**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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|            | x          | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF**                                                                                                                                                                                                           | ** ** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** |       | **THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                           | ** ** |
| ** ** |       | ** **                                                                                                                                                                                                                                                         | ** ** |
| ** ** | ** ** | **For the  quarterly period ended March 31, 2007**                                                                                                                                                                                                                 | ** ** |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                         | ** ** |
|       | o          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF**                                                                                                                                                                                                          | ** ** |
| ** ** |       | **THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                           | ** ** |
| ** ** |       | ** **                                                                                                                                                                                                                                                         | ** ** |
| ** ** | ** ** | **For the  transition period from                     to                   .** | ** ** |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                         | ** ** |
| ** ** |       | **Commission  File Number: 001-32248**                                                                                                                                                                                                                             |       |

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**GRAMERCY CAPITAL CORP.**

**(Exactname of registrant as specified in its charter)**

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

 

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

**(Address of principal executiveoffices) (Zip Code)**

**(212) 297-1000**

**(Registrant’s telephone number,including area code)**

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

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

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|--------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x

Thenumber of shares outstanding of the registrant’s common stock, $0.001 parvalue, was 26,049,805 as of May 10,2007.

 

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**GRAMERCY CAPITALCORP.**

**INDEX**
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                  | ** ** |
|----------------|------------------------------------------------------------------------------------------------------------|------------|
| ** **     | ** **                                                                                                 | ** ** |
| **ITEM 1.**    | **FINANCIAL STATEMENTS**                                                                                   | ** ** |
| ** **     | ** **                                                                                                 | ** ** |
| ** **     | ** **                                                                                                 | ** ** |
| ** **     | ** **                                                                                                 | ** ** |
|                |                                                                                                            | **PAGE**   |
|           |                                                                                                       | ** ** |
|           | Consolidated  Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006                        |       | 1 |   |
|           |                                                                                                       |       |   |   |
|           | Consolidated Statements of Income for the three months  ended March 31, 2007 and 2006 (unaudited)          |       | 2 |   |
|           |                                                                                                       |       |   |   |
|           | Consolidated Statement of Stockholders’ Equity for the  three months ended March 31, 2007 (unaudited) |       | 3 |   |
|           |                                                                                                       |       |   |   |
|           | Consolidated Statements of Cash Flows for the three  months ended March 31, 2007 and 2006 (unaudited)      |       | 4 |   |
|           |                                                                                                       |       |   |   |
|           | Notes to Consolidated Financial Statements (unaudited)                                                     |       | 5 |   |
|           |                                                                                                       |       |   |   |
| **ITEM 2.**    | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**            |       | 26 |   |
| ** **     | ** **                                                                                                 |       |   |   |
| **ITEM 3.**    | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                            |       | 45 |   |
| ** **     | ** **                                                                                                 |       |   |   |
| **ITEM 4.**    | **CONTROLS AND  PROCEDURES**                                                                               |       | 48 |   |
| ** **     | ** **                                                                                                 |       |   |   |
| **PART II.**   | **OTHER  INFORMATION**                                                                                     |       | 49 |   |
| ** **     | ** **                                                                                                 |       |   |   |
| **ITEM 1.**    | **LEGAL  PROCEEDINGS**                                                                                     |       | 49 |   |
| ** **     | ** **                                                                                                 |       |   |   |
| **ITEM 1A.**   | **RISK  FACTORS**                                                                                          |       | 49 |   |
| ** **     | ** **                                                                                                 |       |   |   |
| **ITEM 2.**    | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                           |       | 49 |   |
| ** **     | ** **                                                                                                 |       |   |   |
| **ITEM 3.**    | **DEFAULTS  UPON SENIOR SECURITIES**                                                                       |       | 49 |   |
| ** **     | ** **                                                                                                 |       |   |   |
| **ITEM 4.**    | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                   |       | 49 |   |
| ** **     | ** **                                                                                                 |       |   |   |
| **ITEM 5.**    | **OTHER  INFORMATION**                                                                                     |       | 49 |   |
| ** **     | ** **                                                                                                 |       |   |   |
| **ITEM  6.**   | **EXHIBITS**                                                                                               |       | 50 |   |
| ** **     |                                                                                                       |       |   |
| **Signatures** |                                                                                                       | 51         |   |

 

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**PART I.          FINANCIALINFORMATION**

