Mezzanine loans


159,411


148,164Total

$
198,151

$
425,033


In
July 2008, this facility was terminated and a new facility was entered into by the Company. See Note 23Subsequent Events.

40

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

9. Debt Obligations (Continued)

Subsidiaries
of the Company also have entered into a repurchase facility with Goldman. In October 2006, this facility was increased from $200,000 to $400,000 and its maturity date
extended until September 2009. In June 2007, the facility was modified further by reducing the credit spreads. As a result of the modifications, the facility bears interest at spreads of 1.00% to
1.50% over one-month LIBOR and, based on its expected investment activities, provides for advance rates that vary from 70% to 90% 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. The Company had no accrued interest and borrowings of $16,004 at a weighted average spread to LIBOR of 1.5% as of June 30, 2008, and accrued interest of $189 and
borrowings of $34,911 at a weighted average spread to LIBOR of 1.07% under this facility at December 31, 2007. The Company has guaranteed a portion of its consolidated subsidiaries' obligations
under this facility under certain specified circumstances.

Borrowings
under the Goldman facility at June 30, 2008 and December 31, 2007 were secured by the following investments:

Carrying ValueInvestment Type

2008

2007Whole loans

$
85,511

$
151,679Total

$
85,511

$
151,679


The
terms of the repurchase facilities (together with any related guarantees) include covenants that (a) limit the Company's maximum total indebtedness to no more than 85% of
total assets, (b) require the Company to maintain minimum liquidity of at least $15,000, (c) require the Company's fixed charge coverage ratio to be at no time less than 1.25 to 1.00,
(d) require the Company's minimum interest coverage ratio to be at no time less than 1.35 to 1.00, and (e) require the Company to maintain minimum tangible net worth of not less than
(i) $400,000, plus (ii) 75% of the net proceeds of the Company's equity offerings completed subsequent to the date of the June 2007 amendments. The covenants also restrict the Company
from making annual distributions to stockholders in excess of a maximum of 100% of the Company's FFO (as defined therein) for the previous four quarters under the Wachovia facility, except that the
Company may in any case pay distributions necessary to maintain the Company's REIT status. An event of default can be triggered on the repurchase facilities if, among other things, GKK
Manager LLC is terminated as the Manager. As of June 30, 2008 and December 31, 2007, the Company was in compliance with all such covenants.

The
repurchase facilities require that borrowings under these facilities be paid down 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, mezzanine loans, and rated CMBS or commercial real estate CDO
securities originated or acquired by the Company.

41

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

9. Debt Obligations (Continued)

Credit Facilities

The Company has two credit facilities, one with KeyBank National Association, or KeyBank, and one with Deutsche Bank AG, Cayman Islands
Branch, or Deutsche Bank.

In
May 2006, the Company closed on a $100,000 senior unsecured revolving credit facility with KeyBank with an initial term of three years and a one-year extension option. The
initial facility was supported by a negative pledge of an identified asset base (involving substitution rights) with advance rates that vary from 30% to 90% of the asset value provided under a
borrowing base calculation. The lender also had consent rights to the inclusion of assets in the borrowing base calculation. The facility bore interest at 1.90% over one-month LIBOR to the
extent the Company's leverage ratio, defined as total liabilities to total assets, including the Company's proportionate share of the liabilities and assets of the Company's unconsolidated
subsidiaries, was less than 80% and 2.10% over one-month LIBOR to the extent the Company's leverage ratio was equal to or greater than 80%. In June 2007, the facility was increased to
$175,000 and interest spreads on the facility were reduced. The facility is supported by a negative pledge of an identified asset base with advance rates that vary from 30% to 90% of the asset value
provided under a borrowing base calculation. The lender also has consent rights to the inclusion of assets in the borrowing base calculation. Following the modifications in June 2007, the facility
bears interest at 1.65% over one-month LIBOR. The Company had accrued interest of $35 and borrowings of $75,000 as of June 30, 2008, and no accrued interest and borrowings under
this facility at December 31, 2007.

The
terms of the unsecured revolving credit facility include covenants that (a) limit the Company's maximum total indebtedness to no more than 85% of total assets,
(b) require the Company's fixed charge coverage ratio to be at no time less than 1.30 to 1.00, and (c) require the Company to maintain minimum tangible net worth of not less than
$450,000 plus 75% of the net proceeds from equity offerings completed subsequent to the date of the June 2007 amendment. The covenants also restrict the Company from making annual distributions to
shareholders in excess of a maximum of 100% of FFO (as defined by the National Association of Real Estate Investment Trusts, or NAREIT) for the previous four quarters, except that the Company may in
any case pay distributions necessary to maintain the Company's REIT status. An event of default can be triggered on the unsecured revolving credit facility if, among other things, GKK
Manager LLC is terminated as the Manager. As of June 30, 2008 and December 31, 2007, the Company was in compliance with all such covenants.

In
connection with the acquisition of American Financial on April 1, 2008, the Company's indirect wholly-owned subsidiaries, First States Investors DB I L.P. (formerly
known as First States Investors DB I LLC) and American Financial TRS, Inc., and certain of their direct or indirect subsidiaries, collectively, the DB Loan Borrowers entered into an
amendment and restatement of an assumed American Financial credit facility, or the DB Loan Agreement with Deutsche Bank AG, Cayman Islands Branch, as agent for certain lenders. As part of the
amendment and restatement of the DB Loan Agreement, the available amount under the DB Loan Agreement was reduced from $400,000 to $100,000, or the DB Loan. In addition, amounts were paid to reduce the
outstanding borrowings under the former facility to $95,000. The DB Loan Agreement provides the DB Loan Borrowers with a one year facility that matures on March 31, 2009, and permits, subject
to certain conditions, a six-month

42

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

9. Debt Obligations (Continued)

extension
at the DB Loan Borrowers' option which is subject to certain conditions. Advances made under the DB Loan bear interest at 3.00% over the greater of (i) 3.50% or (ii) LIBOR. The
DB Loan allows for prepayment in whole or in part on any payment date; provided, however, that any such prepayment shall be accompanied by all accrued interest on the portion of the DB Loan agreement
being prepaid. The Company had accrued interest of $339 and borrowings of $93,917 as of June 30, 2008.

The
obligations under the DB Loan Agreement are secured by equity pledges of the shares in certain DB Loan Borrowers and mortgages over the various properties owned by certain DB Loan
Borrowers. The DB Loan is guaranteed by the Company. The DB Loan Agreement contains customary events of default, the occurrence of which could result in the acceleration of all amounts payable there
under.

The
DB Loan Agreement requires the Company to establish and fund certain reserve accounts to be used for the payment of taxes and insurance, rollover and replacement expenses, payment of
tenant improvements and leasing commissions and the funding of debt service shortfalls.

Mortgage Loans

Certain real estate assets are subject to mortgage liens. As of June 30, 2008, 737 of the Company's real estate assets were
encumbered with a cumulative outstanding balance of approximately $2,600,000. The Company's mortgage notes payable typically require that specified loan-to-value and debt
service coverage ratios be maintained with respect to the financed properties before the Company can exercise certain rights under the loan agreements relating to such properties. If the specified
criteria are not satisfied, in addition to other conditions that the Company may have to observe, the Company's ability to release properties from the financing may be restricted and the lender may be
able to "trap" portfolio cash flow until the required ratios are met on an ongoing basis. As of June 30, 2008, the Company was out of debt service coverage compliance
under one of its mortgage note financings, although such non-compliance does not, and will not, constitute an event of default under the applicable loan agreement.



On April 1, 2008, certain subsidiaries of the Company, collectively, the Goldman Loan Borrowers, entered into a mortgage loan
agreement or, the Goldman Mortgage Loan with Goldman Sachs Commercial Mortgage Capital, L.P., or GSCMC, Citicorp North America, Inc., or Citicorp and SL Green in connection with a
mortgage loan in the amount of $250,000, or the Goldman Mortgage Loan, 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 GSCMC and Citicorp. The Goldman Mortgage Loan bears 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 0.75% prepayment fee, during the first six

43

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

9. Debt Obligations (Continued)

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.

The
Goldman Mortgage Loan requires an environmental escrow reserve for the remediation of environmental conditions in the combined amount of $700. 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 has accrued interest of $759 as of June 30, 2008.



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 GSCMC and Citicorp The Goldman Mezzanine Loan bears 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.

The
Goldman Mezzanine Loan requires an environmental escrow reserve for the remediation of environmental conditions in the combined amount of $850. 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 has accrued interest of $1,820 as of June 30, 2008.



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

44

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

9. Debt Obligations (Continued)

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 no accrued interest as of June 30, 2008.

Certain
of our mortgage notes payable related to assets held for sale contain provisions that require us to compensate the lender for the early repayment of the loan. These charges will
be separately classified in the statement of operations as yield maintenance fees within discontinued operations during the period in which the charges are incurred.

The
following is a summary of mortgage notes payable and acquisition loan facilities as of June 30, 2008

Encumbered
Properties

Balance

Interest Rates

Maturity DatesFixed-rate mortgages


477

$
1,446,329
(1)
4.5% to 8.3%

July 2009 to Sept. 2023Variable-rate mortgages


260


1,086,903

4.1% to 6.8%

March 2009 to April 2013Total mortgage notes payable


737


2,533,232Above/below market interest





23,949Mortgage notes payable related to assets held for sale





Balance, June 30, 2008


737

$
2,557,181


---

Combined
aggregate principal maturities of the Company's consolidated CDOs, repurchase facilities, trust preferred securities, mortgage loans (including the Goldman Mortgage and
Mezzanine

45

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

9. Debt Obligations (Continued)

Loans
and the proportionately consolidated mortgage note payable related to its TIC interest in 55 Corporate Drive) and the credit facilities as of June 30, 2008 are as follows:

CDOs

Repurchase
Facilities

Trust
Preferred
Securities

Mortgage
Loans

Credit
Facilities

Total2008

$


$


$


$
12,934

$
3,250

$
16,1842009





94,915





75,929


165,667


336,5112010











884,618





884,6182011











33,824





33,8242012











80,256





80,256Thereafter


2,683,955





150,000


1,445,671





4,279,626Above/Below Market Interest











23,949





23,949Total

$
2,683,955

$
94,915

$
150,000

$
2,557,181

$
168,917

$
5,654,968


10. Leasing 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 renewal options. Future minimum rental payments under non-cancelable leases, excluding reimbursements for operating expenses, as of June 30, 2008 are as follows:

Operating
Lease2008 (July 1December 31)

$
141,2732009


276,7412010


266,0052011


207,3322012


190,5932013 and thereafter


1,516,864Total minimum lease payments

$
2,598,808


11. Operating Partnership Agreement/Manager

At June 30, 2008, the Company owned all of the Class A limited partnership interests in the Operating Partnership. At June 30, 2008, the majority of the
Class B limited partnership interests were owned by the Manager and SL Green Operating Partnership, L.P. interests were also held by certain officers and employees of SL Green, including
some of whom are the Company's executive officers, certain of which interests are subject to performance thresholds that were satisfied in May 2008.

At
June 30, 2008, the majority of the interests in the Manager were held by SL Green Operating Partnership, L.P. Interests were also held by certain officers and employees
of SL Green, including

46

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

11. Operating Partnership Agreement/Manager (Continued)

some
of whom are the Company's executive officers, certain of which interests were subject to performance thresholds that were satisfied in May 2008.

12. Related Party Transactions

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 provides for a term through December 2009 with automatic one-year extension options and is subject to certain termination rights. The Company pays 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. The Company incurred
expense to the Manager under this agreement of an aggregate of $9,106 and $16,251 for the three and six months ended June 30, 2008 and $3,109 and $5,775 for the three and six months ended
June 30, 2007, respectively. In 2008, each of the Company and SL Green have formed special committees comprised solely of independent directors to consider whether the internalization of the
Manager and/or amendment to the management agreement would be in the best interest of each company and its respective stockholders.

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 are 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 will
record 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 have become probable and
reasonably estimable in accordance with the partnership agreement. The Company incurred $2,604 and $5,100 and $3,784 and
$6,601 with respect to such Class B limited partner interests for the three and six months ended June 30, 2008 and 2007, respectively.

The
Company is 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, provides 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 may be reduced by SL Green Operating Partnership, L.P. for fees paid directly to outside servicers by the Company.
At June 30, 2008, the outsource agreement provides for an annual fee payable by the Company, which fee became $2,732 per year subsequent to the closing of the American Financial merger to
reflect higher costs resulting from the increased size and number of assets of the combined company, increasing 3% annually over the prior year on the anniversary date of the outsource agreement in
August of each year. For the three and six months ended June 30, 2008 and 2007, the Company realized expense of $683 and $1,024 and $332 and $664, respectively, to the Manager under the
outsource agreement. For the three and six months ended June 30, 2008 and 2007,

47

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

12. Related Party Transactions (Continued)

the
Company realized expense of $1,365 and $2,676 and $890 and $1,659, respectively, to the Manager under the asset servicing agreement.

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 has allocated
to the Manager the subordinate collateral management fee paid on the CDO notes not held by the Company. At June 30, 2008 and December 31, 2007, the Company owned all of the
non-investment grade bonds, preferred equity and equity in the 2005 CDO. The senior collateral management fee and balance of the subordinate collateral management fee is allocated to the
Company. For the three and six months ended June 30, 2008 and 2007, the Company realized expense of $512 and $1,024 and $512 and $1,019, respectively, to the Manager under such collateral
management agreement.

Except
for the 2005 CDO, fees payable in connection with CDOs or other securitization vehicles are governed by the management agreement. Pursuant to that agreement, if a collateral
manager is retained as part of the formation of a CDO or other securitization vehicle, the Manager or an affiliate will be the collateral manager and will receive the following fees: (i) 0.25%
per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with the Company or the Manager, which CDO is
structured to own loans secured by transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a managed non-transitional
CDO that are owned by third-party investors unaffiliated with the Company or the Manager, which CDOs structured to own loans secured by non-transitional properties, (iii) 0.10% per
annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third party investors unaffiliated with the Company or the Manager, which CDO is structured to own
non-investment grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with
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

48

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

12. Related Party Transactions (Continued)

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. For the three and six months ended June 30, 2008 and 2007, the Company realized expense of $571 and $1,142 and $571 and $1,136, respectively, to the Manager under
this agreement. With respect to the CDO which closed in August 2007, the Company realized expense of $216 and $432 to the Manager for the three and six months ended June 30, 2008, respectively.

In
April 2005, the Company closed on a $57,503 initial investment in a joint venture with SL Green to acquire, own and operate the South Building located at One Madison Avenue, New York,
New York. The joint venture, which was owned 45% by a wholly-owned subsidiary of the Company and 55% by a wholly-owned subsidiary of SL Green, was created to acquire, own and operate the South
Building. The joint venture interests were pari-passu. The joint venture completed the acquisition of the South Building from Metropolitan Life Insurance Company for the purchase price of
approximately $802,800 plus closing costs, financed in part through a $690,000 first mortgage loan on the South Building. The South Building comprises approximately 1.2 million square feet and
is almost entirely net leased to Credit Suisse Securities (USA) LLC ("CS") pursuant to a lease with a 15-year remaining term. In August 2007, the Company sold its entire investment
in the joint venture to SL Green for approximately $147,000 and realized a gain of $92,235. In August 2007, an affiliate of SL Green loaned approximately $147,000 to the Operating Partnership. This
loan was to be repaid with interest at an annual rate of 5.80% on the earlier of September 1, 2007 or the closing of the sale of the
Company's 45% interest in One Madison Avenue to SL Green. As a result of the sale of the Company's interest in August 2007, the loan was repaid with interest on such date.

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 5,000 square feet with an option to lease an additional approximately 2,000 square feet and carries a term of ten years with rents on the
entire seven thousand square feet of approximately $249 per annum for year one rising to $315 per annum in year ten. For the three and six months ended June 30, 2008 and 2007, the Company paid
$62 and $125 and $62 and $125 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 Company has determined that the yield on its mezzanine loan after giving effect to the interest-only participation retained by the seller is at
market. The mezzanine loan is secured by the equity interests in an office property in New York, New York.

49

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

12. Related Party Transactions (Continued)

In February 2006, the Company closed on the purchase of a $90,000 whole loan, which bears interest at three-month LIBOR plus 2.15%, to a joint venture in which SL Green is an equity
holder. The loan is secured by 55 Corporate Drive in Bridgewater, New Jersey. The loan was repaid in full in June 2006 with the proceeds from new mortgage financing obtained in connection with the
sale of the property, 49.75% of which is now owned by the Company through a TIC structure.

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 has a book value of $90,538 and $90,389 as of June 30, 2008 and December 31, 2007,
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, ten-year, fixed-rate first mortgage loan.

In
August 2006, the Company acquired from a financial institution a 50% pari-passu interest in a $65,000 preferred equity investment secured by an office property in New
York, New York. An affiliate of SL Green simultaneously acquired and owns the other 50% pari-passu interest. The investment bears interest at a blended fixed rate of 10.52%.

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.

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 June 30, 2008 and December 31, 2007, the Company's interest in the whole loan had a carrying value of $65,610 and $65,033, respectively. The investment in
the mezzanine loan was repaid in full in September 2007.

50

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

12. Related Party Transactions (Continued)

In
March 2007, the Company closed on the acquisition of a $62,500 pari-passu interest in one tranche of a multiple-level mezzanine structure primarily secured by pledges of
equity and rights to cash distributions, which was used to fund the acquisition of a large office portfolio. The investment bears interest at one-month LIBOR plus 2.85%. At closing, an
affiliate of SL Green simultaneously acquired a $62,500 pari-passu interest in the same tranche of the mezzanine structure. The investment was repaid in full in May 2007.

In
April 2007, the Company purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along
34th Street in New York, New York. The acquisition was financed with a $86,063 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 June 30, 2008 and December 31, 2007, the investment had a carrying value of $23,234 and $20,390, respectively. The Company recorded its pro rata share of net income of $1,250 and
$2,754 and $1,099 and $1,099 for the three and six months ended June 30, 2008 and 2007, 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
June 30, 2008 and December 31, 2007, the investment had a carrying value of $32,781 and $28,332, respectively. The Company recorded its pro rata share of net income of $1,408 and $3,340
for the three and six months ended June 30, 2008, respectively.

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 ten-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 bears 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.

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. 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.

51

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

12. Related Party Transactions (Continued)

In
September 2007, the Manager earned a $1,000 collateral selection fee payable by Nomura International plc. The Company purchased $18,000 of par bonds of the same securities to
which the collateral selection fee was related and was earned. As part of the closing on the securities purchased, the Company collected and immediately remitted the fee due to the Manager.

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%.

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%.

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%.

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 9. In addition, 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.

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 for each of the three and six months ended June 30, 2008 and 2007, was less than $1.

13. Deferred Costs

Deferred costs at June 30, 2008 and December 31, 2007 consisted of the following:

2008

2007Deferred financing

$
88,933

$
59,294Deferred acquisition


4,766


4,320Deferred leasing


10,603


9,457104,302


73,071Less accumulated amortization


(25,830
)

(16,962
)78,472


56,109Less held for sale


(31
)

$
78,441

$
56,109


52

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

13. Deferred Costs (Continued)

Deferred
financing costs relate to the Company's existing repurchase facilities with Wachovia and Goldman, the Company's credit facilities with each of KeyBank and
Deutsche Bank, the Goldman Mortgage Loan, the Goldman Mezzanine Loan, the PB Loan Agreement, the Company's CDOs, mortgage loans, including, the proportionately consolidated mortgage note payable
related to the Company's TIC interest in 55 Corporate Drive, and the trust preferred securities. These costs are amortized on a straight-line basis to interest expense based on the
remaining 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.

14. Fair Value of Financial Instruments

Effective January 1, 2008, 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 will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair
value. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are categorized in the table below based upon the lowest level of
significant input to the valuations.

At June 30, 2008

Total

Level I

Level II

Level IIIFinancial Assets:Derivative instruments

$
786

$


$
786

$
Financial Liabilities:Derivative instruments

$
63,902

$


$
63,902

$



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

53

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

14. Fair Value of Financial Instruments (Continued)

down
to fair value as a result of valuation allowances established for possible loan losses, and loans held for sale, which are reported at lower of cost or fair value less costs to sell. The
following table shows the fair value hierarchy for those assets measured at fair value on a non-recurring basis based upon the lowest level of significant input to the valuations for which
a non-recurring change in fair value has been recorded during the six months ended June 30, 2008:

At June 30, 2008

Total

Level I

Level II

Level IIIFinancial Assets:Lending investments

$
130,577

$


$


$
130,577Loans held for sale

$
144,172

$


$


$
144,172


The
total change in fair value of financial instruments for which a fair value adjustment has been included in the consolidated statements of income for the three and six months ended
June 30, 2008 was $23,214 and $31,214, respectively.

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 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.

15. 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 June 30, 2008, 51,295,294 shares of common stock and 4,600,000 shares of preferred stock
were issued and outstanding.

54

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

15. Stockholders' Equity (Continued)

Preferred Stock

In April 2007, the Company issued 4,600,000 shares of its 8.125% Series A cumulative redeemable preferred stock (including the
underwriters' over-allotment option of 600,000 shares) with a mandatory liquidation preference of $25.00 per share. Holders of the Series A cumulative redeemable preferred shares
receive annual dividends of $2.03125 per share paid on a quarterly basis and dividends are cumulative, subject to certain provisions. On or after April 18, 2012, 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

As of the date of the Company's formation, April 12, 2004, the Company had 500,000 shares of common stock outstanding valued at
approximately $200. On August 2, 2004 the Company completed its initial public offering of 12,500,000 shares of common stock resulting in net proceeds of approximately $172,900, which was used
to fund investments and commence operations. As of June 30, 2008 and December 31, 2007, 687,504 and 594,333, respectively, restricted shares had also been issued under the Company's 2004
Equity Incentive Plan, or the Equity Incentive Plan. These shares have a vesting period of two to four years.

In
December 2004, the Company sold 5,500,000 shares of its common stock, at a price of $17.27 per share, resulting in net proceeds of approximately $93,740 under a private placement
exemption from the registration requirements of Section 5 of the Securities Act of 1933, as amended, or the Securities Act. The Company subsequently registered these shares for resale under the
Securities Act in August 2005. A total of 4,225,000 shares were sold to various institutional investors and an additional 1,275,000 shares were sold to SL Green Operating Partnership, L.P.
pursuant to its contractual right to choose to maintain up to a 25% ownership interest in the Company's outstanding shares of common stock. Of the 5,500,000 shares sold, 2,000,000 shares were settled
in December 2004 and the remaining 3,500,000 shares were settled in January 2005.

In
September 2005, the Company sold 3,833,333 shares of common stock, at a price of $25.80 per share, resulting in net proceeds of approximately $97,830. A total of 2,875,000 shares were
sold through a public offering and an additional 958,333 shares were sold to SL Green Operating Partnership, L.P. pursuant to its contractual right to choose to maintain up to a 25% ownership
interest in the Company's outstanding shares of common stock. Net proceeds were used for loan acquisitions and originations, repayment of outstanding principal under one of the Company's repurchase
facilities and general corporate purposes.

In
May 2006, the Company sold 3,000,000 shares of common stock, at a price of $26.75 per share, resulting in net proceeds of approximately $79,787. A total of 2,250,000 shares were sold
through a public offering and an additional 750,000 shares were sold to SL Green Operating Partnership, L.P. pursuant to its contractual right to choose to maintain up to a 25% ownership
interest in the Company's outstanding shares of common stock. Net proceeds were used for loan acquisitions and originations, repayment of outstanding principal under the Company's repurchase
facilities and general corporate purposes.

55

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

15. Stockholders' Equity (Continued)

In
May 2007, the Company's new $500,000 shelf registration statement was declared effective by the Securities and Exchange Commission, or SEC. This registration statement provides the
Company with the ability to issue common and preferred stock, depository shares and warrants. The Company currently has $373,344 available under the shelf.

In
September 2007, the Company sold 4,825,000 shares of common stock, at a public offering price of $26.25 per share, resulting in net proceeds of approximately $124,451. A total of
3,618,750 shares were sold through a public offering and an additional 1,206,250 shares were sold directly to SL Green Operating Partnership, L.P. pursuant to its contractual right to choose to
maintain up to a 25% ownership interest in the Company's outstanding shares of common stock. After this offering, SL Green Operating Partnership, L.P. owned 7,624,583 shares of the Company's
common stock. Net proceeds were used to retire borrowings under the Company's unsecured facility and to create additional funding capacity for opportunistic investments.

In
November 2007, the Company sold, through a private placement, 3,809,524 shares of common stock at a price of $26.25 per share to an affiliate of Morgan Stanley Real Estate Special
Situations Fund III, a global diversified fund managed by Morgan Stanley Real Estate, raising gross proceeds of approximately $100,000. The shares were not registered under the Securities Act of 1933
or any state securities laws, and were sold in a private transaction under Regulation D of the Securities Act. Subsequent to this offering, SL Green's ownership percentage was approximately 22%
of the outstanding shares of the Company's common stock at March 31, 2008.

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
$378,692 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. SL Green Operating Partnership, L.P. owned shares
of the Company's common stock representing approximately 15.8% of the outstanding shares of the Company's common stock as of June 30, 2008.

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 June 30, 2008, 2,596,820 shares of common stock were available for issuance under the Equity Incentive Plan.

Management
and outsource fees paid to the Company's Manager and SL Green Operating Partnership, L.P. are sufficient to reimburse the Manager and SL Green Operating
Partnership, L.P. for the applicable compensation, including payroll taxes, of the employees who provide services to

56

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

15. Stockholders' Equity (Continued)

Gramercy
pursuant to the confirmatory addendum to the Management Agreement between Gramercy, the Manager and the Operating Partnership. These awardees are considered co-leased employees.
Options granted under the Equity Incentive Plan to recipients who are co-leased 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 its affiliates, but are not considered
co-leased employees because compensation for their services is not covered by the management agreement or outsource agreement. Options granted to recipients that are not
co-leased employees have the same terms as those issued to co-leased 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 a co-leased 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 June 30, 2008 and December 31, 2007 are presented below:

June 30, 2008

December 31, 2007Options
Outstanding

Weighted
Average
Exercise
Price

Options
Outstanding

Weighted
Average
Exercise
PriceBalance at beginning of period


1,428,169

$
22.82


830,001

$
18.02Modification


110,716








Granted


85,000

$
21.17


770,500

$
27.76Exercised


(85,547
)
$
14.83


(103,330
)
$
19.44Lapsed or cancelled


(89,946
)
$
27.09


(69,002
)
$
25.29Balance at end of period


1,448,392

$
21.32


1,428,169

$
22.82


For
the three and six months ended June 30, 2008, all options were granted within a price range of $18.98 to $25.90. The remaining weighted average contractual
life of the options was 7.8 years. Compensation expense of $1,665 will be recorded over the course of the next eleven months, representing the remaining weighted average vesting period of the
option awards as of June 30, 2008. In connection with the payment of a special dividend to common shareholders, the equity incentive plan was amended to provide for the modification of stock
options pursuant to the special dividend paid. There was no incremental cost to the modification. Compensation expense of $263 and $526 and $136 and $326 was recorded for the three and six months
ended June 30, 2008 and 2007, respectively, related to the issuance of stock options.

Through
June 30, 2008, 687,504 restricted shares had been issued under the Equity Incentive Plan, of which 64% have vested. The vested and unvested shares are currently entitled
to receive

57

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

15. Stockholders' Equity (Continued)

distributions
declared by the Company on its common stock. 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 $2,482 will be recorded over the course of the next nine months, representing the remaining weighted average vesting period of the restricted
stock awards as of June 30, 2008. Compensation expense of $671 and $1,530 and $652 and $1,875 was recorded for the three and six months ended June 30, 2008 and 2007, 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 of 1986, as amended, and has been adopted by the board to enable the Company's
eligible employees to purchase its shares of common stock through payroll deductions. The ESPP became effective on January 1, 2008 with a maximum of 250,000 shares of the common stock available
for issuance, subject to adjustment upon a merger, reorganization, stock split or other similar corporate change. The Company filed a registration statement on Form S-8 with the
Securities and Exchange Commission with respect to the
ESPP. The common stock 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, all of whom are co-leased employees, 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 and $617 and $383 and $766 was recorded for the
three and six months ended June 30, 2008 and 2007, respectively, related to the 2005 Outperformance Plan. Based on the Company's total return to stockholders as of the May 31, 2008
measurement period conclusion date, the Company did not meet the minimum 30% return threshold and accordingly, the plan participants automatically forfeited the LTIP Units that they had been granted.

58

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

15. 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 June 30, 2008, there were approximately 43,791 phantom stock units outstanding, of which 31,791 units are vested.

Earnings per Share

Earnings per share for the three and six months ended June 30, 2008 and 2007 is computed as follows:

For The Three
Months Ended
June 30,

For The Six
Months Ended
June 30,2008

2007

2008

2007Numerator (Income)Income from continuing operations

$
13,500

$
21,860

$
38,970

$
38,909Loss from discontinued operations


(1,104
)




(1,104
)

Net income


12,396


21,860


37,866


38,909Preferred stock dividends


(2,336
)

(1,895
)

(4,672
)

(1,895
)Numerator for basic income per sharenet income available to common stockholders


10,060


19,965


33,194


37,014Effect of dilutive securities











Diluted earnings:Numerator for diluted income per sharenet income applicable to common stockholders

$
10,060

$
19,965

$
33,194

$
37,014


59

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

15. Stockholders' Equity (Continued)

Denominator (Weighted Average Shares)Denominator for basic income per shareweighted average shares


51,166


26,049


42,966


26,037Effect of dilutive securities:Stock-based compensation plans


81


1,389


158


1,406Phantom stock units


44


24


43


24Diluted Shares


51,291


27,462


43,167


27,467


16. Benefit Plans

At June 30, 2008, 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. 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.

17. 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 five thousand square feet with an option to lease an additional approximately two thousand square feet and carries a term of ten years with
rents on the entire seven thousand square feet of approximately $249 per annum for year one rising to $315 per annum in year ten.

As
of June 30, 2008, 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 2087. These lease obligations generally contain rent increases and renewal options.

60

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

17. Commitments and Contingencies (Continued)

Future
minimum lease payments under non-cancelable operating leases as of June 30, 2008 are as follows:

2008 (July 1  December 31)

$
8,9972009


18,3112010


18,0412011


17,8892012


17,5782013 and thereafter


169,028Total

$
249,844


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.

18. 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 June 30, 2008. The notional value is an indication of the extent of
the Company's

61

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

18. Financial Instruments: Derivatives and Hedging (Continued)

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

Benchmark Rate

Notional Value

Strike
Rate

Effective
Date

Expiration
Date

Fair
ValueInterest Rate Swap

1 month LIBOR

$
3,465


4.280
%

7/2005


12/2009

$
(56
)Interest Rate Swap

3 month LIBOR


3,465


5.178
%

4/2006


3/2010


(101
)Interest Rate Swap

3 month LIBOR


14,650


4.425
%

11/2007


7/2015


(57
)Interest Rate Swap

3 month LIBOR


12,000


3.063
%

1/2008


7/2010


103Interest Rate Swap

3 month LIBOR


12,000


9.850
%

8/2006


8/2011


(463
)Interest Rate Swap

3 month LIBOR


2,000


3.073
%

1/2008


7/2010


15Interest Rate Swap

3 month LIBOR


347,908


5.408
%

8/2007


5/2017


(18,452
)Interest Rate Swap

3 month LIBOR


699,441


5.331
%

8/2007


1/2018


(41,224
)Interest Rate Swap

1 month LIBOR


42,718


4.990
%

1/2007


1/2017


(2,019
)Interest Rate Swap

1 month LIBOR


24,143


5.114
%

2/2008


1/2017


(1,006
)Interest Rate Swap

1 month LIBOR


16,412


5.203
%

2/2008


5/2017


(773
)Interest Rate Swap

3 month LIBOR


4,700


3.170
%

4/2008


4/2012


131Interest Rate Cap

1 month LIBOR


250,000


5.250
%

4/2008


3/2010


231Interest Rate Cap

1 month LIBOR


600,000


5.250
%

4/2008


3/2010


555Total



$
2,032,902










$
(63,116
)


At
June 30, 2008, derivative instruments were reported at their fair value as a net liability of $63,116. Offsetting adjustments are represented as deferred losses in Accumulated
Other Comprehensive Income of $6,737. For the three and six months ended June 30, 2008, the Company recognized a decrease to interest expense of $249 attributable to any ineffective component
of its derivative instruments designated as cash flow hedges. For the same period the Company recognized an increase to earnings of $2,709 attributable to the change in value of undesignated
derivatives. Currently, all derivative instruments are designated as cash flow hedging instruments. Over time, the realized and unrealized gains and losses held in Accumulated Other Comprehensive
Income will be reclassified into earnings in the same periods in which the hedged interest payments affect earnings.