###### ITEM 1.           FinancialStatements

**GramercyCapital Corp.**

**Consolidated Balance Sheets**

**(Amountsin thousands, except share and per share data)**
| ** **                                                                                                                                                                    | ** ** | **March 31,** | ** ** | ** **            | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **2007**           | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                    | ** ** | **(Unaudited)**    | ** ** | **2006**              | ** ** |
| **Assets:**                                                                                                                                                                   |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                    |       | $                  | 16,430     |                  | $          | 19,314 |   |
| Restricted cash                                                                                                                                                               |       | 135,414            |       | 354,283               |       |
| Loans and other lending  investments, net                                                                                                                                     |       | 2,321,893          |       | 2,144,151             |       |
| Investment in  unconsolidated joint ventures                                                                                                                                  |       | 56,779             |       | 57,567                |       |
| Loans held for sale,  net                                                                                                                                                     |       | 135,086            |       | 42,733                |       |
| Commercial real estate,  net                                                                                                                                                  |       | 100,818            |       | 99,821                |       |
| Accrued interest                                                                                                                                                              |       | 12,031             |       | 12,092                |       |
| Deferred financing  costs                                                                                                                                                     |       | 27,664             |       | 27,456                |       |
| Deferred costs                                                                                                                                                                |       | 150                |       | 1,271                 |       |
| Derivative instruments,  at fair value                                                                                                                                        |       | 1,144              |       | 2,910                 |       |
| Other assets                                                                                                                                                                  |       | 4,449              |       | 4,515                 |       |
| Total assets                                                                                                                                                                  |       | $                  | 2,811,858  |                  | $          | 2,766,113 |   |
| ** **                                                                                                                                                                    |       |               |       |                  |       |
| **Liabilities and Stockholders’  Equity:**                                                                                                                               |       |               |       |                  |       |
| Repurchase agreements                                                                                                                                                         |       | $                  | 246,278    |                  | $          | 277,412 |   |
| Credit facilities                                                                                                                                                             |       | 90,000             |       | 15,000                |       |
| Collateralized debt  obligations                                                                                                                                              |       | 1,714,250          |       | 1,714,250             |       |
| Mortgage note payable                                                                                                                                                         |       | 94,525             |       | 94,525                |       |
| Management fees payable                                                                                                                                                       |       | 2,125              |       | 2,093                 |       |
| Incentive fee payable                                                                                                                                                         |       | 2,817              |       | 1,195                 |       |
| Dividends payable                                                                                                                                                             |       | 14,448             |       | 14,419                |       |
| Accounts payable and  accrued expenses                                                                                                                                        |       | 25,162             |       | 24,750                |       |
| Other liabilities                                                                                                                                                             |       | 7,731              |       | 11,809                |       |
| Junior subordinated  deferrable interest debentures held by trusts that issued trust preferred  securities                                                                    |       | 150,000            |       | 150,000               |       |
| Total liabilities                                                                                                                                                             |       | 2,347,336          |       | 2,305,453             |       |
|                                                                                                                                                                          |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                                |       | —             |       | —                |       |
| ** **                                                                                                                                                                    |       |               |       |                  |       |
| **Stockholders’ Equity:**                                                                                                                                                |       |               |       |                  |       |
| Preferred stock, par  value $0.001, 25,000,000 shares authorized, no shares issued or outstanding                                                                             |       | —             |       | —                |       |
| Common stock, par value  $0.001, 100,000,000 shares authorized, 26,044,806and 25,878,391 shares issued and outstanding at March 31, 2007  and December 31, 2006, respectively |       | 26                 |       | 26                    |       |
| Additional  paid-in-capital                                                                                                                                                   |       | 456,016            |       | 453,766               |       |
| Accumulated other  comprehensive income                                                                                                                                       |       | 1,901              |       | 2,890                 |       |
| Retained earnings                                                                                                                                                             |       | 6,579              |       | 3,978                 |       |
| Total  stockholders’ equity                                                                                                                                              |       | 464,522            |       | 460,660               |       |
| Total liabilities and stockholders’ equity                                                                                                                               |       | $                  | 2,811,858  |                  | $          | 2,766,113 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

1

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**Gramercy Capital Corp.**

**Consolidated Statements ofIncome**

**(Unaudited,amounts in thousands, except per share data)**
| ** **                                                                                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Revenues**                                                                                                           |       |                                             |       |   |   |
| Investment  income                                                                                                     |       | $                                                | 59,969     |   | $ | 31,879 |   |
| Rental revenue,  net                                                                                                   |       | 1,736                                            |       | 914 |   |
| Gain on sales  and other income                                                                                        |       | 6,429                                            |       | 4,197 |   |
| Total revenues                                                                                                         |       | 68,134                                           |       | 36,990 |   |
|                                                                                                                   |       |                                             |       |   |   |
| **Expenses**                                                                                                           |       |                                             |       |   |   |
| Interest expense                                                                                                       |       | 36,461                                           |       | 17,721 |   |
| Management fees                                                                                                        |       | 4,839                                            |       | 3,523 |   |
| Incentive fee                                                                                                          |       | 2,817                                            |       | 1,193 |   |
| Depreciation and  amortization                                                                                         |       | 671                                              |       | 455 |   |
| Marketing,  general and administrative                                                                                 |       | 3,820                                            |       | 2,770 |   |
| Provision for  loan loss                                                                                               |       | 1,248                                            |       | — |   |
| Total expenses                                                                                                         |       | 49,856                                           |       | 25,662 |   |
| Income from  continuing operations before equity in net loss  of unconsolidated joint ventures and provision for taxes |       | 18,278                                           |       | 11,328 |   |
| Equity in net  loss of unconsolidated joint ventures                                                                   |       | (695                                             | )          | (727 | ) |
| Income from  continuing operations before provision for taxes                                                          |       | 17,583                                           |       | 10,601 |   |
| Provision for  taxes                                                                                                   |       | (534                                             | )          | (47 | ) |
| Net income  available to common stockholders                                                                           |       | $                                                | 17,049     |   | $ | 10,554 |   |
|                                                                                                                   |       |                                             |       |   |   |
| **Basic earnings per share:**                                                                                          |       |                                             |       |   |   |
| Net income  available to common stockholders                                                                           |       | $                                                | 0.66       |   | $ | 0.46 |   |
| **Diluted earnings per share:**                                                                                        |       |                                             |       |   |   |
| Net income  available to common stockholders                                                                           |       | $                                                | 0.62       |   | $ | 0.44 |   |
| Dividends per  common share                                                                                            |       | $                                                | 0.56       |   | $ | 0.50 |   |
| Basic weighted  average common shares outstanding                                                                      |       | 26,027                                           |       | 22,807 |   |
| Diluted weighted  average common shares and common share equivalents outstanding                                       |       | 27,472                                           |       | 23,988 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