The
Company is hedging exposure to variability in future interest payments on our debt facilities and cash flows for future transactions except in the case of swaps the Company may enter
into from time to time, including total rate of return swaps, or TROR swaps, which are tied to the Lehman Brothers CMBS index and are intended to hedge the Company's exposure to variability in the
rate of return in excess of anticipated future interest payments on that portion of the Company's debt facilities used to fund fixed rate mortgage loan assets held as available for sale.

19. 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

62

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

19. Income Taxes (Continued)

distribute
at least 90% of its ordinary taxable income to stockholders. As a REIT, the Company generally will not be subject to 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 federal income taxes on taxable income at regular corporate rates and will not be permitted to
qualify for treatment as a REIT for 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
federal income tax purposes. The Company may, however, be subject to certain state and local taxes.

The
Company's Board of Directors intends to evaluate the Company's dividend policy in the third quarter of 2008 to determine whether a potential dividend decrease is merited. Because of
the American Financial acquisition, the Company incurs a considerably higher amount of depreciation which reduces its taxable income and would allow the Company to maintain its REIT distribution
requirement with a lower dividend. Given current market conditions, retained earnings is an extremely efficient and low cost of capital option.

For
the three and six months ended June 30, 2008 and 2007, the Company recorded $0 and $429 and $11 and $963 of income tax expense, respectively, in net income from continuing
operations for income attributable to the Company's wholly-owned TRSs. The Company has assumed an effective tax rate for
the three and six months ended June 30, 2008 of 44% taking into consideration the anticipated applicable U.S. federal statutory tax rate at June 30, 2008 of 34% and state and local
taxes.

20. 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.

21. 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, as of June 30, 2008, the Company has determined that it has two reportable operating
segments: Structured Finance and Real Estate. The reportable segments were determined based on the management
approach, which looks to the Company's internal organizational structure. These two lines of business require different support infrastructures.

The
Structured 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

63

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

21. Segment Reporting (Continued)

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 (in thousands):

Structured
Finance

Real Estate

Corporate/
Other(1)

Total CompanyThree months ended June 30, 2008Total revenues(2)

$
88,136

$
109,217

$


$
197,353Earnings (loss) from unconsolidated joint ventures


2,320


(729
)




1,591Total operating and interest expense(3)


(62,111
)

(107,314
)

(15,778
)

(185,203
)Net income from continuing operations(4)

$
28,345

$
1,174

$
(15,778
)
$
13,741Six months ended June 30, 2008Total revenues(2)

$
174,227

$
109,217

$


$
283,444Earnings (loss) from unconsolidated joint ventures


5,429


(729
)




4,700Total operating and interest expense(3)


(113,385
)

(107,314
)

(28,223
)

(248,922
)Net income from continuing operations(4)

$
66,271

$
1,174

$
(28,233
)
$
39,222Total assets

$
4,423,577

$
4,171,729

$
(712,447
)
$
7,882,859


---

64

---



Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

21. Segment Reporting (Continued)



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

The following table represents non-cash activities recognized in other comprehensive income for the six months ended June 30, 2008 and 2007:

2008

2007Deferred (losses) gains and other non-cash activity related to derivatives

$
(6,737
)
$
10,864


23. Subsequent Events

On July 22, 2008, Gramercy Warehouse Funding I LLC ("Gramercy Funding I"), GKK Trading Warehouse I LLC ("GKK Warehouse I"), GKK 450 LEX LLC, each an indirect
wholly-owned subsidiary of the Company, terminated their existing Master Repurchase Agreement with Wachovia and entered into a new credit agreement ("Credit Agreement") with Wachovia, as
administrative agent, sole lead arranger and sole bookrunner. Gramercy Funding I and GKK Warehouse I are borrowers (collectively, the "Borrowers") and the Company, the Operating Partnership, GIT and
GKK Trading are guarantors (each a "Guarantor" and collectively, the "Guarantors") under the Credit Agreement and the related credit documents, including a Guarantee Agreement, dated as of
July 22, 2008, by and among the Company, the Operating Partnership, GIT, GKK Trading and Wachovia (the "Guarantee Agreement") (such credit documents, the Guarantee Agreement and the Credit
Agreement being referred to herein collectively as the "Credit Documents").

Pursuant
to the Credit Documents, the Borrowers may request loans and letters of credit for the acquisition of real estate-related assets, including the assets previously financed
pursuant to the Master Repurchase Agreement. Total credit availability under the new credit facility with Wachovia (the "Credit Facility") will be $215,680 comprised of a term loan equal to $115,680
and a revolving loan equal to $100,000,000, with a credit spread of 242.5 basis points (which will be increased to 267.5 basis points upon an extension of the maturity of the Credit Facility). The
term of the Credit Facility is two years and the Borrowers may extend the term for an additional twelve-month period if certain conditions are met. Advance rates for assets acquired pursuant to the
Credit Agreement vary from 50% to 80% of purchase price, depending on the type and structure of the asset.

The
Credit Agreement provides Wachovia with the ability to mark the value of the assets acquired pursuant to the Credit Agreement and to require the Borrowers to commensurately pay down
the corresponding loan with respect to a reduction in an asset's value based on Wachovia's mark. Wachovia's ability to mark an asset, however, is limited to situations where an asset's value has been
affected by credit issues with respect to the related underlying property; Wachovia cannot mark an asset

65

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Gramercy Capital Corp.

Notes To Consolidated Financial Statements (Continued)

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

June 30, 2008

23. Subsequent Events (Continued)

based
on credit spreads or other criteria outside of property-level credit issues. Furthermore, the Credit Agreement requires the Borrowers and the Guarantors to comply with certain corporate and
financial covenants, including, among other things, positive net income of each Borrower, minimum interest coverage ratio and maintenance of ratio of consolidated total indebtedness to consolidated
total assets of all Borrowers. In addition, the Credit Agreement permits Wachovia to call an event of default with respect to the Credit Facility upon the occurrence (and continuation beyond
applicable notice and cure periods) of certain events, including the failure to pay obligations due pursuant to the Credit Documents, the failure to comply with covenants, including financial
covenants, set forth in the Credit Documents, cross defaults with certain other indebtedness, material misrepresentations made in connection with the Credit Documents, among others.

Pursuant
to the Guarantee Agreement, the Guarantors are required to provide a limited guaranty with respect to the Borrowers' obligations under the Credit Facility. This guaranty is
limited to the sum of (i) 10% of the outstanding balance of loans related to assets with certain designated ratings assigned by the ratings agencies, and (ii) 40% of the unpaid balance
for all loans related to assets not covered in (i) above. The Borrowers' obligations under the Credit Facility become fully recourse to the Guarantors only upon the occurrence of certain
limited events, including voluntary bankruptcy of a Borrower, if any.

66

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

Overview

Gramercy Capital Corp. is an integrated commercial real estate specialty 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 $7.9 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, subordinate interests in
whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. Our property investment business, which operates under the
name Gramercy Realty, focuses on the acquisition and management of commercial properties leased primarily to
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., Wachovia Bank, National Association,
Regions Financial Corporation and Citizens Financial Group, Inc. 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 externally managed and advised by
GKK Manager LLC, or our Manager, a majority-owned subsidiary of SL Green Realty Corp. (NYSE: SLG), or SL Green. We have elected to be taxed as a real estate
investment trust, or REIT, under the Internal Revenue Code and generally will not be subject to 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 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 financing 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, 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 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 begun to rise above historical levels. Consequently, 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

67

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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 have 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 recent 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 would provide for a complete return of our investment. We have also carefully managed our exposure to interest rate changes that could affect our liquidity. 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 have 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 third 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. The residential sector capital markets issues 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. In the case of (a), 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 will result in credit spreads increasing. During periods of volatility, such as the markets 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 in order to finance their portfolio of commercial loans. Lenders
are forced to increase the credit spread at which they are willing to lend as liquidity in the capital market decreases. As the market tightens, many warehouse lenders have requested additional
collateral or repayments with respect to their loans in order to maintain margins that are acceptable to them.

For
existing loans, when credit spreads widen, the fair value of these existing 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 will impact the
total proceeds that the lender will receive.

68

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In
the short-term, we believe the current environment of rapidly changing and evolving markets will provide increasing challenges to both our industry and our company. While
we continue to believe the commercial lending business has strong long-term fundamentals and is being adversely affected by recent volatility in the credit and capital markets, due to
these uncertainties, we are experiencing the following: (i) lower loan originations, (ii) reduced access to capital, if at all, 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.

We
responded to these difficult conditions by decreasing investment activity when we observed deteriorating market conditions. We expect credit to continue to be challenging throughout
2008 and into 2009. However, we believe we have the resources to quickly identify potential issues and to act aggressively to protect our invested capital and that in the longer term, liquidity and
attractive pricing could return to the commercial real estate finance markets.

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 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 which is repaid and reinvested
in this market. Approximately $406.2 million of our loans have their initial maturity date in 2008. However, many of these loans contain extension options of at least six months (many subject
to performance criteria) 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 attractive liquidity 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 finance new investment activity. We believe these sources will 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.

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 our loans and leases and could lead to increased vacancy rates in office properties servicing these institutions. For the three months ended
June 30, 2008, we recorded a gross provision for loan losses of $23,200 related to six separate loans.

As
of June 30, 2008, Gramercy Real Estate had 29.2 million square feet of commercial real estate in 37 states and the District of Columbia with an aggregate asset book
value of approximately $4.1 billion, in addition to $3.8 billion of debt investments, commercial real estate securities investments and other assets. As of June 30, 2008,
approximately 52% of its assets were comprised of commercial property, 30% of debt investments, 11% of commercial mortgage real estate securities and 7% of other assets.

As
of June 30, 2008, Gramercy Finance loans and other lending investments and CMBS of $3,179,297 net of fees, discounts, and unfunded commitments with an average spread to
30 LIBOR of 404 basis points for its floating rate investments, and an average yield of 6.96% for its fixed rate investments. As of June 30, 2008, Gramercy Finance also held interests in
three credit tenant net lease investments, or CTL investments, two interests in 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.

69

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The
aggregate carrying values, allocated by product type and weighted average coupons of our loans, and other lending investments and CMBS investments as of June 30, 2008 and
December 31, 2007, including loans held for sale, were as follows (dollars in thousands):

Carrying Value(1)

Allocation by Investment Type

Fixed Rate:
Average Yield

Floating Rate:
Average Spread over
LIBOR(2)2008

2007

2008

2007

2008

2007

2008

2007Whole loans, floating rate

$
1,392,185

$
1,594,338


59.9
%

60.5
%







335 bps


332 bpsWhole loans, fixed rate


155,254


204,192


6.7
%

7.7
%

7.15
%

7.79
%




Subordinate interests in whole loans, floating rate


132,023


146,901


5.7
%

5.6
%







451 bps


447 bpsSubordinate interests in whole loans, fixed rate


43,584


61,890


1.9
%

2.3
%

8.32
%

8.78
%




Mezzanine loans, floating rate


361,164


413,813


15.5
%

15.7
%







568 bps


607 bpsMezzanine loans, fixed rate


227,393


203,753


9.8
%

7.7
%

8.99
%

8.91
%




Preferred equity, fixed rate


11,879


11,858


0.5
%

0.5
%

10.09
%

10.09
%




Subtotal/ Weighted average

$
2,323,482

$
2,636,745


100.0
%

100.0
%

8.30
%

8.45
%

389 bps


395 bpsCMBS, floating rate


68,643


23,817


8.0
%

3.0
%







854 bps


593 bpsCMBS, fixed rate


787,172


768,166


92.0
%

97.0
%

6.22
%

6.13
%




Subtotal/ Weighted average


855,815


791,983


100.0
%

100.0
%

6.22
%

6.13
%

854 bps


593 bpsTotal

$
3,179,297

$
3,428,728


100.0
%

100.0
%

6.96
%

7.02
%

404 bps


397 bps


---

As
of June 30, 2008, Gramercy Realty, our commercial real estate business, owned a portfolio comprised of 798 bank branches, 347 office buildings and 11 land
parcels, of which 125 bank braches and one office building were partially owned through joint ventures. Our wholly-owned properties aggregated approximately 27.7 million rentable square feet
and its partially-owned properties aggregated approximately 1.0 million rentable square feet, including 0.6 million rentable square feet in an unconsolidated joint venture. As of
June 30, 2008, the occupancy of our wholly-owned properties was 87.5% and the occupancy for its partially-owned properties was 99.9%. Our two largest tenants are Bank of America, N.A.
and Wachovia Bank, National Association and, as of June 30, 2008, they represented approximately 43.0% and 14.8%, respectively, of the rental income of our portfolio and occupied approximately
45.2% and 19.2%, respectively, of our total rentable square feet.

70

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Summarized
in the table below are our key property portfolio statistics as of June 30, 2008:

Number of Buildings

Square Feet

OccupancyPortfolio

At
Acquisition

At
June 30, 2008

At
Acquisition

At
June 30, 2008

At
Acquisition

At
June 30, 2008Core


653


652


20,935,260


20,910,046


96.4
%

96.3
%ValueAdd(1)


303


295


5,265,870


5,223,593


65.8
%

65.7
%Subtotal


956


947


26,201,130


26,133,639


90.3
%

90.2
%Held for Sale(2)


96


84


2,382,666


1,914,749


57.1
%

53.2
%Total


1,052


1,031


28,583,796


28,048,388


87.5
%

87.6
%


---

Due
to the nature of the business of our tenant base, which places a high premium on serving its customers from a well established distribution network, we typically enter into
long-term leases with our tenants. As of June 30, 2008, the weighted average remaining term of our leases was 10.8 years and approximately 80.6% 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. During the second half of 2007 and the first half of 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, as well as the equity securities of financial
institutions and real estate companies. As the severity of residential sector issues increased, nearly all securities markets experienced 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 markets remain at or near all-time highs with liquidity
extremely low compared to historical standards or virtually non-existent. As a result, most commercial real estate finance and financial services industry participants, including ours,
have reduced new investment activity until the capital 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 up vacant space and reducing corporate overhead as a percentage of our total assets and total
revenues.

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:

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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 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 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
June 30, 2008, we owned securities of three controlling class CMBS trusts with a carrying value of $38,867. 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 June 30, 2008, our maximum exposure to loss as a result of its investment in these QSPEs totaled $38,867, which
equals the book value of these investments as of June 30, 2008.

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 at cost. Depreciation is computed using the straight-line method over the estimated useful
life of 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 depreciates it over the shorter of the useful life of the leasehold improvements or the lease term. If the tenant allowance represents a
payment for a purpose other than funding leasehold improvements, or in the event 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

72

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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.

CTL
investments are recorded at cost less accumulated depreciation. 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. Capitalized items are depreciated using the
straight-line method over the shorter of the useful lives of the capitalized item or 40 years for buildings or facilities, the remaining life of the facility for facility
improvements, five to ten years for personal property and equipment, and the shorter of the remaining lease term or the expected life for tenant improvements.

Results
of operations of properties acquired are included in the Consolidated Statements of Income from the date of acquisition.

In
accordance with FASB No. 144, or SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," a property to be disposed of is reported at
the lower of its carrying amount or its estimated fair value, less its cost to sell. Once an asset is classified as held for sale, depreciation expense and straight-line rent adjustments
are no longer recorded and historic results are reclassified as Discontinued Operations.

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 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
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 Income, 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 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). 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.

We
have not yet obtained all the information necessary to finalize our estimates to complete the purchase price allocations in accordance with SFAS No. 141 related to the American
Financial acquisition. The purchase price allocations will be finalized once the information indentified has been received, which should not be longer than one year from the date of acquisition.

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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 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 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 June 30, 2008 and December 31, 2007, we had investments of $68,799 and $49,440 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. We may originate or acquire preferred equity
interests that allow us to participate in a percentage of the underlying property's cash flows from operations and proceeds from a sale or refinancing. Should we make such a preferred equity
investment, we must determine whether that investment should be accounted for as a loan, joint venture or as an interest in real estate.

Specific
valuation allowances are established for possible loan losses based on the fair value of collateral on an individual loan basis and the consideration of guarantees or other
recourse. The fair 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. These methodologies include the evaluation of
operating cash flow from the property during the projected holding period, and the estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net
operating income of the specific property, less selling costs, all of which are discounted at market discount rates. Because the determination of estimated value is based upon projections of future
economic events, which are inherently subjective, amounts ultimately realized from loans and investments may differ materially from the carrying value at the balance sheet date.