2

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**GramercyCapital Corp.**

**Consolidated Statement ofStockholders’ Equity**

**(Unaudited, amounts in thousands, except sharedata)**
| ** **                                            | ** ** | **Common  Stock** | ** ** | **Additional   Paid-** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained** | ** ** | ** **   | ** ** | **Comprehensive** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------------|------------|--------------|------------|--------------|------------|-------------------|------------|
| ** **                                            | ** ** | **Shares**        | ** ** | **Par Value**          | ** ** | **In-Capital**                        | ** ** | **Income**   | ** ** | **Earnings** | ** ** | **Total**         | ** ** | **Income** | ** ** |
| **Balance at December 31, 2006**                      |       | 25,878            |       | $                           | 26         |                                  | $          | 453,766      |       | $            | 2,890      |              | $          | 3,978 |   | $ | 460,660 |   |   |   |
| Net  income                                           |       |              |       |                        |       |                                  |       |         |       | 17,049       |       | 17,049            |       | $ | 17,049 |   |
| Net  unrealized loss on derivative instruments        |       |              |       |                        |       |                                  |       | (989         | )          |         |       | (989              | )          | (989 | ) |
| Stock-based  compensation — fair value           |       |              |       |                        |       | 1,453                                 |       |         |       |         |       | 1,453             |       |   |   |
| Proceeds  from stock option exercises                 |       | 23                |       | —                      |       | 414                                   |       |         |       |         |       | 414               |       |   |   |
| Deferred  compensation plan, net                      |       | 143               |       | —                      |       | 383                                   |       |         |       |         |       | 383               |       |   |   |
| Cash  distributions declared ($0.56 per common share) |       |              |       |                        |       |                                  |       |         |       | (14,448      | )          | (14,448           | )          |   |   |
| **Balance at March 31, 2007**                         |       | 26,044            |       | $                           | 26         |                                  | $          | 456,016      |       | $            | 1,901      |              | $          | 6,579 |   | $ | 464,522 |   | $ | 16,060 |   |

 

 

 

Theaccompanying notes are an integral part of these financial statements

 