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

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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.
We maintained a reserve of $35,442 and $8,658 at June 30, 2008 and December 31, 2007, respectively, relating to ten and eleven separate loans, respectively. A substantial majority of the
additional loan loss reserve is attributable to a broadly syndicated second and third lien financing secured by residential land in Southern California. We reserved against the entire $15,000 third
lien and $11,000 of the $45,000 second lien. We continue to work with our co-lenders, the senior lending group and the borrower for a favorable resolution, but the successful restructuring
of these loans is speculative, additional reserves are possible and any such restructuring will take longer than a more customary restructuring. During the six months ended June 30, 2008,
charge-offs totaled $4,430 relating to two loans we foreclosed upon. During the year ended December 31, 2007, charge-offs totaled $3,200 relating to one loan we
foreclosed upon.



The results of operations from real estate investments or CTL Investments sold or held for sale in the current and prior periods are
classified as "Loss from discontinued operations" on our consolidated statement of operations even though such losses were actually recognized by us prior to the asset sale.

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 income using the level yield method. CMBS
securities that we do not hold for the purpose of selling in the near-term but may dispose of prior to maturity, are designated as available-for-sale and are
carried at estimated fair value with the net unrealized gains or losses recorded as a component of accumulated other comprehensive income (loss) in stockholder's equity. Unrealized losses on
securities that in the judgment of management are other than temporary are charged against earnings as a loss on the consolidated statement of income. 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 $43.6 million to held to maturity. As of June 30, 2008 and December 31, 2007, the unrealized loss on the redesignated CMBS investments included in other
comprehensive income was $5,281 and $5,575, 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.

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

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other
investors in similar instruments. Because fair value estimates 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 recognize an 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 $103,527, a fair value of $99,879 and unrealized losses of $3,648 at June 30, 2008, and have maturities that extend through November 2013. We did not maintain
a portfolio of pledged treasury securities at December 31, 2007.

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 June 30, 2008 and December 31, 2007 were $4,461 and $0, respectively. We
continually review receivables related to rent, tenant reimbursements and unbilled rent receivables and determines collectability by taking into consideration the tenant's payment history, the
financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the
collectability of a receivable is in doubt, we increase the allowance for uncollectible accounts or record a direct write-off of the receivable in the consolidated statements of income.

Intangible Assets

Pursuant to SFAS No. 141, we follow the purchase method of accounting for all business combinations. To ensure that intangible
assets acquired and liabilities assumed in a purchase method business combination are recognized and reported apart from goodwill, we apply criteria specified in SFAS No. 141.

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

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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
and below-market 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 two to 20 years. In no event does the
amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and
customer relationship intangibles 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. The allocations presented in the accompanying
consolidated balance sheets as of June 30, 2008 is substantially complete; however, there are certain items that we will finalize once additional information is received. Accordingly, this
allocation is subject to revision when final information is available, although future revisions are not expected to have a significant impact on our financial position or results of operations.

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 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.

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Other Assets

We make 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 prepaid expenses and amortized over the respective period of benefit relating to the contractual arrangement. We also escrow deposits related to pending acquisitions
and financing arrangements, as required by a seller or lender, respectively. Prepaid acquisition costs represent a portion of the total purchase price of a property and are reclassified into real
estate investments and related intangible assets, as appropriate, at the time the acquisition is completed. If such costs are related to an acquisition that will not be consummated and the deposit is
not recoverable, the respective amounts are recorded as broken deal costs in the accompanying consolidated statements of income. Costs prepaid in connection with
securing financing for a property are reclassified into deferred costs at the time the transaction is completed.

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.

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 June 30, 2008, we had three first mortgage loans with an
aggregate carrying value of $171,809, one second lien loan with a carrying value of $33,900 and one third lien loan with a carrying value of $0, which were classified as non-performing
loans. In April 2008, the first lien lenders commenced a foreclosure action with respect to the collateral supporting the second lien and third lien loans referenced above and such loans changed from
being classified as sub-performing loans as of March 31, 2008 to non-performing loans as of June 30, 2008. The first and second lien loans are secured by land, which is
intended primarily for residential development. Given the significant deterioration in the United States residential real estate markets, we believe that the sucessful restructuring of these loans is
speculative, additional reserves are possible, and any such restructuring will take longer than a more customary restructuring. Therefore, there is more uncertainty surrounding the possible outcome of
these loans. We and our co-lenders are currently evaluating our options to protect our interests. In May 2008, the borrowers (controlled by the same sponsor) under two of the
non-performing first mortgage loans referenced above with an aggregate
carrying value of $69,755 filed a petition in bankruptcy under Chapter 11. We are currently evaluating our options to protect our interest, including the pursuit of a guaranty provided by the
sponsor for all principal due. At December 31, 2007, we had one non-performing loan with foreclosure and carrying value of $29,058, which was subsequently repaid in full on
March 14, 2008, along with accrued interest and substantially all other fees and charges due to us.

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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. At June 30, 2008, one first mortgage loan with a
total carrying value of $26,927, two subordinate interests in whole loans with a carrying value totaling $26,749, and one mezzanine loan with a carrying value of $46,299 were classified as
sub-performing. At December 31, 2007, one first mortgage loan with a carrying value of $10,403, and one 40% participation interest in a first mortgage loan with a carrying value of
$22,000, 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 and six months ended June 30, 2008 and 2007,
we recognized $0 and $10 and $1,668 and $4,354, respectively, in net gains from the sale of debt investments or commitments.



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.

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 June 30, 2008 include 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.

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Reserve for Possible Loan Losses

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

If,
upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created
with a corresponding charge to the provision for possible loan losses. The allowance for each loan is maintained at a level we 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. We maintained a reserve of $35,442 and $8,658 at June 30, 2008
and December 31, 2007, respectively, relating to ten and eleven separate loans, respectively, with carrying values of $218,679 and $264,612, respectively. A substantial majority of the
additional loan loss reserve is attributable to a broadly syndicated second and third lien financing secured by residential land in Southern California. We reserved against the entire $15,000 third
lien and $11,000 of the $45,000 second lien. We continue to work with our co-lenders, the senior lending group and the borrower for a favorable resolution, but the successful restructuring
of these loans is speculative, additional reserves are possible and any such restructuring will take longer than a more customary restructuring. During the six months ended June 30, 2008,
charge-offs totaled $4,430 relating to two loans we foreclosed upon. During the year ended December 31, 2007, charge-offs totaled $3,200 relating to one defaulted loan
we foreclosed upon, which had a carrying value of $19,899 and $19,155 at June 30, 2008 and December 31, 2007, respectively, and is recorded in other assets.

Income
recognition is generally suspended for loans at the earlier of the date at which payment becomes 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 suspended loan becomes contractually current and performance is demonstrated to be resumed.

Stock Based Compensation Plans

We have a stock-based compensation plan, described more fully in Note 15. 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.

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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 co-leased 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 2008 and 2007.

2008

2007Dividend yield


8.8%


7.9%Expected life of option


5.8 years


5.9 yearsRisk-free interest rate


3.2%


4.3%Expected stock price volatility


35.0%


28.0%


Incentive Distribution (Class B Limited Partner Interest)

The Class B limited partner interests are entitled to receive an incentive return equal to 25% of the amount by which funds from
operations, or FFO, plus certain accounting gains (as defined in the partnership agreement of our Operating Partnership) exceed the product of our weighted average stockholders equity (as defined in
the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). We will record 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 will reduce the amount of cash available for distribution to our common unit holders in our Operating Partnership and to our common stockholders. We incurred
approximately $2,604 and $3,784 and $5,100 and $6,601 with respect to such Class B limited partner interests for the three and six months ended June 30, 2008 and 2007, respectively.

Derivative Instruments

In the normal course of business, we use a variety of derivative instruments to manage, or hedge, interest rate risk. We require that
hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Some
derivative instruments are associated with an anticipated transaction. In those cases, hedge effectiveness criteria also require that it be probable that
the underlying transaction occurs. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract.

We
use a variety of commonly used derivative products that are considered "plain vanilla" derivatives. These derivatives typically include interest rate swaps, caps, collars and floors.
We also use total rate of return swaps, or TROR swaps, which are tied to the Lehman Brothers CMBS index. 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.

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In
the normal course of business, we are exposed to the effect of interest rate changes and limit these risks by following established risk management policies and procedures including
the use of derivatives. To address exposure to interest rates, we use derivatives primarily to hedge the mark-to-market risk of our liabilities with respect to certain of our
assets. We may also use derivatives to hedge variability in sales proceeds to be received upon the sale of loans held for sale.

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.

We
may employ swaps, forwards or purchased options to hedge qualifying forecasted transactions. Gains and losses related to these transactions are deferred and recognized in net income
as interest expense or other income in the same period or periods that the underlying transaction occurs, expires or is otherwise terminated.

All
hedges held by us are deemed effective based upon the hedging objectives established by our corporate policy governing interest rate risk management. The effect of our derivative
instruments on our financial statements is discussed more fully in Note 18 to 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 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 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 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 federal income tax purposes. We may, however, be subject to certain state and local taxes.

Our
TRSs are subject to federal, state and local taxes.

Our
Board of Directors intends to evaluate our dividend policy in the third quarter of 2008 to determine whether a potential dividend decrease is merited. Because of the American
Financial acquisition, we incur a considerably higher amount of depreciation which reduces our taxable income and would allow us to maintain our REIT distribution requirement with a lower dividend.
Given current market conditions, retained earnings is an extremely efficient and low cost of capital option.

For
the three and six months ended June 30, 2008 and 2007, we recorded $0 and $429 and $11 and $963 of income tax expense, respectively, in income from continuing operations for
income attributable to our wholly-owned TRSs. We have assumed an effective tax rate for the three and six months ended June 30, 2008 of 44% taking into consideration the anticipated applicable
U.S. federal statutory tax rate at June 30, 2008 of 34% and state and local taxes.

82

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Results of Operations (Amounts in thousands, except share and per share data)

Comparison of the three months ended June 30, 2008 to the three months ended June 30, 2007



2008

2007

$ ChangeInvestment income

$
63,003

$
72,828

$
(9,825
)Rental revenue


79,580


1,850


77,730Operating expense reimbursement


32,014





32,014Gain on sales and other income


22,756


3,625


19,131Total revenues


197,353


78,303

$
119,050Equity in net income of joint ventures

$
1,591

$
484

$
1,107


Investment
income is generated on our whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS. The decrease of $9,825 over the prior
period is primarily due to a decrease in the carrying value of our loans and other lending instruments by approximately
$262.0 million, a decline in LIBOR interest rates in 2008 and non-performing loans with a carrying value of $205,709 in 2008. There were no non-performing loans in the
three months ended June 30, 2007.

Rental
revenue for the three months ended June 30, 2008 includes revenue earned on 292 Madison Avenue, revenue earned on our TIC interest in 55 Corporate Drive, which has been
held as a proportionately consolidated property since its acquisition in June 2006, and revenue earned on properties acquired as a result of the American Financial acquisition. Rental revenue for the
three months ended June 30, 2008 includes the effect of adjustments for straight-line rent for 55 Corporate Drive and 292 Madison Avenue. For the three months ended June 30,
2008, $3,479 was earned on 292 Madison Avenue and 55 Corporate Drive and $78,685 was earned on American Financial's rental property portfolio. The increase in rental revenue of $77,730 over the prior
period is due primarily to our acquisition of American Financial.

Operating
expense reimbursement of $32,014 for the three months ended June 30, 2008 is attributed to the closing of the American Financial acquisition on April 1, 2008.

Gains
on sales and other income of $22,756 for the three months ended June 30, 2008 is primarily attributable to $17,597 in net gains from the repurchase of CRE CDO bonds
previously issued by us. The remaining balance is primarily composed of interest on restricted cash balances in our three CDOs (only two of which were in place during the same period in 2007) and
other cash balances held by us. Gains on sales and other income of $3,625 for the three months ended June 30, 2007 is comprised primarily of gains recorded on the sale of one loan and lending
investment of $1,668 and interest earned on restricted cash balances in our CDOs and other cash balances.

The
income on investments in unconsolidated joint ventures of $1,591 for the three months ended June 30, 2008 represents our proportionate share of the income generated by our
joint venture interests including $179 of real estate-related depreciation and amortization, which when added back, results in a contribution to Funds from Operations, or FFO, of $1,771. Our use of
FFO as an important non-GAAP financial measure is discussed in more detail below. The income on investments in unconsolidated joint venture of $484 for the three months ended
June 30, 2007 represents our proportionate share of income generated by our unconsolidated joint venture interests including $1,946 of real estate-related depreciation and amortization, which
when added back, resulted in a contribution to FFO of $2,430.

83

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2008

2007

$ ChangeOperating expenses

$
46,302




$
46,302Interest expense


77,678

$
39,209


38,469Management fees


9,106


5,414


3,692Incentive fee


2,604


3,784


(1,180
)Depreciation and amortization


22,232


1,088


21,144Marketing, general and administrative


4,067


4,103


(36
)Provision for loan loss


23,214


2,900


20,314Provision for taxes





429


(429
)Total expenses

$
185,203

$
56,927

$
128,276


Property
operating expenses for the three months ended June 30, 2008 were $46,302, entirely attributed to the American Financial acquisition which closed on April 1, 2008.
This amount included 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 $77,678 for the three months ended June 30, 2008 compared to $39,209 for the three months ended June 30, 2007. The increase of $38,469 is primarily
attributed to $2.5 billion in additional debt incurred as a result of the American Financial acquisition. Interest expense associated with this additional debt was $40,425 for the three months
ended June 30, 2008.

Management
fees increased $3,692 for the three months ended June 30, 2008 to $9,106 versus $5,414 for the same period in 2007 due primarily to an increase in our stockholder's
equity as a result of additional issuances of common equity during the second half of 2007 as well as in connection with the American Financial acquisition on which base management fees are
calculated. The remaining increase is attributable to the amount paid or payable to our Manager on investments in our three CDOs (only two of which was in place during the same period in 2007) in
accordance with the CDO collateral management agreements in lieu of the 0.15% fee otherwise payable to SL Green Operating Partnership, L.P. on those investments under the asset servicing
agreement, higher fees paid or payable to SL Green Operating Partnership, L.P. under our outsource and servicing agreements due to the increase in our investment balances and the scheduled 3%
annual increase in the fee payable under our outsource agreement.

We
recorded an incentive fee expense of $2,604 during the three months ended June 30, 2008 in accordance with requirements of the partnership agreement of our Operating
Partnership which entitles 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 amended and restated partnership agreement of
our Operating Partnership) multiplied by 9.5% (divided by 4 to adjust for quarterly calculations). We recorded incentive fee expense of $3,784 for the three months ended June 30, 2007, which
reflects a higher FFO recognized during that period compared to the comparable period in 2008.

We
recorded depreciation and amortization expenses of $22,232 for the three months ended June 30, 2008, versus $1,088 for the three months ended June 30, 2007. The increase
of $21,144 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 $4,068 for the three months ended June 30, 2008, versus $4,103 for the same period in 2007.

84

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Provision
for loan losses was $23,214 for the three months ended June 30, 2008, versus $2,900 for the three months ended June 30, 2007. The provision was based upon an
increase in non-performing loans and the review of our loan portfolio, and reflects the challenging economic conditions, severe illiquidity in the capital markets, and a difficult
operating environment. See Note 2 to our Consolidated Financial StatementsRevenue RecognitionFinance Investments.

Provision
for taxes was $0 for the three months ended June 30, 2008, versus $429 for the three months ended June 30, 2007.

Comparison of the six months ended June 30, 2008 to the six months ended June 30, 2007



2008

2007

$ ChangeInvestment income

$
137,598

$
132,797

$
4,801Rental revenue


83,279


3,586


79,693Operating expense reimbursement


32,014





32,014Gain on sales and other income


30,553


10,054


20,499Total revenues

$
283,444


146,437

$
137,007Equity in net income (loss) of joint ventures

$
4,700

$
(211
)
$
4,911


Investment
income is generated on our whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS. The decrease of $4,801 over the prior
period is primarily due to a decrease in the carrying value of our loans and other lending instruments by approximately
$262.0 million, a decline in LIBOR interest rates in 2008 and non-performing loans with a carrying value of $205,709 in 2008. There were no non-performing loans in the
six months ended June 30, 2007.

The
increase in rental revenue of $79,693 over the prior period is due primarily to the our acquisition of American Financial.

Operating
expense reimbursement of $32,014 for the six months ended June 30, 2008 is attributed to the closing of the American Financial acquisition on April 1, 2008.

Gain
on sales and other income of $30,553 for the six months ended June 30, 2008 is primarily attributable to $21,286 in net gains from the repurchase of CRE CDO bonds previously
issued by us. The remaining balance is primarily composed of interest on restricted cash balances in our three CDOs (only two of which were in place during the same period in 2007) and other cash
balances held by us. Gains on sales and other income of $10,054 for the six months ended June 30, 2007 is comprised primarily of gains recorded on the sale of one loan and lending investment of
$1,668, $2,686 gain on the sale of one debt investment, and interest earned on restricted cash balances in our CDOs and other cash balances.

The
income on investments in unconsolidated joint ventures of $4,700 for the six months ended June 30, 2008 represents our proportionate share of the income generated by our joint
venture interests including $365 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $5,065. Our use of FFO as an important
non-GAAP financial measure is discussed in more detail below. The loss on investments in unconsolidated joint venture of $211 for the six months ended June 30, 2007 represents our
proportionate share of the losses generated by our joint venture interests including $3,893 of real estate-related depreciation and amortization, which when added back, resulted in a contribution to
FFO of $3,682.

85

---





2008

2007

$ ChangeProperty operating expenses

$
46,302




$
46,302Interest expense


119,121

$
75,670


43,451Management fees


16,251


10,253


5,998Incentive fee


5,100


6,601


(1,501
)Depreciation and amortization


24,062


1,759


22,303Marketing, general and administrative


6,872


7,923


(1,051
)Provision for loan loss


31,214


4,148


27,066Provision for taxes


11


963


(952
)Total expenses

$
248,933

$
107,317

$
141,616


Property
operating expenses for the six months ended June 30, 2008 were $46,302, entirely attributed to the American Financial acquisition which closed on April 1, 2008.
This amount included 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 $119,121 for the six months ended June 30, 2008 compared to $75,670 for the six months ended June 30, 2007. The increase of $43,451 is primarily
attributed to $2.5 billion in additional debt incurred as a result of the American Financial acquisition. Interest expense associated with this additional debt was $40,425 for the six months
ended June 30, 2008.

Management
fees increased $5,998 for the six months ended June 30, 2008 to $16,251 versus $10,253 for the same period in 2007 due primarily to an increase in our stockholder's
equity as a result of additional issuances of common equity during the second half of 2007 as well as in connection with the American Financial acquisition on which base management fees are
calculated. The remaining increase is attributable to the amount paid or payable to our Manager on investments in our three CDOs (only two of which was in place during the same period in 2007) in
accordance with the CDO collateral management agreements in lieu of the 0.15% fee otherwise payable to SL Green Operating Partnership, L.P. on those investments under the asset servicing
agreement, higher fees paid or payable to SL Green Operating Partnership, L.P. under our outsource and servicing agreements due to the increase in our investment balances and the scheduled 3%
annual increase in the fee payable under our outsource agreement.

We
recorded an incentive fee expense of $5,100 during the six months ended June 30, 2008 in accordance with requirements of the partnership agreement of our Operating Partnership
which entitles 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 amended and restated partnership agreement of our Operating
Partnership) multiplied by 9.5% (divided by 4 to adjust for quarterly calculations). We recorded incentive fee expense of $6,601 for the six months ended June 30, 2007, which reflects a higher
FFO recognized during that period compared to comparable period in 2008.

We
recorded depreciation and amortization expenses of $24,062 for the six months ended June 30, 2008, versus $1,759 for the six months ended June 30, 2007. The increase of
$22,303 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 $6,872 for the six months ended June 30, 2008, versus $7,923 for the same period in 2007.

86

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Provision
for loan losses was $31,214 for the six months ended June 30, 2008, versus $4,148 for the six months ended June 30, 2007. The provision was based upon an increase
in non-performing loans and our review of our loan portfolio, and reflects the challenging economic conditions, severe illiquidity in the capital markets, and a difficult operating
environment. See Note 2 to our Consolidated Financial StatementsRevenue RecognitionFinance Investments.

Provision
for taxes was $11 for the six months ended June 30, 2008, versus $963 for the six months ended June 30, 2007.

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 investments, pay dividends and other general business needs. Our principal sources of working capital and funds for additional investments primarily include: 1) cash flow
from operations; 2) borrowings under our repurchase facilities and credit facilities; 3) our CDOs; 4) other forms of financing or additional securitizations including CMBS or
subsequent CDO offerings; 5) proceeds from common or preferred equity offerings; 6) issuances of trust preferred securities; 7) the proceeds from principal payments on our
investment; and 8) the sale or syndication of certain of our debt investments or real estate investments. We believe these sources of financing will be sufficient to meet our
short-term liquidity needs. Due to recent conditions in the capital and credit markets, we do not anticipate having the ability in the near-term to access equity or debt
capital through the public markets or debt capital through new CDO issuances. Therefore, we will rely primarily on cash flows from operations, principal and interest payments on our investments, sales
or syndications of loans, asset sales and, if available, other forms of secured or unsecured debt, or private equity, that may become available to us.

Our
ability to fund our short-term liquidity needs, including distributions to stockholders, debt service and general operations, 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.

In
addition, we recently announced that a special committee of our Board of Directors has been formed to consider whether the internalization of our Manager is in the best interests of
our stockholders. If such internalization occurs, it potentially could require additional liquidity to the extent any of the consideration for the internalization consists of cash. We currently
anticipate that any consideration would consist primarily, if not 100%, of equity consideration.

Further,
our short-term liquidity requirements could be affected by a potential change in our dividend policy. Our Board of Directors intends to evaluate our dividend policy
in the third quarter of 2008 to determine whether a potential dividend decrease is merited. Because of the American Financial acquisition, we incur a considerably higher amount of depreciation which
reduces our taxable income and would allow us to maintain our REIT distribution requirement with a lower dividend. Given current market conditions, retained earnings is an extremely efficient and low
cost of capital option.

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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, may have an adverse effect on our business and results of operations. In addition, an event of default can be
triggered under our repurchase facilities and our credit facilities if, among other things, the management agreement with the Manager is terminated. Depending on market conditions, our debt financing
will generally be in the range of 70% to 80% of the carrying value of our total assets. Any indebtedness we incur will likely be subject to continuing covenants and more restrictive and we will likely
be required to make continuing representations and warranties in connection with such debt. Our debt financing terms may require us to keep uninvested cash on hand, or to maintain a certain portion of
our assets free of liens, each of which could serve to limit our borrowing ability. Moreover, our debt may be secured by our assets. If we default in the payment of interest or principal on any such
debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to
immediately repay all outstanding principal. If we are unable to make such payment, our lender could foreclose on our assets that are pledged as collateral to such lender. The lender could also sue us
or force us into bankruptcy. Any such event would have a material adverse effect on our liquidity and the value of our common stock. In addition, posting additional collateral to support our credit
and repurchase facilities will reduce our liquidity and limit our ability to leverage our assets.

To
maintain our status 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. 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 lending and investment opportunities.

We
rely on the credit and equity markets to finance and grow our business. During the second half of 2007 and the first half of 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, as well as the equity securities of financial
institutions and real estate companies.
As the severity of residential sector issues increased, nearly all securities markets experienced 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 markets remain at or near all-time highs with liquidity extremely low compared to historical standards
or virtually non-existent. As a result, most commercial real estate finance and financial services industry participants, including ours, have reduced new investment activity until the
capital 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 up vacant space, and reducing corporate overhead as a percentage of its total assets and total revenues.

Cash Flows (Amounts in thousands, except share and per share data)

Net cash provided by operating activities increased $63,936 to $117,998 for the six months ended June 30, 2008 compared to cash
provided of $54,062 for same period in 2007. Operating cash flow is generated primarily by net interest income from our Structured Finance segment and net rental income from our Real Estate segment.
The increase in operating cash flow for the six months ended June 30, 2008 compared to the same period in 2007 was primarily due to an increase to restricted cash of $39,855, an increase in
depreciation of $18,955, an increase in provision for loan losses of $27,066 and an increase to other assets of $23,695 net of a gain on the extinguishment of debt of $21,697.

Net
cash used in investing activities for the six months ended June 30, 2008 was $585,927 compared to net cash used in investing activities of $687,964 during the same period in
2007. The

88

---



decrease
in cash used in investing activities is primarily due to a significant decline to new investment originations net of repayments and acquisitions of real estate investments for the six months
ended June 30, 2008 as compared to the same period in 2007.

Net
cash provided by financing activities for the six months ended June 30, 2008 was $230,005 as compared to $633,991 during the same period in 2007. In connection with the
acquisition of American Financial on April 1, 2008, we received proceeds from Acquisition Financial of $1,114,743, offset by repayments on mortgage notes and credit facilities of $716,525. The
decrease for the six months ended 2008 as compared to the same period in 2007 is primarily attributable to a decrease of $111,205 in proceeds from the sale of preferred stock, a net decrease in
proceeds/payments of repurchase facilities of $384,529, a decrease of $146,628 in restricted cash in connection with financing investments in our CDOs, and an increase of dividends paid in 2008 of
$101,035, which was primarily due to the declaration of a $2.00 per common share special dividend in December 2007 paid in January 2008.

Capitalization (Amounts in thousands, except share and per share data)

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 June 30, 2008, 51,295,294 shares of common stock and
4,600,000 shares of preferred stock were issued and outstanding.

Preferred Stock (Amounts in thousands, except share and per share data)

In April 2007, we issued 4,600,000 shares of our 8.125% Series A cumulative redeemable preferred stock (including the
underwriters' over-allotment option of 600,000 shares) with a mandatory liquidation preference of $25.00 per share. Holders of the Series A cumulative redeemable preferred shares
receive annual dividends of $2.03125 per share paid on a quarterly basis and dividends are cumulative, subject to certain provisions. On or after April 18, 2012, we may at our 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 (Amounts in thousands, except share and per share data)

As of the date of our formation, April 12, 2004, we had 500,000 shares of common stock outstanding valued at approximately $200.
On August 2, 2004 we completed our initial public offering of 12,500,000 shares of common stock resulting in net proceeds of approximately $172,900, which was used to fund investments and
commence our operations. As of June 30, 2008, and December 31, 2007, 687,504 and 594,333 restricted shares had also been issued under our 2004 Equity Incentive Plan, or our Equity
Incentive Plan. These shares have a vesting period of two to four years.

In
December 2004, we sold 5,500,000 shares of our common stock, at a price of $17.27 per share, resulting in net proceeds of approximately $93,740 under a private placement exemption
from the registration requirements of Section 5 of the Securities Act of 1933, as amended. We subsequently registered these shares for resale under the Securities Act in August 2005. A total of
4,225,000 shares were sold to various institutional investors and an additional 1,275,000 shares were sold to SL Green
Operating Partnership, L.P. pursuant to its contractual right to choose to maintain up to a 25% ownership interest in the outstanding shares of our common stock. Of the 5,500,000 shares sold,
2,000,000 shares were settled on December 31, 2004 and the remaining 3,500,000 shares were settled on January 3, 2005.

In
September 2005, we sold 3,833,333 shares of our common stock, at a price of $25.80 per share, resulting in net proceeds of approximately $97,830. A total of 2,875,000 shares were sold
through a public offering and an additional 958,333 shares were sold to SL Green Operating Partnership, L.P. pursuant to its contractual right to choose to maintain up to a 25% ownership
interest in our outstanding shares of common stock. Net proceeds were used for loan acquisitions and originations,

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repayment
of outstanding principal under one of our repurchase facilities and general corporate purposes.

In
May 2006, we sold 3,000,000 shares of our common stock, at a price of $26.75 per share, resulting in net proceeds of approximately $79,787. A total of 2,250,000 shares were sold
through a public offering and an additional 750,000 shares were sold to SL Green Operating Partnership, L.P. pursuant to its contractual right to choose to maintain up to a 25% ownership
interest in the outstanding shares of our common stock. Net proceeds were used for loan acquisitions and originations, repayment of outstanding principal under our repurchase facilities and general
corporate purposes.

In
May 2007 our new $500,000 shelf registration statement was declared effective by the Securities and Exchange Commission, or SEC. This registration statement provides us with the
ability to issue common and preferred stock, depository shares and warrants. We currently have $373,344 available under the shelf.

In
September 2007, we sold 4,825,000 shares of common stock, at a public offering price of $26.25 per share, resulting in net proceeds of approximately $124,500. A total of 3,618,750
shares were sold through a public offering and an additional 1,206,250 shares were sold directly to SL Green Operating Partnership, L.P. pursuant to its contractual right to choose to maintain
up to a 25% ownership interest in our outstanding shares of common stock. After this offering, SL Green Operating Partnership, L.P. owned 7,624,583 shares of our common stock. Net proceeds were
used to retire borrowings under the our unsecured facility and to create additional funding capacity for opportunistic investments.

In
November 2007, we sold, through a private placement pursuant to Section 4(2) of the Securities Act, 3,809,524 shares of common stock at a price of $26.25 per share to an
affiliate of Morgan Stanley Real Estate Special Situations Fund III, a global diversified fund managed by Morgan Stanley Real Estate, raising gross proceeds of approximately $100,000. Subsequent to
this private placement, SL Green's ownership percentage was approximately 22% of the outstanding shares of our common stock at June 30, 2008.

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. As of June 30, 2008, SL Green Operating Partnership, L.P. owned approximately 15.8% of the
outstanding shares of our common stock.

Outperformance Plan (Amounts in thousands, except share and per share data)

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, all of whom are co-leased employees, 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 award in accordance with FASB Statement No. 123(R). Compensation expense of $308 and $617 and $383 and $766 was recorded for the three and six months
ended June 30, 2008 and 2007, respectively, related to the 2005 Outperformance Plan. Based on our total return to stockholders as of the May 31, 2008 measurement period conclusion date,
we did not meet the minimum 30% return threshold and accordingly, the plan participants automatically forfeited the LTIP Units that they had been granted.

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Deferred Stock Compensation Plan for Directors (Amounts in thousands, except share and per share data)

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

As
of June 30, 2008, there were approximately 43,791 phantom stock units outstanding, of which 31,791 units are vested.

Market Capitalization (Amounts in thousands, except share and per share data)

At June 30, 2008, our CDOs and borrowings under our repurchase facilities, trust preferred securities, mortgage loans (including
the Goldman Mortgage and Mezzanine Loans and the proportionately consolidated mortgage note payable related to our TIC interest in 55 Corporate Drive) and the credit facilities (excluding our share of
joint venture debt), represented 81% of our consolidated market capitalization of $3.7 billion (based on a common stock price of $11.59 per share, the closing price of our common stock on the
New York Stock Exchange on June 30, 2008). Market capitalization includes our consolidated debt and common and preferred stock.

Indebtedness (Amounts in thousands, except share and per share data)

The table below summarizes borrowings at June 30, 2008 and December 31, 2007, which currently include our Wachovia and
Goldman repurchase facilities, KeyBank and Deutsche Bank credit facilities, mortgage loans (including the Goldman Mortgage and Mezzanine Loans and the proportionately consolidated mortgage note
payable related to our TIC interest in 55 Corporate Drive), our CDOs and our junior subordinated debentures:

June 30,
2008

December 31,
2007Repurchase agreements

$
94,915

$
200,197Credit facilities


168,917


Mortgage Loans


2,557,181


153,624Collateralized debt obligations


2,683,955


2,735,145Junior subordinated debentures


150,000


150,000Total

$
5,654,968

$
3,238,966Cost of debt


LIBOR+1.94
%

LIBOR+0.81
%


Repurchase Facilities (Amounts in thousands, except share and per share data)

We have entered into two repurchase facilities, one with Wachovia Capital Markets, LLC or one or more of its affiliates, or
Wachovia, and one with Goldman Sachs Mortgage Company, or Goldman.

The
repurchase facility with Wachovia is a $500,000 facility. This facility was initially established as a $250,000 facility, was increased to $350,000 from $250,000 effective January
2005, and was subsequently increased to $500,000 effective April 2005. In June 2007, the facility was modified further by reducing the credit spreads. As a result of the modifications, the $500,000
facility bears interest at

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spreads
of 0.65% to 2.50% over one-month LIBOR and, based on its expected investment activities, provides for advance rates that vary from 60% to 95% based upon the collateral provided
under a borrowing base calculation. In October 2006, the facility's maturity date was extended to October 2009. The lender has a consent right with respect 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. We had no accrued interest and borrowings of $78,911 at a
weighted average spread to LIBOR of 1.33% as of June 30, 2008, and no accrued interest and borrowings of $165,286 at a weighted average spread to LIBOR of 1.33% as of December 31, 2007.
We have guaranteed a portion of our consolidated subsidiaries' obligations under this facility under specified circumstances.

In
July 2008, this facility was terminated and a new facility was entered into by us. See Notes 23Subsequent Events, to our Consolidated Financial Statements.