3

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**Gramercy Capital Corp.**

**ConsolidatedStatements of Cash Flows**

**(Unaudited,amounts in thousands)**
| ** **                                                                                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Operating  Activities**                                                                                                        | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income  available to common stockholders                                                                                     |       | $                                                    | 17,049     |   | $ | 10,554 |   |
| Adjustments to  reconcile net income available to common stockholders to net cash provided by  / (used in) operating activities: |       |                                                 |       |   |   |
| Depreciation and  amortization                                                                                                   |       | 2,722                                                |       | 1,422 |   |
| Amortization of  discount, premium and other fees on investments                                                                 |       | (5,777                                               | )          | (426 | ) |
| Deferred rents  receivable                                                                                                       |       | (1,736                                               | )          | — |   |
| Equity in net  loss of unconsolidated joint ventures                                                                             |       | 695                                                  |       | 727 |   |
| Gain on sale of  securities                                                                                                      |       | —                                               |       | 1,718 |   |
| Amortization of  stock compensation                                                                                              |       | 1,836                                                |       | 896 |   |
| Provision for  loan loss                                                                                                         |       | 1,248                                                |       | — |   |
| Unrealized gain  on derivative instruments                                                                                       |       | (66                                                  | )          | — |   |
| Net realized  gain on loan held for sale                                                                                         |       | (2,686                                               | )          | — |   |
| Changes in  operating assets and liabilities:                                                                                    |       |                                                 |       |   |   |
| New investments  in loans held for sale                                                                                          |       | (92,238                                              | )          | (62,441 | ) |
| Proceeds from  sale of loans held for sale                                                                                       |       | 175,246                                              |       | 42,000 |   |
| Accrued interest                                                                                                                 |       | 61                                                   |       | (1,717 | ) |
| Other assets                                                                                                                     |       | 64                                                   |       | (1,716 | ) |
| Management fees  payable                                                                                                         |       | 32                                                   |       | 103 |   |
| Incentive fee  payable                                                                                                           |       | 1,622                                                |       | (44 | ) |
| Settlement of  derivative instruments                                                                                            |       | (460                                                 | )          | 843 |   |
| Accounts  payable, accrued expenses and other liabilities                                                                        |       | (4,112                                               | )          | 7 |   |
| Net cash  provided by / (used in) operating activities                                                                           |       | 93,500                                               |       | (8,074 | ) |
| **Investing  Activities**                                                                                                        |       |                                                 |       |   |   |
| New investment  originations and funded commitments                                                                              |       | (726,833                                             | )          | (388,621 | ) |
| Principal  collections on investments                                                                                            |       | 381,405                                              |       | 74,665 |   |
| Investment in  commercial real estate and securities                                                                             |       | 157                                                  |       | (2,107 | ) |
| Net proceeds  from the sale of securities                                                                                        |       | —                                               |       | 5,000 |   |
| Investment in  joint venture                                                                                                     |       | 93                                                   |       | (60 | ) |
| Change in  restricted cash from investing activities                                                                             |       | 8,015                                                |       | (3,320 | ) |
| Deferred  investment costs                                                                                                       |       | 733                                                  |       | (703 | ) |
| Net cash used in  investing activities                                                                                           |       | (336,430                                             | )          | (315,146 | ) |
| **Financing  Activities**                                                                                                        |       |                                                 |       |   |   |
| Proceeds from  repurchase facilities                                                                                             |       | 471,079                                              |       | 315,260 |   |
| Repayments of  repurchase facilities                                                                                             |       | (502,213                                             | )          | (55,434 | ) |
| Proceeds from  unsecured revolving credit facility                                                                               |       | 75,000                                               |       | — |   |
| Change in  restricted cash from financing activities                                                                             |       | 210,880                                              |       | — |   |
| Settlement of  derivative instruments                                                                                            |       | —                                               |       | 770 |   |
| Proceeds from  stock options exercised                                                                                           |       | 414                                                  |       | 45 |   |
| Issuance of  trust preferred securities                                                                                          |       | —                                               |       | 50,000 |   |
| Deferred  financing costs and other liabilities                                                                                  |       | (694                                                 | )          | (1,270 | ) |
| Dividends paid                                                                                                                   |       | (14,420                                              | )          | (10,726 | ) |
| Net cash  provided by financing activities                                                                                       |       | 240,046                                              |       | 298,645 |   |
| Net decrease in  cash and cash equivalents                                                                                       |       | (2,884                                               | )          | (24,575 | ) |
| Cash and cash  equivalents at beginning of period                                                                                |       | 19,314                                               |       | 70,576 |   |
| Cash and cash  equivalents at end of period                                                                                      |       | $                                                    | 16,430     |   | $ | 46,001 |   |
| **Non-cash  activity**                                                                                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Deferred gains/(losses)  and other non-cash activity related to derivatives                                                      |       | (1,832                                               | )          | 3,784 |   |
| **Supplemental  cash flow disclosures**                                                                                          | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Interest paid                                                                                                                    |       | 34,756                                               |       | 7,754 |   |
| Income taxes paid                                                                                                                |       | 834                                                  |       | 249 |   |

 

Theaccompanying notes are an integral part of these financial statements.

4

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**Gramercy Capital Corp.**

**Notes To Consolidated Financial Statements**

**(Unaudited, amounts in thousands, except share and per sharedata)**

**March31, 2007**

**1.   Organization**

Gramercy Capital Corp. (the “Company” or “Gramercy”) is a commercialreal estate specialty finance company that focuses on the direct originationand acquisition of whole loans, subordinate interests in whole loans, mezzanineloans, preferred equity, and net lease investments involving commercialproperties throughout the United States. We have also established a real estate securities business that willfocus on the acquisition, trading and financing of commercial mortgage backedsecurities, or CMBS, and other real estate related securities.  When evaluating transactions, we assess ourrisk-adjusted return and target transactions with yields that seek to provideexcess returns for the risks being taken.

Substantially all of our operations are conducted through GKK CapitalLP, a Delaware limited partnership, or our Operating Partnership.  We, as the sole general partner of, andcurrently the holder of 100% of the common units of, our Operating Partnership,have responsibility and discretion in the management and control of ourOperating Partnership, and the limited partners of our Operating Partnership,in such capacity, have no authority to transact business for, or participate inthe management activities of, our Operating Partnership.  Accordingly, we consolidate the accounts ofour Operating Partnership.

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

As of March 31, 2007,we held loans and other lending investments of $2,456,979 net of fees,discounts, and unfunded commitments with an average spread to LIBOR of 396basis points for our floating rate investments, and an average yield of 9.48%for our fixed rate investments.  As ofMarch 31, 2007, we also held interests in four credit tenant lease, orCTL, investments comprised of a 49.75% tenancy-in-common, or TIC, interest in55 Corporate Drive in Bridgewater, New Jersey,and three joint ventureinvestments.

**Basisof Quarterly Presentation**

The accompanying financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, it does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States, or GAAP, for complete financial statements.  In management’s opinion, all adjustments(consisting of normal recurring accruals) considered necessary for fairpresentation have been included.  The2007 operating results for the period presented are not necessarily indicativeof the results that may be expected for the year ending December 31,2007.  These financial statements should be read in conjunction with thefinancial statements and accompanying notes included in the Company’s annualreport on Form 10-K/A for the year ended December 31, 2006.

The balance sheet at December 31,2006 has been derived from the audited financial statement at that date, butdoes not include all the information and footnotes required by GAAP forcomplete financial statements.

**2.   Significant Accounting Policies**

**Principlesof Consolidation**

Theconsolidated financial statements include our accounts and those of oursubsidiaries which are wholly-owned or controlled by us, or entities which arevariable interest entities in which we are the primary beneficiaries under FASBInterpretation No. 46, FIN 46, “Consolidation of Variable Interest Entities.”  FIN 46 requires a variable interest entity,or VIE, to be consolidated by its primary beneficiary.  The primary beneficiary is the party thatabsorbs a majority of the VIE’s anticipated losses and/or a majority of theexpected returns.  We have evaluated ourinvestments for potential classification as variable interests by evaluatingthe sufficiency of the entities’ equity investment at risk to absorb losses,and determined that we are not the primary beneficiary for any of ourinvestments.  Entities which we do notcontrol and entities which are VIE’s, but where we are not the primarybeneficiary, are accounted for under the equity method.  When investments are made through a TICstructure, we report our pro rata share of the assets,

5

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liabilities,revenues, and expenses of the investment in our financial statements. Allsignificant intercompany balances and transactions have been eliminated.

**Cashand Cash Equivalents**

We consider all highly liquid investments withmaturities of three months or less when purchased to be cash equivalents.

**Restricted Cash**

**Restrictedcash at March 31, 2007 consists primarily of $111,313**on deposit with thetrustee of our collateralized debt obligations, or CDOs, representing proceedsfrom our second CDO issuance that will be used to fund future investments thatwill be acquired by the CDO trust.  Alsoincluded are the proceeds of repayments from loans serving as collateral in ourCDOs, which will be used to fund investments to replace those trust assetswhich are repaid or sold by the trust, interest payments received by thetrustee on investments that serve as collateral for our CDOs, which are remittedto us on a quarterly basis in the month following the end of our fiscalquarter, and future funding obligations on certain investments.  The remaining balance consists of interestreserves held on behalf of borrowers and $17,062 representing our share of thereserves of 55 Corporate Drive.

### **Loansand Investments and Loans 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 unfundedcommitments unless such loan or investment is deemed to be impaired.  Loans held for sale are carried at the lowerof cost or market value using available market information obtained throughconsultation with dealers or other originators of such investments.  We may originate or acquire preferred equityinterests that allow us to participate in a percentage of the underlyingproperty’s cash flows from operations and proceeds from a sale orrefinancing.  Should we make such apreferred equity investment, we must determine whether that investment shouldbe accounted for as a loan, joint venture or as an interest in real estate.

Specific valuationallowances are established for impaired loans based on the fair value of collateralon an individual loan basis.  The fairvalue of the collateral is determined by selecting the most appropriatevaluation methodology, or methodologies, among several generally available andaccepted  in the commercial real estateindustry.  The determination of the mostappropriate valuation methodology is based on the key characteristics of thecollateral type.  These methodologiesinclude the evaluation of operating cash flow from the property during the projectedholding period, and the estimated sales value of the collateral computed byapplying an expected capitalization rate to the stabilized net operating incomeof the specific property, less selling costs, all of which are discounted atmarket discount rates.

Ifupon completion of the valuation, the fair value of the underlying collateralsecuring the impaired loan is less than the net carrying value of the loan, anallowance is created with a corresponding charge to the provision for loanlosses.  The allowance for each loan ismaintained at a level we believe is adequate to absorb probable losses.  We maintained a reserve of $3,708 and $2,460at March 31, 2007 and December 31, 2006, respectively.

OurManager evaluates our assets on a regular basis to determine if they continueto satisfy our investment criteria. Subject to certain restrictions, ourManager may cause us to sell our investments opportunistically and use theproceeds of any such sale for debt reduction, additional acquisitions orworking capital purposes.

#### **Classificationsof Mortgage-Backed Securities**

Mortgage-backed securities, or MBS, are classified asavailable-for-sale securities.  As aresult, changes in fair value will be recorded as a balance sheet adjustment toaccumulated other comprehensive income, which is a component of stockholdersequity, rather than through our statement of operations.  If available-for-sale securities wereclassified as trading securities, there could be substantially greatervolatility in earnings from period-to-period as these investments would bemarked to market and any reduction in the value of the securities versus theprevious carrying value would be considered an expense on our statement ofoperations. We had no investments as of March 31, 2007 that were accounted foras trading securities.