We
also have a repurchase facility with Goldman. In October 2006 this facility was increased from $200,000 to $400,000 and its maturity date was extended until September 2009. In June
2007, the facility was modified further by reducing the credit spreads. As a result of the modifications, the facility bears interest at spreads of 1.00% to 1.50% over one-month LIBOR and,
based on its expected investment activities, provides for advance rates that vary from 70% to 90% 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. We had no accrued
interest and borrowings of $16,004 at a weighted average spread to LIBOR of 1.5% as of June 30, 2008, and accrued interest of $189 and borrowings of $34,911 at a weighted average spread to
LIBOR of 1.07% under this facility at December 31, 2007. We have guaranteed a portion of this facility under specified circumstances.

Restrictive Covenants (Amounts in thousands, except share and per share data)

The terms of our repurchase facilities (together with any related guarantees) include covenants that (a) limit our maximum total
indebtedness to no more than 85% of
total assets, (b) require us to maintain minimum liquidity of at least $15,000, (c) require our fixed charge coverage ratio to be at no time less than 1.25 to 1.00, (d) require
our minimum interest coverage ratio to be at no time less than 1.35 to 1.00, and (e) require us to maintain minimum tangible net worth of not less than (i) $400,000, plus (ii) 75%
of the net proceeds of our equity offerings completed subsequent to the date of the June 2007 amendments. The covenants also restrict us from making annual distributions to stockholders in excess of a
maximum of 100% of our FFO (as defined therein) for the previous four quarters under the Wachovia facility, except that we may in any case pay distributions necessary to maintain our REIT status. An
event of default can be triggered on our repurchase facilities if, among other things, GKK Manager LLC is terminated as the Manager. As of June 30, 2008 and December 31, 2007, we
were in compliance with all such covenants.

The
repurchase facilities require that borrowings under these facilities be paid down 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, mezzanine loans, and rated CMBS or commercial real estate CDO
securities originated or acquired by the us.

Credit Facilities (Amounts in thousands, except share and per share data)

We have two credit facilities, one with KeyBank National Association, or KeyBank, and one with Deutsche Bank AG, Cayman Islands Branch,
or Deutsche Bank.

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In
May 2006, we closed on a $100,000 senior unsecured revolving credit facility with KeyBank with an initial term of three years and a one-year extension option. The initial
facility was supported by a negative pledge of an identified asset base (involving substitution rights) with advance rates that vary from 30% to 90% of the asset value provided under a borrowing base
calculation. The lender also had consent rights to the inclusion of assets in the borrowing base calculation. The facility bore interest at 1.90% over one-month LIBOR to the extent our
leverage ratio, defined as total liabilities to total assets, including our proportionate share of the liabilities and assets of our unconsolidated subsidiaries, is less than 80% and 2.10% over
one-month LIBOR to the extent our leverage ratio is equal to or greater than 80%. In June 2007 the facility was increased to $175,000 and interest spreads on the facility were reduced. The
facility is supported by a negative pledge of an identified asset base with advance rates that vary from 30% to 90% of the asset value provided under a borrowing base calculation. The lender also has
consent rights to the inclusion of assets in the borrowing base calculation. Following the modifications in June 2007, the facility bears interest at 1.65% over one-month LIBOR. We had
accrued interest of $35 and
borrowings of $75,000 as of June 30, 2008, and no accrued interest and borrowings under this facility at December 31, 2007.

The
terms of the unsecured revolving credit facility include covenants that (a) limit our maximum total consolidated indebtedness to no more than 85% of total assets,
(b) require our fixed charge coverage ratio to be at no time less than 1.30, and (c) require us to maintain minimum tangible net worth of not less than $450,000 plus 75% of the net
proceeds from equity offerings completed following the date of the June 2007 amendment. The covenants also restrict us from making annual distributions in excess of a maximum of 100% of our FFO (as
defined by the National Association of Real Estate Investment Trusts, or NAREIT) for the previous four quarters, except that we may in any case pay distributions necessary to maintain our REIT
qualification. An event of default can be triggered on our unsecured revolving credit facility if, among other things, GKK Manager LLC is terminated as the Manager. As of June 30, 2008
and December 31, 2007, we were in compliance with all such covenants.

In
connection with the acquisition of American Financial on April 1, 2008, our indirect wholly-owned subsidiaries, First States Investors DB I L.P. (formerly known as First
States Investors DB I LLC) and American Financial TRS, Inc., and certain of their direct or indirect subsidiaries, collectively, the DB Loan Borrowers entered into an amendment and
restatement of an assumed American Financial credit facility, or the DB Loan Agreement with and Deutsche Bank AG, Cayman Islands Branch, as agent for certain lenders. As part of the amendment and
restatement of the DB Loan Agreement, the available amount under the DB Loan Agreement was reduced from $400,000 to $100,000, or the DB Loan". In addition, amounts were paid to reduce the outstanding
borrowings under the former facility to $95,000. The DB Loan Agreement provides the DB Loan Borrowers with a one-year facility that matures on March 31, 2009, and permit, subject to
certain conditions, a six month extension at the DB Loan Borrowers' option, subject to certain conditions. Advances made under the DB Loan Agreement bear interest at 3.00% over the greater of
(i) 3.50% or (ii) LIBOR. The DB Loan allows for prepayment in whole or in part on any payment date; provided, however, that, any such prepayment shall be accompanied by all accrued
interest on the portion of the DB Loan Agreement being prepaid. We had accrued interest of $339 and borrowings of $93,917 as of June 30, 2008.

The
obligations under the DB Loan Agreement are secured by equity pledges of the shares in certain DB Loan Borrowers and mortgages over the various properties owned by certain DB Loan
Borrowers. The DB Loan is guaranteed by us. The DB Loan Agreement contains customary events of default, the occurrence of which could result in the acceleration of all amounts payable thereunder.

The
DB Loan requires us to establish and fund certain reserve accounts to be used for the payment of taxes and insurance, rollover and replacement expenses, payment of tenant
improvements and leasing commissions and the funding of debt service

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Mortgage Loans (Amounts in thousands, except share and per share data)

Certain real estate assets are subject to mortgage liens. As of June 30, 2008, 737 of our real estate assets were encumbered
with mortgages with a cumulative outstanding balance of approximately $2,600,000. Our mortgage notes payable typically require that specified loan-to-value and debt service
coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not
satisfied, in addition to other conditions that we may have to observe, our ability to release properties from the financing may be restricted and the lender may be able to "trap" portfolio cash flow
until the required ratios are met on an ongoing basis. As of June 30, 2008, we were out of debt service coverage compliance under one of our mortgage note financings, although such
non-compliance does not, and will not, constitute an event of default under the applicable loan agreement.

Goldman Mortgage Loan (Amounts in thousands, except share and per share data)

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 GSCMC and Citicorp. The Goldman Mortgage Loan bears 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 0.75% 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.

The
Goldman Mortgage Loan requires an environmental escrow reserve for the remediation of environmental conditions in the combined amount of $700. 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
have accrued interest of $759 as of June 30, 2008.

Goldman Mezzanine Loan (Amounts in thousands, except share and per share data)

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 GSCMC and Citicorp. The Goldman Mezzanine Loan bears 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.

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The
Goldman Mezzanine Loan requires an environmental escrow reserve for the remediation of environmental conditions in the combined amount of $850. 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
have accrued interest of $1,820 as of June 30, 2008.

Secured Term Loan (Amounts in thousands, except share and per share data)

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

We
have no accrued interest as of June 30, 2008.

Certain
of our mortgage notes payable related to assets held for sale contain provisions that require us to compensate the lender for the early repayment of the loan. These charges will
be separately classified in the statement of operations as yield maintenance fees within discontinued operations during the period in which the charges are incurred.

Collateralized Debt Obligations (Amounts in thousands, except share and per share data)

During 2005 we issued approximately $1,000,000 of CDOs 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 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 an additional approximately $1,000,000 of CDOs 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 CDOs through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 Issuer, and together
with the 2005 Issuer and the 2006 Issuer, the Issuers, and Gramercy Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer, and together with the 2005 Co-Issuer
and the 2006 Co-Issuer, the Co-Issuers. The CDO consists of

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$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 and 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.

During
the three months ended June 30, 2008, we repurchased, at a discount, $12,900 of investment grade notes of the 2005 Issuer, $12,000 of investment grade notes of the 2006
Issuer and of $12,900 investment grade notes of the 2007 Issuer. During the three months ended March 31, 2008, we repurchased, at a discount, $4,000 of investment grade notes of the 2005 Issuer
and $9,500 of investment grade notes of the 2007 Issuer. We recorded a net gain of $17,597 and $21,096 for the three and six months ended June 30, 2008, respectively, in connection with the
repurchase of notes of such Issuers.

Junior Subordinated Debentures (Amounts in thousands, except share and per share data)

In January 2006, May 2005 and August 2005, 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 are also wholly-owned subsidiaries of our
Operating Partnership. The securities issued in January 2006 bear 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 will float based on the three-month LIBOR plus 270 basis points. The securities issued in May 2005
bear interest at a fixed rate of 7.57% for the first ten years ending June 2015 and the securities issued in August 2005 bear interest at a fixed rate of 7.75% for the first ten years ending October
2015. Thereafter the rates will float based on the three-month LIBOR plus 300 basis points.

All
issuances of trust preferred securities require quarterly interest distributions; however, payments may be deferred while the interest expense is accrued for a period of up to four
consecutive quarters if our Operating Partnership exercises its right to defer such payments, which it may elect to do on more than one occasion. The trust preferred securities are redeemable, at the
option of our Operating Partnership, in whole or in part, with no prepayment premium any time after June 30, 2010, October 30, 2010 or January 30, 2011 for the securities issued
by GCTI, GCTII and GCTIII, respectively.

GCTI,
GCTII and GCTIII each issued $1,550 aggregate liquidation amount of common securities, representing 100% of the voting common stock of those entities to our Operating Partnership
for a total purchase price of $4,650. GCTI, GCTII and GCTIII used the proceeds from the sale of the trust preferred securities and the common securities to purchase our Operating Partnership's junior
subordinated notes. The terms of the junior subordinated notes match the terms of the trust preferred

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securities.
The notes are subordinate and junior in right of payment to all present and future senior indebtedness and certain other of our financial obligations. We realized net proceeds from each
offering of approximately $48,956.

Our
interests in GCTI, GCTII and GCTIII are accounted for using the equity method and the assets and liabilities of those entities are not consolidated into our financial statements.
Interest on the junior subordinated notes is included in interest expense on our consolidated statements of income while the value of the junior subordinated notes, net of our investment in the trusts
that issued the securities, are presented as a separate item in our consolidated balance sheet.

Contractual Obligations (Amounts in thousands, except share and per share data)

Combined aggregate principal maturities of our CDOs, repurchase facilities, trust preferred securities, mortgage loans (including the
Goldman Mortgage and Mezzanine loans), credit facilities, unfunded loan commitments and our obligations under our management agreement, outsource agreement, CDO collateral management agreements and
operating lease as of June 30, 2008 are as follows:

CDOs

Repurchase
Facilities

Trust
Preferred
Securities

Mortgage
Loans(1)

Credit
Facilities

Unfunded
Loan(2)
Commitments

Outsource
and
Management
Agreements(3)

CDO
Collateral
Management
Agreements

Operating
Lease

Total2008

$


$


$


$
12,934

$
3,250

$
76,667

$
13,099

$
2,570

$
8,997

$
117,5172009





94,915





75,929


165,667


24,893


26,056


5,139


18,311


410,9102010











884,618





413





4,205


18,041


907,2772011











33,824











2,302


17,889


54,0152012











80,256











555


17,578


98,389Thereafter


2,683,955





150,000


1,445,671














169,028


4,448,654Above/Below Market Interest











23,949

















23,949Total

$
2,683,955

$
94,915

$
150,000

$
2,557,181

$
168,917

$
101,973

$
39,155

$
14,771

$
249,844

$
6,060,711


---

Leasing Agreements (Amounts in thousands, except share and per share data)

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 June 30, 2008, 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.

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Future
minimum rental payments under non-cancelable leases, excluding reimbursements for operating expenses, as of June 30, 2008 are as follows:

2008 (July 1December 31)

$
8,9972009


18,3112010


18,0412011


17,8892012


17,5782013 and thereafter


169,028Total

$
249,844


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 deduction and net capital gains. We intend to continue to pay regular quarterly dividends to our stockholders. Before we pay any
dividend, whether for 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.

Our
Board of Directors intends to evaluate our dividend policy in the third quarter of 2008 to determine whether a potential dividend decrease is merited. Because of the American
Financial acquisition, we incur a considerably higher amount of depreciation which reduces our taxable income
and would allow us to maintain our REIT distribution requirement with a lower dividend. Given current market conditions, retained earnings is an extremely efficient and low cost of capital option.

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 (Amounts in thousands, except share and per share data)

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 provides for a term through December 2009 with automatic one-year extension options and is subject to certain termination rights. We
pay our 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

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securities.
We incurred expense to the Manager under this agreement of an aggregate of $9,106 and $16,251 and $3,109 and $5,775 for the three and six months ended June 30, 2008 and 2007,
respectively. In 2008, we and SL Green formed special committees comprised solely of independent directors to consider whether the internalization of the Manager and/or amendment to the management
agreement would be in the best interest of each company and its respective stockholders.

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 are 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 will record 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 have become probable and reasonably estimable in accordance with the partnership agreement. We incurred $2,640 and $5,100 and $3,784 and $6,601 with respect to such
Class B limited partner interests for the three and six months ended June 30, 2008 and 2007.

We
are obligated to reimburse our 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, provides 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 may be reduced by SL Green Operating Partnership, L.P. for fees paid directly to outside servicers by us. The outsource agreement provides for
an annual fee payable by us, which fee became $2,732 per year subsequent to the closing of the American Financial merger to reflect higher costs resulting from the increased size and number of assets
of the combined company, increasing 3% annually over the prior year on the anniversary date of the outsource agreement in August of each year. For the three and six months ended June 30, 2008
and 2007, we realized expense of $683 and $1,024 and $332 and $664, respectively, to our Manager under the outsource agreement. For the three and six months ended June 30, 2008 and 2007, we
realized expense of $1,365 and $2,676 and $890 and $1,659, respectively, to our Manager under the asset servicing agreement.

In
connection with the closing of our first CDO in July 2005, the 2005 Issuer, entered into a collateral management agreement with the Manager. Pursuant to the collateral management
agreement, the Manager has agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The
collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum
of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per
annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted
securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the
calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under the first CDO, the Board of Directors has allocated to the Manager
the subordinate collateral management fee paid on the CDO securities not held by us. At June 30, 2008 and December 31, 2007 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 and six months ended
June 30, 2008 and 2007, we realized expense of $512 and $1,024 and $512 and $1,019, respectively, to the Manager under such collateral management agreement.

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Except
for the 2005 CDO, fees payable in connection with CDOs or other securitization vehicles are governed by the management agreement. Pursuant to that agreement, if a collateral
manager is retained as part of the formation of a CDO or other securitization vehicle, our Manager or an affiliate will be the collateral manager and will receive the following fees: (i) 0.25%
per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with us or our 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 our 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. For the three and six months ended June 30, 2008 and 2007, we realized expense of $571 and $1,142 and $571 and $1,136, respectively, to the Manager under
this agreement. With respect to the CDO which closed in August, 2007, we realized expense of $216 and $432 to our Manger for the three and six months ended June 30, 2008.

In
April 2005, we closed on a $57,503 initial investment in a joint venture with SL Green to acquire, own and operate the South Building located at One Madison Avenue, New York, New
York. The joint venture, which was owned 45% by a wholly-owned subsidiary of us and 55% by a wholly-owned subsidiary of SL Green was created to acquire, own and operate the South Building, The joint
venture interests are pari-passu. The joint venture completed the acquisition of the South Building from Metropolitan Life Insurance Company for the purchase price of approximately
$802,800 plus closing costs, financed in part through a $690,000 first mortgage loan on the South Building. The South Building comprises approximately 1.2 million square feet and is almost
entirely net leased to Credit Suisse Securities (USA) LLC ("CS") pursuant to a lease with a 15-year remaining term. In August 2007 we sold our entire investment in the joint venture
to SL Green Realty Corp. for approximately $147,000 and realized a gain of $92,235. In August 2007, an affiliate of SL Green loaned approximately $147,000 to our Operating Partnership. This loan was
to be repaid with interest at an annual rate of 5.80% on the earlier of September 1, 2007 or the closing of the sale of our 45% interest in One Madison Avenue to SL Green. As a result of the
sale of our interest in August 2007, the loan was repaid with interest on such date.