#### **Valuationsof Mortgage-Backed Securities**

All MBS are carried on the balance sheet at fair value.  We determine the fair value of MBS based onthe types of securities in which we have invested.  For liquid, investment-grade securities, weconsult with dealers of such securities to periodically obtain updated marketpricing for the same or similar instruments. For non-investment grade securities, we actively monitor the performanceof the underlying properties and loans and update our pricing model to reflectchanges in projected cash flows.  Thevalue of the securities is derived by applying discount rates to such cashflows 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 otherinvestors in similar instruments.

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Because fair value estimates may vary to some degree, we must makecertain judgments and assumptions about the appropriate price to use tocalculate the fair values for financial reporting purposes.  Different judgments and assumptions couldresult in different presentations of value.

Whenthe fair value of an available-for-sale security is less than the amortizedcost, we consider whether there is an other-than-temporary impairment in thevalue of the security (for example, whether the security will be sold prior tothe recovery of fair value).  If, in ourjudgment, an other-than-temporary impairment exists, the cost basis of the securityis written down to the then-current fair value, and this loss is realized andcharged against earnings.  Thedetermination of other-than-temporary impairment is a subjective process, anddifferent judgments and assumptions could affect the timing of lossrealization.

#### **CreditTenant Lease Investments**

Consolidated CTL investments arerecorded at cost less accumulated depreciation. Costs directly related to the acquisition of such investments arecapitalized.  Certain improvements arecapitalized when they are determined to increase the useful life of thebuilding.  Capitalized items aredepreciated using the straight-line method over the shorter of the useful livesof the capitalized item or 40 years for buildings or facilities, the remaininglife of the facility for facility improvements, four to seven years forpersonal property and equipment, and the shorter of the remaining lease term orthe expected life for tenant improvements.

Results of operations ofproperties acquired are included in the Statement of Income from the date ofacquisition.

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

In accordance with FASB No.141, or SFAS 141, “Business Combinations,” we allocate the purchase price ofreal estate to land and building and, if determined to be material,intangibles, such as the value of above, below and at-market leases andorigination costs associated with the in-place leases.  We depreciate theamount allocated to building and other intangible assets over their estimateduseful lives, which generally range from three to 40 years.  The values ofthe above and below-market leases are amortized and recorded as either anincrease (in the case of below-market leases) or a decrease (in the case ofabove-market leases) to rental income over the remaining term of the associatedlease.  The value associated with in-place leases and tenant relationshipsare amortized over the expected term of the relationship, which includes anestimated probability of the lease renewal, and its estimated term.  If atenant vacates its space prior to the contractual termination of the lease andno rental payments are being made on the lease, any unamortized balance of therelated intangible will be written off.  The tenant improvements andorigination costs are amortized as an expense over the remaining life of thelease (or charged against earnings if the lease is terminated prior to itscontractual expiration date).  We assess fair value of the leases based onestimated cash flow projections that utilize appropriate discount andcapitalization rates and available market information.  Estimates offuture cash flows are based on a number of factors including the historicaloperating results, known trends, and market/economic conditions that may affectthe property.

**Investments in Unconsolidated Joint Ventures**

#### We account for our investments inunconsolidated joint ventures under the equity method of accounting since weexercise significant influence, but do not unilaterally control, the entitiesand are not considered to be the primary beneficiary under FIN 46.  In thejoint ventures, the rights of the other investor are protective andparticipating. Unless we are determined to be the primary beneficiary, theserights preclude us from consolidating the investments.  The investmentsare recorded initially at cost as an investment in unconsolidated jointventures, and subsequently are adjusted for equity in net income (loss) andcash contributions and distributions.  Any difference between the carryingamount of the investments on our balance sheet and the underlying equity in netassets is amortized as an adjustment to equity in net income (loss) ofunconsolidated joint ventures over the lesser of the joint venture term or 40years.  None of the joint venture debt is recourse to us.  As of March 31, 2007 and December 31, 2006,we had investments of $56,779 and $57,567 in unconsolidated joint ventures,respectively.

#### **RevenueRecognition**

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

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Income recognition is generally suspended for debtinvestments at the earlier of the date at which payments become 90 days pastdue or when, in our opinion, a full recovery of income and principal becomesdoubtful.  Income recognition is resumedwhen the loan becomes contractually current and performance is demonstrated tobe resumed.

In some instances we may sell all or a portion ofour investments to a third party.  To theextent the fair value received for an investment exceeds the amortized cost ofthat investment and FASB Statement No. 140, or SFAS 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities,”criteria is met, under which control of the asset that is sold is surrenderedmaking it a “true sale,” a gain on the sale will be recorded through earningsas other income.  To the extent aninvestment that is sold has a discount or fees, which were deferred at the timethe investment was made and were being recognized over the term of theinvestment, the unamortized portion of the discount or fees are recognized atthe time of sale and recorded as a gain on the sale of the investment throughother income.  For the three months endedMarch 31, 2007 and 2006, we recognized $2,686 and $1,114 in net gains from thesale of debt investments or commitments.

Rentalrevenue is recognized on a straight-line basis over the term of the lease. Theexcess of rents recognized over amounts contractually due pursuant to theunderlying leases is included in other assets on the accompanying balancesheets. We may establish, on a current basis, an allowance against this accountfor future potential tenant credit losses, which may occur. The balancereflected on the balance sheet will be net of such allowance.

Inaddition to base rent, the tenants in our CTL investments also pay alloperating costs of owned property including real estate taxes.

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

The expense for possible loan losses inconnection with debt investments is the charge to earnings to increase theallowance for possible loan losses to the level that management estimates to beadequate considering delinquencies, loss experience and collateralquality.  Other factors considered relateto geographic trends and project diversification, the size of the portfolio andcurrent economic conditions.  Based uponthese factors, we may establish the provision for possible loan losses byindividual asset or category of asset. When it is probable that we will beunable to collect all amounts contractually due, the account is consideredimpaired.

Where impairment is indicated, a valuationwrite-down or write-off is measured based upon the excess of the recordedinvestment amount over the net fair value of the collateral, as reduced byselling costs.  Any deficiency betweenthe carrying amount of an asset and the net sales price of foreclosedcollateral is charged to the allowance for loan losses.  We maintained a reserve for possible loanlosses of $3,708 against investments with a carrying value of $141,709 as ofMarch 31, 2007, and a reserve for possible loan losses of $2,460 againstinvestments with a carrying value of $131,427 as of December 31, 2006.

**Deferred Costs**

Deferredcosts consist of fees and direct costs incurred to originate new investmentsand are amortized using the effective yield method over the related term of theinvestment.

InMarch 2006, we recorded a nonrecurring charge of $525 for third-partyprofessional expenses in connection with a possible business combinationinvolving the acquisition of a publicly-traded commercial real estate financecompany with business lines considered by management to be highly complementaryto ours.  The decision to expense thesecosts was made once management concluded the proposed transaction was unlikelyto occur on terms advantageous to us.

**DeferredFinancing Costs**

Deferred financing costs represent commitment fees,legal and other third party costs associated with obtaining commitments forfinancing which result in a closing of such financing.  These costs are amortized over the terms ofthe respective agreements and the amortization is reflected in interestexpense.  Unamortized deferred financingcosts are expensed when the associated debt is refinanced or repaid beforematurity.  Costs incurred in seekingfinancing transactions, which do not close, are expensed in the period in whichit is determined that the financing will not close.

**Stock Based CompensationPlans**

We have a stock-based compensation plan, describedmore fully in Note 14.  We account forthis plan using the fair value recognition provisions of FASB Statement 123(R),“Share-Based Payment, a revision of FASB Statement No. 123, Accounting forStock-Based Compensation.”

The Black-Scholes option-pricing model was developedfor use in estimating the fair value of traded options, which have no vesting

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restrictions and are fully transferable.  In addition, option valuation models requirethe input of highly subjective assumptions including the expected stock pricevolatility.  Because our plan hascharacteristics significantly different from those of traded options andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in our opinion, the existing models do not necessarilyprovide a reliable single measure of the fair value of our stock options.

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

The fair valueof each stock option granted is estimated on the date of grant for awards toco-leased employees, and quarterly for options issued to non-employees, usingthe Black-Scholes option pricing model with the following weighted averageassumptions for grants in 2007 and 2006.

|                                  | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|----------------------------------|------------|-----------|------------|-----------|------------|
| Dividend yield                   |       | 7.5%      |       | 8.0%      |       |
| Expected life of  option         |       | 6.0 years |       | 6.7 years |       |
| Risk-free  interest rate         |       | 4.61%     |       | 4.14%     |       |
| Expected stock price  volatility |       | 22.5%     |       | 21.0%     |       |

 

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

The Class B limited partner interests are entitled to receive anincentive return equal to 25% of the amount by which funds from operations, orFFO plus certain accounting gains (as defined in the partnership agreement ofour Operating Partnership which was amended and restated in April 2006) exceedthe product of our weighted average stockholders equity (as defined in theamended and restated partnership agreement of our Operating Partnership)multiplied by 9.5% (divided by 4 to adjust for quarterly calculations). We willrecord any distributions on the Class B limited partner interests as anincentive distribution expense in the period when earned and when payment ofsuch amounts has become probable and reasonably estimable in accordance withthe partnership agreement.  These cashdistributions will reduce the amount of cash available for distribution to ourcommon unitholders in our Operating Partnership and to commonstockholders.  We incurred approximately$2,817 and $1,193 with respect to such Class B limited partner interests forthe three months ended March 31, 2007 and 2006, respectively.

#### **DerivativeInstruments**

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

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

Inthe normal course of business, we are exposed to the effect of interest ratechanges and limit these risks by following established risk management policiesand procedures including the use of derivatives.  To address exposure to interest rates, we usederivatives primarily to hedge the mark-to-market risk of our liabilities withrespect to certain of our assets.  We mayalso use derivatives to hedge variability in sales proceeds to be received uponthe sale of loans held for sale.