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 five thousand square feet with an option to lease an additional approximately two thousand square feet and carries a term of ten years with rents on the entire
seven thousand square feet of approximately $249 per annum for year one rising to $315 per annum in year ten. For
the three and six months ended June 30, 2008 and 2007, we paid $62 and $125 and $62 and $125 under this lease, respectively.

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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. We have determined that the yield on our mezzanine loan after giving effect to the interest-only participation retained by the seller is at market.
The mezzanine loan is secured by the equity interests in an office property in New York, New York.

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

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 has a book value of $90,538 and $90,389 as of June 30, 2008 and December 31, 2007, 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 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
August 2006, we acquired from a financial institution a 50% pari-passu interest in a $65,000 preferred equity investment secured by an office property in New York, New
York. An affiliate of SL Green simultaneously acquired and owns the other 50% pari-passu interest. The investment bears interest at a blended fixed rate of 10.52%.

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.

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
June 30, 2008 and December 31, 2007, our interest in the whole loan had a carrying value of $65,610 and $65,033, respectively. The investment in the mezzanine loan was repaid in full in
September 2007.

In
March 2007, we closed on the acquisition of a $62,500 pari-passu interest in one tranche of a multiple-level mezzanine structure primarily secured by pledges of equity and
rights to cash distributions, which was used to fund the acquisition of a large office portfolio. The investment bears interest at one-month LIBOR plus 2.85%. At closing, an affiliate of
SL Green simultaneously acquired

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a
$62,500 pari-passu interest in the same tranche of the mezzanine structure. The investment was repaid in full in May 2007.

In
April 2007, we purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34th Street in
New York, New York. The acquisition was financed with a $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated third
party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. As of June 30, 2008 and
December 31, 2007, the investment had a carrying value of $23,324 and $20,390, respectively. We recorded our pro rata share of net income of $1,250 and $2,754 and $1,099 and $1,099 for the
three and six months ended June 30, 2008 and 2007, 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 June 30,
2008 and December 31, 2007, the investment had a carrying value of $32,712 and $28,332, respectively. We recorded our pro rata share of net income of $1,408 and $3,340 for the three and six
months ended June 30, 2008, respectively.

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 bears 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.

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. 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.

In
September 2007, the Manager earned a $1,000 collateral selection fee payable by Nomura International plc. We purchased $18,000 of par bonds of the same securities to which the
collateral selection fee was related and was earned. As part of the closing on the securities purchased, we collected and immediately remitted the fee due to the Manager.

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%.

102

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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%.

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%.

In
connection with the closing of the acquisition of American Financial, we received, as part of a larger financing, financing of $50,000 from SL Green, which is described more fully in
Note 9. 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.

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 for each of the three and six months ended June 30, 2008 and 2007, was less than $1.

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), excluding gains (or losses) from items which are not a recurring part of our
business, such as debt restructurings, and 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 and real estate investments including tenancy-in-common 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 and six months ended June 30, 2008 and 2007 are as follows (amounts in thousands, except share and per share data):

For the Three
Months Ended
June 30, 2008

For the Three
Months Ended
June 30, 2007

For the Six
Months Ended
June 30, 2008

For the Six
Months Ended
June 30, 2007Net income available to common stockholders

$
10,060

$
19,965

$
33,194

$
37,014Add:Depreciation and amortization


25,721


3,174


30,310


5,593FFO adjustment for unconsolidated joint ventures


179


1,946


365


3,893Less:Non real estate depreciation and amortization


(3,036
)

(2,592
)

(6,913
)

(4,428
)Funds from operations

$
32,924

$
22,493

$
56,956

$
42,072Funds from operations per share-basic

$
0.64

$
0.86

$
1.33

$
1.62Funds from operations per share-diluted

$
0.64

$
0.82

$
1.32

$
1.53


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.

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

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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 February 2007, the FASB issued Statement No. 159, or SFAS No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities." SFAS No. 159 permits entities to choose to measure many financial instruments and certain other item, at fair value. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 applies to
reporting periods beginning after November 15, 2007. We did not elect FAS No. 159 for any of our financial assets and financial liabilities as of June 30, 2008.

In
June 2007, the American Institute of Certified Public Accountants, or AICPA, issued Statement of Position ("SOP") 07-01 "Clarification of the Scope of the Audit and
Accounting Guide for Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies." SOP 07-1 clarifies the scope of
accounting for investment companies and provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide for Investment Companies or the Guide. For those
entities that are investment companies under SOP 07-1, the specialized industry accounting principles of the Guide (referred to as Investment Company accounting) should be retained
by a parent company when it consolidates its interest in the investment company or by an equity method investor when it records its interest in the investment company. The SOP also provides for
certain disclosure requirements for parent companies and equity method investors in investment companies that continue investment company accounting in the parent's consolidated financial statements
or the financial statements of the equity method investor. The SOP was to be effective for fiscal years beginning on or after December 15, 2007; however in a meeting on October 17, 2007,
the FASB voted to indefinitely defer the effective date and add to the FASB's technical agenda, consideration of amending certain provisions of the SOP. We maintain an exemption from the Investment
Company Act of 1940, as amended, and are therefore not regulated as an investment company but as a REIT, the Company is not subject to the AICPA's Investment Company Accounting and Auditing Guide. We
continue to monitor the AICPA's developments with respect to SOP 07-1.

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, 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

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and
goodwill which is recorded as if a 100% interest was acquired. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the
effect, if any, that this pronouncement will have on our future financial position and results of operations.

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.
This Statement is effective for interim periods beginning on or after December 15, 2008. We are currently evaluating the impact, if any, that the adoption of this Statement will have on our
consolidated financial statements.

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 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 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. FSP 140-3 is effective
for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating the effect, if any, that this pronouncement will have on our future financial
position and results of operations.

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 are currently evaluating the effect, if any, that this pronouncement
will have on our future financial position and results of operations.

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

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principles.
FSP FAS No. 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier application is not permitted. We believe the impact of adopting FSP FAS
No. 142-3 will not have a material effect on the 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 revised standards have not been finalized, and deferred for potential application
until 2010, this change may affect 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 in the first two quarters of 2008, 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 growing portfolio of commercial loans and CMBS investment portfolio. Overall, this
environment has led to increased costs, reduced availability of efficient debt capital and reduced production volumes for us.
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.

We
believe our businesses will ultimately benefit in the long run, from a market environment where assets are priced and structured more conservatively. In addition, our acquisition of
American Financial will combine the existing operating platforms of American Financial with our own to create an integrated commercial real estate finance and operating company, and will transform us
from primarily a specialty finance company into a $7.9 billion diversified enterprise with complementary business lines consisting of commercial real estate finance and property investments.

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.

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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 assets and borrowings are variable-rate
instruments that we finance with variable rate debt. The objective of this strategy is to minimize the impact of interest rate changes on the spread between the yield on our assets and our cost of
funds. We 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. Furthermore, as most of our available financing provides for an ability of the lender to mark-to-market our assets
and make margin calls based on a change in the value of our assets, financing fixed rate assets with this debt creates the risk that an increase in fixed rate benchmarks (such as "swap" yields) would
decrease the value of our fixed rate assets. We have entered into certain swap transactions in anticipation of drawing upon our mark-to-market debt to hedge against this risk.
Some of our loans are subject to various interest rate floors. As a result, if interest rates fall below the floor rates, the spread between the yield on our assets and our cost of funds will
increase, which will generally increase our returns. Because we generate income principally from the spread between the yields on our assets and the cost of our borrowing and hedging activities, our
net income will generally increase if LIBOR increases and decreases if LIBOR decreases, but this may not always be true in the future. A hypothetical 100 basis point increase in interest rates along
the entire interest rate curve for the three and six months ended June 30, 2008 would have increased our interest cost by approximately $16,761, offset by an increase in our investment income
of approximately $10,363.

Our
exposure to interest rates will also be affected by our overall corporate leverage, which we generally target to be 70% to 80% of the carrying value of our assets, although our
actual leverage 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.

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The
aggregate carrying values, allocated by product type and weighted average coupons of our loans and other lending investments and CMBS investments as of June 30, 2008 and
December 31, 2007, including loans held for sale, were as follows (dollars in thousands):

Carrying Value(1)

Allocation by
Investment Type

Fixed Rate:
Average Yield

Floating Rate:
Average Spread over
LIBOR(2)2008

2007

2008

2007

2008

2007

2008

2007Whole loans, floating rate

$
1,392,185

$
1,594,338


59.8
%

60.5
%







335 bps


332 bpsWhole loans, fixed rate


155,254


204,192


6.7
%

7.7
%

7.15
%

7.79
%




Subordinate interests in whole loans, floating rate


132,023


146,901


5.7
%

5.6
%







451 bps


447 bpsSubordinate interests in whole loans, fixed rate


43,584


61,890


1.9
%

2.3
%

8.32
%

8.78
%




Mezzanine loans, floating rate


361,164


413,813


15.6
%

15.7
%







568 bps


607 bpsMezzanine loans, fixed rate


227,393


203,753


9.8
%

7.7
%

8.99
%

8.91
%




Preferred equity, fixed rate


11,879


11,858


0.5
%

0.5
%

10.09
%

10.09
%




Subtotal/ Weighted average

$
2,323,482

$
2,636,745


100
%

100
%

8.30
%

8.45
%

389 bps


395 bpsCMBS, floating rate


68,643


23,817


8.0
%

3.0
%







854 bps


593 bpsCMBS, fixed rate


787,172


768,166


92.0
%

97.0
%

6.22
%

6.13
%




Subtotal/ Weighted average


855,815


791,983


100
%

100
%

6.22
%

6.13
%

854 bps


593 bpsTotal

$
3,179,297

$
3,428,728


100
%

100
%

6.96
%

7.02
%

404 bps


397 bps


---

As of June 30, 2008, the Company's loans and other lending investments and CMBS investments had the following maturity characteristics:

Year of Maturity

Number of
Investments
Maturing

Current
Carrying Value
(In thousands)

% of Total2008 (July 1December 31)


15

$
406,191


12.8
%2009


38


1,189,852


37.4
%2010


15


359,755


11.3
%2011


2


45,880


1.4
%2012


4


91,567


2.9
%Thereafter


25


1,086,052


34.2
%Total


99

$
3,179,297


100
%Weighted average maturity(1)





3.6 years


---

Combined
aggregate principal maturities of our consolidated CDOs, repurchase facilities, trust preferred securities, mortgage loans (including the Goldman Mortgage and Mezzanine Loans
and the

111

---



proportionately
consolidated mortgage note payable related to our TIC interest in 55 Corporate Drive), and the credit facilities as of June 30, 2008 are as follows:

CDOs

Repurchase
Facilities

Trust
Preferred
Securities

Mortgage
Loans

Credit
Facilities

Total2008 (July 1December 31)

$


$


$


$
12,934

$
3,250

$
16,1842009





94,915





75,929


165,667


336,5112010











884,618





884,6182011











33,824





33,8242012











80,256





80,256Thereafter


2,683,955





150,000


1,445,671





4,279,626Above / Below Market Interest











23,949





23,949Total

$
2,683,955

$
94,915

$
150,000

$
2,557,181

$
168,917

$
5,654,968


The
following table summarizes the notional and fair value of the Company's derivative financial instruments at June 30, 2008. 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

$
(56
)Interest Rate Swap

3 month LIBOR


3,465


5.178
%

4/2006


3/2010


(101
)Interest Rate Swap

3 month LIBOR


14,650


4.425
%

11/2007


7/2015


(57
)Interest Rate Swap

3 month LIBOR


12,000


3.063
%

1/2008


7/2010


103Interest Rate Swap

3 month LIBOR


12,000


9.850
%

8/2006


8/2011


(463
)Interest Rate Swap

3 month LIBOR


2,000


3.073
%

1/2008


7/2010


15Interest Rate Swap

3 month LIBOR


347,908


5.408
%

8/2007


5/2017


(18,452
)Interest Rate Swap

3 month LIBOR


699,441


5.331
%

8/2007


1/2018


(41,224
)Interest Rate Swap

1 month LIBOR


42,718


4.990
%

1/2007


1/2017


(2,019
)Interest Rate Swap

1 month LIBOR


24,143


5.114
%

2/2008


1/2017


(1,006
)Interest Rate Swap

1 month LIBOR


16,412


5.203
%

2/2008


5/2017


(773
)Interest Rate Swap

3 month LIBOR


4,700


3.170
%

4/2008


4/2012


131Interest Rate Cap

1 month LIBOR


250,000


5.250
%

4/2008


3/2010


231Interest Rate Cap

1 month LIBOR


600,000


5.250
%

4/2008


3/2010


555Total



$
2,032,902










$
(63,116
)


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

112

---



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 Controls over Financial Reporting

Except as discussed below, 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.

On
April 1, 2008, we completed the acquisition of American Financial Realty Trust. As a result of this acquisition, we adopted certain new accounting policies and accounting
systems relating to our property investment business. This acquisition did not require any material changes to our internal control over financial reporting with respect to our commercial real estate
finance business and its operations. We continue to evaluate additional processes and other components of internal control over financial reporting resulting from this acquisition, including American
Financial Realty Trust's historical internal control over financial reporting and the integration of those internal controls into our own internal controls. This ongoing evaluation and integration may
lead to our making additional changes in our internal control over financial reporting in future fiscal periods.

113

---





PART II OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

None

ITEM 1A.    RISK FACTORS

Other than the risk factors set forth below, 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, 2007. 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.

With limited exceptions, we acquire properties on an "as is" basis and, therefore, the value of these properties may decline if we discover problems with the properties
after we acquire them.

We often acquire properties on an "as is" basis. We may receive limited representations, warranties and indemnities from the sellers
and, in certain cases, we may be required to indemnify the sellers for certain matters, including environmental matters, in connection with our acquisition of such properties. In addition, we may
purchase properties that have known or suspected environmental conditions, on the condition that the seller agrees, depending on the terms of the relevant purchase and sale contract, to either
(i) investigate or remediate the environmental conditions, (ii) deduct the mutually agreed cost of remediation from the purchase price or (iii) indemnify us for the costs of
investigating or remediating the environmental conditions, which indemnity may be limited. If we discover issues or problems related to the physical condition of a property, zoning, compliance with
ordinances and regulations or other significant problems after we acquire the property, we typically have no recourse against the seller and the value of the property may be less than the amount we
paid for such property. We may incur substantial costs in remediating or repairing a property that we acquire or in ensuring its compliance with governmental regulations. These capital expenditures
would reduce cash available for distribution to our stockholders. In addition, we may be unable to rent these properties on terms favorable to us, or at all.

The bankruptcy or insolvency of our tenants under their leases or delays by our tenants in making rental payments could seriously harm our operating results and financial
condition.

Any bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that
tenant or its property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases,
and could ultimately preclude full collection of these sums. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold
against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less
than the full value of any unsecured claims, which would harm our financial condition.

Many
of our tenants are banks that are not eligible to be debtors under the federal bankruptcy code, but would be subject to the liquidation and insolvency provisions of applicable
banking laws and regulations. If the FDIC were appointed as receiver of a banking tenant because of a tenant's insolvency, we would become an unsecured creditor of the tenant and be entitled to share
with the other unsecured non-depositor creditors in the tenant's assets on an equal basis after payment to the depositors of their claims. The FDIC has broad powers to reject any contract
(including a lease) of a failed depository institution that the FDIC deems burdensome if the FDIC determines that such rejection is necessary to promise the orderly administration of the institutions
affairs. By federal statute,

114

---



a
landlord under a lease rejected by the FDIC is not entitled to claim any damages with respect to the disaffirmance, other than rent through the effective date of the disaffirmance. The amount paid
on claims in respect of the lease would depend on, among other factors, the amount of assets of the insolvent tenant available for unsecured claims. We may recover substantially less than the full
value of any unsecured claims, which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders at historical levels
or at all.

We acquire a substantial number of vacant bank branches, which are specialty-use properties and therefore may be more difficult to lease to
non-banks.

Bank branches are specialty-use properties that are outfitted with vaults, teller counters and other customary
installations and equipment that require significant capital expenditures. Our revenue from and the value of the bank branches in our portfolio may be affected by a number of factors,
including:



These
factors may have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to stockholders, if financial institutions do
not increase the number of bank branches they operate, do not find the locations of our bank branches desirable, or elect to make capital expenditures to materially modify other properties rather than
pay higher lease or acquisition prices for properties already configured as bank branches. The sale or lease of these properties to entities other than financial institutions may be difficult due to
the added cost and time of refitting the properties, which we do not expect to undertake.

Certain of our mortgage loans that we assumed in connection with our acquisition of American Financial (the "Merger"), impose "cash traps" when the financial performance of
the property or the portfolio of properties securing such loans fails to meet certain pre-determined financial metrics, which if enforced could adversely affect our financial condition and
operating results.

The provisions relating to "cash traps" in our mortgage loan for our Bank of America, N.A. portfolio that American Financial acquired
in October 2004 have been triggered as a result of the portfolio's failure to meet certain financial performance metrics. If payments into these cash traps continue and if similar provisions in our
other mortgage loans are triggered, our liquidity will be negatively impacted and this could have a material adverse effect on our results of operations and financial condition.

The consideration paid for our properties may exceed fair market value, which may harm our financial condition and operating results.

Under our formulated price contracts, we are obligated to purchase properties at a formulated price based on independent appraisals
using a valuation methodology that values the properties based on their highest and best use and their alternative uses, and then applies a negotiated discount or, in some cases, a premium. Therefore,
where we ultimately lease or sell a property to a non-bank, the fair market value of the property measured with respect to the lease or sale may be less than the purchase price that we
paid for the property. In addition, the consideration that we pay for our properties not acquired under a formulated price contract will be based upon numerous factors and such properties will often
be purchased in negotiated transactions rather than through a competitive bidding process.

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---



We
cannot assure you that the purchase prices we pay for our properties or their appraised values will be a fair price for these properties, that we will be able to generate an acceptable return on
these properties, or that the location, lease terms or other relevant economic and financial data of any properties that we acquire, including our existing portfolio, will meet risk profiles
acceptable to our investors. As a result, our investments in these properties may fail to perform in accordance with our expectations, which may substantially harm our operating results and financial
condition, as well as our ability to pay dividends to stockholders at historical levels or at all.

We structure many of our acquisitions using complex structures often based on forecasted results for the acquisitions, and if the acquired properties underperform forecasted
results, our financial condition and operating results may be harmed.

We may acquire some of our properties under complex structures that we tailor to meet the specific needs of the tenants and/or sellers.
For instance, we may enter into transactions under which a portion of the properties are vacant or will be vacant following the completion of the acquisition. If we fail to accurately forecast the
leasing of such properties following our acquisition, our operating results and financial condition, as well as our ability to pay dividends to stockholders, may be adversely impacted.

If third party managers providing property management services for our office buildings or their personnel are negligent in their performance of, or default on, their
management obligations, our tenants may not renew their leases or we may become subject to unforeseen liabilities. If this occurs, our financial condition and operating results, as well as our ability
to pay dividends to stockholders at historical levels or at all, could be substantially harmed.

We have entered into agreements with third party management companies to provide property management services for a significant number
of our office buildings, and we expect to enter into similar third party management agreements with respect to office buildings we acquire in the future. We do not supervise these third party managers
and their personnel on a day-to-day basis and we cannot assure you that they will manage our properties in a manner that is consistent with their obligations under our
agreements, that they will not be negligent in their performance or engage in other criminal or fraudulent activity, or that these managers will not otherwise default on their management obligations
to us. If any of the foregoing occurs, our relationships with our tenants could be damaged, which may prevent the tenants from renewing their leases, and we could incur liabilities resulting from loss
or injury to our properties or to persons at our properties. If we are unable to lease our properties or we become subject to significant liabilities as a result of third party management performance
issues, our operating results and financial condition, as well as our ability to pay dividends to stockholders, could be substantially harmed.

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem
remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may
cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a
costly remediation program to contain or remove the mold from the affected property. In addition, the presence of significant mold could expose us to liability from our tenants, employees of our
tenants and others if property damage or health concerns arise.

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---



Our properties may contain asbestos which could lead to liability for adverse health effects and costs of remediating asbestos.

Certain laws and regulations govern the removal, encapsulation or disturbance of asbestos-containing materials ("ACMs") when those
materials are in poor condition or in the event of building renovation or demolition, impose certain worker protection and notification requirements and govern emissions of and exposure to asbestos
fibers in the air. These laws may also impose liability for a release of ACMs and may enable third parties to seek recovery against us for personal injury associated with ACMs. There are
or may be ACMs at certain of our properties. We have either developed and implemented or are in the process of developing and implementing operations and maintenance programs that establish
operating procedures with respect to ACMs.

In
March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations," (FIN 47).
FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to
perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional
on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably
estimated. The fair value of a liability for the conditional asset retirement obligation is recognized when incurredgenerally upon acquisition, construction, or development and (or)
through the normal operation of the asset.

To
comply with FIN 47, we assessed the cost associated with our legal obligation to remediate asbestos in our properties known to contain asbestos. We believe that the majority of
the costs associated with our remediation of asbestos have been identified and recorded in compliance with FIN 47, however other obligations associated with asbestos in our properties may
exist. Other obligations associated with asbestos in our properties will be recorded in our consolidated statement of operations in the future when/if the cost is incurred.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our ability
to pay dividends to stockholders at historical levels or at all.

All of our properties are required to comply with the Americans with Disabilities Act, or the ADA. The ADA has separate compliance
requirements for "public accommodations" and "commercial facilities," but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could
require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants or both. While the tenants to
whom we lease properties are obligated by law to comply with the ADA provisions with respect to their operations, and under our net leases are typically obligated to cover costs associated with
compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs
could be adversely affected and we could be required to expend our own funds to comply with the provisions of the ADA, which could adversely affect our results of operations and financial condition
and our ability to make distributions to stockholders. In addition, we (and not our tenants) are required to comply with ADA within certain areas and to operate our properties in compliance with fire
and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make
substantial capital expenditures to comply with those requirements and these

117

---



expenditures
could have a material adverse effect on our ability to pay dividends to stockholders at historical levels or at all.

An uninsured loss or a loss that exceeds the policies on our properties could subject us to lost capital or revenue on those properties.

Under the terms and conditions of the leases currently in force on our properties, tenants generally are required to indemnify and hold
us harmless from liabilities resulting from injury to persons, air, water, land or property, on or off the premises, due to activities conducted on the properties, except for claims arising from the
negligence or intentional misconduct of us or our agents. Additionally, tenants are generally required, at the tenants' expense, to obtain and keep in full force during the term of the lease,
liability and property damage insurance policies issued by companies holding general policyholder ratings of at least "A" as set forth in the most current issue of Best's Insurance Guide. Insurance
policies for property damage are generally in amounts not less than the full replacement cost of the improvements less slab, foundations, supports and other customarily excluded improvements and
insure against all perils of fire, extended coverage, vandalism, malicious mischief and special extended perils ("all risk," as that term is used in the insurance industry). Insurance policies are
generally obtained by the tenant providing general liability coverage varying between $1.0 million and
$10.0 million depending on the facts and circumstances surrounding the tenant and the industry in which it operates. These policies include liability coverage for bodily injury and property
damage arising out of the ownership, use, occupancy or maintenance of the properties and all of their appurtenant areas.

In
addition to the indemnities and required insurance policies identified above, many of our properties are also covered by flood and earthquake insurance policies obtained by and paid
for by the tenants as part of their risk management programs. Additionally, we have obtained blanket liability and property damage insurance policies to protect us and our properties against loss
should the indemnities and insurance policies provided by the tenants fail to restore the properties to their condition prior to a loss. All of these policies may involve substantial deductibles and
certain exclusions. In certain areas, we may have to obtain earthquake and flood insurance on specific properties as required by our lenders or by law. We have also obtained terrorism insurance on
some of our larger office buildings, but this insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants and biological and chemical weapons. Should a
loss occur that is uninsured or in an amount exceeding the combined aggregate limits for the policies noted above, or in the event of a loss that is subject to a substantial deductible under an
insurance policy, we could lose all or part of our capital invested in, and anticipated revenue from, one or more of the properties, which could have a material adverse effect on our operating results
and financial condition, as well as our ability to pay dividends to stockholders at historical levels or at all.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing loans and selling our loans and real estate
properties, that may be treated as sales for U.S. federal income tax purposes. In addition, as we have succeeded to any potential tax liability of American Financial in the Merger, we may be subject
to this tax on certain of its past dispositions. If the Internal Revenue Service were to successfully characterize those past dispositions as prohibited transactions, the resulting tax liability could
have a material adverse effect on our results of operations.

A REIT's gain from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other
dispositions of property, other than foreclosure property, but including mortgage loans and real estate, held primarily for sale to customers in the ordinary course of business. We might be subject to
this tax if we were to sell or securitize loans or dispose of loans or real estate in a manner that was treated as a sale of the loans or real estate for U.S. federal income tax purposes. Therefore,
in order to avoid the prohibited transactions tax, we may choose not to engage in certain

118

---



sales
of loans or real estate and may limit the structures we utilize for our securitization transactions even though such sales or structures might otherwise be beneficial to us. It may be possible
to reduce the impact of the prohibited transaction tax by engaging in securitization transactions treated as sales and loan and real estate dispositions through one or more of our TRSs, subject to
certain limitations. Generally, to the extent that we engage in securitizations treated as sales or dispose of loans or real estate through one or more TRSs, the income associated with such activities
would be subject to full corporate income tax at standard rates.

Prior
to our merger with American Financial, American Financial disposed of properties that it deemed to be inconsistent with the investment parameters for its portfolio or for other
reasons it deemed appropriate. If American Financial believed that a sale of a property would likely be subject to the prohibited transaction tax if sold by the parent REIT, it disposed of that
property through its TRS, in which case the gain from the sale was subject to corporate income tax at standard rates but not the 100% prohibited transaction tax. We intend to continue to sell real
estate in a manner similar to American Financial. If the Internal Revenue Service were to successfully characterize American Financial's past dispositions (including the dispositions through its TRS)
as prohibited transactions, we, as successor to American Financial's tax liabilities and property disposition procedures, could be subject to a 100% tax on the gain from those dispositions, and the
resulting tax liability could have a material adverse effect on our results of operations. In addition, we may be liable for the 100% prohibited transaction tax if the Internal Revenue Service were to
successfully challenge our future dispositions of loans and real estate.

While we believe that American Financial qualified as a REIT prior to the Merger, there is no guaranty the Internal Revenue Service will not successfully challenge such
characterization. In the event American Financial did not qualify as a REIT, we as successor to American Financial's tax liabilities could be subject to significant corporate tax on American
Financial's income prior to the Merger. If such a tax were imposed, it could have a material adverse effect on our results of operations.

A corporation which qualify as a REIT is entitled to a deduction for dividends that it pays and, therefore, will not be subject to U.S.
federal corporate income tax to the extent such corporation's net income is currently distributed to its stockholders. However, should the corporation cease to qualify as a REIT it would no longer be
entitled to a deduction for dividends paid and would therefore be required to pay U.S. federal corporate level tax on its net income regardless of any dividends paid.

While
we believe that American Financial qualified as a REIT prior to the Merger, should the Internal Revenue Service successfully challenge such characterization, American Financial
would not have been eligible to deduct any dividends paid to its stockholders and it would have been subject to full U.S. federal corporate taxes on its net income. As successor to American
Financial's tax liabilities, we would be liable for any such tax imposed. If such taxes were imposed, it could have a material adverse effect on our results of operations.

119

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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

On June 25, 2008, we held our annual meeting of stockholders (the "Annual Meeting") in New York, New York for the purpose of:
(i) electing two Class I directors to serve on the Board until our 2011 annual meeting of stockholders and until their successors are duly elected and qualify; (ii) ratifying the
appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008; and (iii) ratifying the adoption of our
2008 Employee Stock Purchase Plan. The total number of shares of common stock entitled to vote at the Annual Meeting was 50,489,520, of which 43,428,082 shares, or approximately 86%, were present in
person or by proxy.

The
following sets forth the results of the election of directors:

Name of Class I Nominees

For

WithheldJeffrey E. Kelter


43,143,660


284,422Charles S. Laven


42,125,295


1,302,787


There
was no solicitation in opposition to the foregoing nominees by stockholders. The terms of office of Stephen L. Green and Allan J. Baum, our Class II directors, and Marc
Holliday and Paul J. Konigsberg, our Class III directors, continued after the Annual Meeting.

The
ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008 was
approved by our stockholders with 43,350,002 votes "For," 42,154 votes "Against" and 35,926 votes "Abstained," none of which such Abstentions were actually broker non-votes that were
treated as Abstentions (as discussed in our Proxy Statement).

The
ratification of the adoption of our 2008 Employee Stock Purchase Plan was approved by our stockholders with 31,803,131 votes "For," 201,660 votes "Against" and 91,140 votes
"Abstained," none of which such Abstentions were actually broker non-votes that were treated as Abstentions (as discussed in our Proxy Statement).

Further
information regarding the proposals in the Annual Meeting is contained in our Proxy Statement, dated May 5, 2008, which was filed with the SEC on that day.

ITEM 5.    OTHER INFORMATION

None

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ITEM 6.    EXHIBITS

Exhibit No.

Description3.1

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

Articles Supplementary designating the Company's 8.125% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $.001 per share (incorporated by reference to Exhibit 3.1 of the Company's
Form 8-K (No. 001-32248) which was filed with the Commission on April 18, 2007).3.3

Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K (No. 001-32248) which was filed with the Commission on December 14, 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 Form 8-K (No. 001-32248) which was filed with the Commission on
April 18, 2007).4.2

Form of stock certificate evidencing the 8.125% Series A Cumulative Redeemable Preferred Stock of the Company, liquidation preference $25.00 per share, par value $.001 per share (incorporated by reference to Exhibit 4.2 of the Company's
Form 8-K (No. 001-32248) which was filed with the Commission on April 18, 2007).10.1

Loan Agreement, dated as of April 1, 2008, between Goldman Sachs Commercial Mortgage Capital, L.P., Citigroup North America, Inc. and SL Green Realty Corp., as lenders, and various borrowers named therein (incorporated by reference to
Exhibit 10.1 of the Company's Form 8-K (No. 001-32248) which was filed with the SEC on April 7, 2008).10.2

Loan Agreement, dated as of April 1, 2008, between Goldman Sachs Commercial Mortgage Capital, L.P., Citigroup North America, Inc. and SL Green Realty Corp., as lenders, the required equity pledgors named therein and GKK Stars
Acquisition LLC, American Financial Realty, First States Group, L.P. and various other borrowers named therein, as borrowers (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K (No. 001-32248) which was filed
with the SEC on April 7, 2008).10.3

Loan Agreement, dated as of April 1, 2008, among First States Investors 3300 B, L.P., as borrower, and PB Capital Corporation, as lender and agent (incorporated by reference to Exhibit 10.3 of the Company's Form 8-K
(No. 001-32248) which was filed with the SEC on April 7, 2008).10.4

Amended and Restated Loan Agreement, dated as of April 1, 2008, by and among First States Investors DB I, L.P., First States Investors DB I B, L.P., First States Investors 4200, LLC, First States Investors DB I SP, L.P. and
First States Investors DB I TRS, L.P., collectively as borrower, Deutsche Bank AG, Cayman Islands Branch, as agent, LaSalle Bank National Association, as collateral agent and each lender signatory thereto (incorporated by reference to
Exhibit 10.4 of the Company's Form 8-K (No. 001-32248) which was filed with the SEC on April 7, 2008).10.5

Guaranty, dated as of April 1, 2008, by the Company to Deutsche Bank AG, Cayman Islands Branch (incorporated by reference to Exhibit 10.5 of the Company's Form 8-K (No. 001-32248) which was filed with the SEC on April 7,
2008).


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Exhibit No.

Description10.6

Loan Agreement, dated as of March 28, 2008, among First States Investors HFS, L.P., First States Investors FPC, L.P., and First States Investors TRS, L.P., as borrowers, and Gramercy Investment Trust,
as lender (incorporated by reference to Exhibit 10.6 of the Company's Form 8-K (No. 001-32248) which was filed with the SEC on April 22, 2008).10.7

Separation Agreement, dated as of April 16, 2008, by and between the Company and Hugh F. Hall (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K (No. 001-32248) which was filed with the SEC on April 22,
2008).10.8

First Amendment to Employment and Noncompetition Agreement, dated as of April 16, 2008, by and between the Manager and Robert R. Foley, and agreed to by the Company as to the obligations of the Company therein (incorporated by reference to
Exhibit 10.2 of the Company's Form 8-K (No. 001-32248) which was filed with the SEC on April 22, 2008).10.9

Severance Agreement, dated as of April 16, 2008, by and between the Company and John B. Roche (incorporated by reference to Exhibit 10.3 of the Company's Form 8-K (No. 001-32248) which was filed with the SEC on April 22,
2008).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/JOHN B. ROCHEJohn B. RocheChief Financial Officer


Date:
August 4, 2008

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