We use a variety of commonly used derivative products that areconsidered plain vanilla derivatives. These derivatives typically include interest rate swaps, caps, collarsand floors.  We also use total rate ofreturn swaps, or TROR swaps, which are tied to the Lehman Brothers CMBS index.We expressly prohibit the use of unconventional derivative instruments andusing derivative instruments for trading or speculative purposes.  Further, we have a policy of only enteringinto contracts with major financial institutions based upon their creditratings and other factors.

**FASB No.133, or SFAS 133, “Accounting for Derivative Instruments and HedgingActivities,” as amended by FASB No. 149, requires us to recognize allderivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through**

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**income.  If a derivative is a hedge, depending on thenature of the hedge, changes in the fair value of the derivative will either beoffset against the change in fair value of the hedged asset, liability, or firmcommitment through earnings, or recognized in other comprehensive income untilthe hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will beimmediately recognized in earnings.  SFAS133 may increase or decrease reported net income and stockholders’ equityprospectively, depending on future levels of LIBOR, swap spreads and othervariables affecting the fair values of derivative instruments and hedged items,but will have no effect on cash flows, provided the contract is carried throughto full term.**

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

Allhedges held by us are deemed to be effective in meeting the hedging objectivesestablished by our corporate policy governing interest rate riskmanagement.  The effect of our derivativeinstruments on our financial statements is discussed more fully in Note 17.

# **Income Taxes**

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

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

**UnderwritingCommissions and Costs**

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

**EarningsPer Share**

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

**Useof Estimates**

The preparationof financial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.

**Concentrationsof Credit Risk**

**Financialinstruments that potentially subject us to concentrations of credit riskconsist primarily of cash investments, debt investments and accountsreceivable.  Gramercy places its cashinvestments in excess of insured amounts with high quality financial institutions.  Our Manager performs ongoing analysis ofcredit risk concentrations in our debt investment portfolio by evaluatingexposure to various markets, underlying property types, investment structure,term, sponsors, tenants and other credit metrics.  Four**investments accounted formore than 19% of the total carrying value of our debt investments as of March31, 2007 and 21% of the total carrying value of our debt investments as ofDecember 31, 2006. Fourinvestments accounted for approximately 24% of the revenue earned on ourdebt investments for the three months ended March 31, 2007, compared to fiveinvestments whichaccounted for approximately 22% of the revenue earned on our debt investmentsfor the three months ended March 31, 2006.

**Recently Issued AccountingPronouncements**

**InFebruary 2006, the FASB issued Statement of Financial Accounting Standard No.155, or SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — anamendment of FASB Statements No. 133 and 140.” SFAS No. 155 (1) permits fairvalue re-measurement for any hybrid financial instrument that contains anembedded derivative that would otherwise require bifurcation, (2)**

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**clarifieswhich interest-only strips and principal-only strips are not subject to therequirements of FASB Statement No. 133, (3) establishes a requirement toevaluate interests in securitized financial assets to identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation, (4) clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives, and (5) amends FASB Statement No. 140 to eliminate the prohibitionon a qualifying special-purpose entity from holding a derivative financial instrumentthat pertains to a beneficial interest in other than another derivativefinancial instrument. SFAS No. 155 is effective January 1, 2007 and did nothave a material effect on our financial results for the three months endedMarch 31, 2007.**

**InJune of 2006 the FASB issued Financial Interpretation No. 48, or FIN 48. This interpretation clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance with FAS109. This interpretation prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. FIN 48 also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. This interpretation waseffective January 1, 2007 for the Company. The adoption of FIN 48 did not havea material impact on our financial results for the three months ended March 31,2007.**

**In September2006, the Securities and Exchange Commission issued Staff Accounting BulletinNo. 108, or SAB 108, which became effective beginning on January 1, 2007. SAB108 provides guidance on the consideration of the effects of prior periodmisstatements in quantifying current year misstatements for the purpose of amateriality assessment. SAB 108 provides for the quantification of the impactof correcting all misstatements, including both the carryover and reversingeffects of prior year misstatements, on the current year financial statements.If a misstatement is material to the current year financial statements, theprior year financial statements should also be corrected, even though suchrevision was, and continues to be, immaterial to the prior year financialstatements. Correcting prior year financial statements for immaterial errorswould not require previously filed reports to be amended. Such correctionshould be made in the current period filings. The implementation of SAB 108 did not have an impact on our financialresults for the three months ended March 31, 2007.**

**InSeptember 2006, the FASB issued Statement No. 157, Fair Value Measurements, orSFAS 157. SFAS No. 157 provides guidance for using fair value to measure assetsand liabilities. This statement clarifies the principle that fair value shouldbe based on the assumptions that market participants would use when pricing theasset or liability. SFAS No. 157 establishes a fair value hierarchy, giving thehighest priority to quoted prices in active markets and the lowest priority tounobservable data. SFAS No. 157 applies whenever other standards require assetsor liabilities to be measured at fair value. This statement is effective infiscal years beginning after November 15, 2007. We believe that the adoption ofthis standard on January 1, 2008 will not have a material effect on financialresults.**

**InFebruary 2007, the FASB issued Statement No. 159, or SFAS 159, ‘‘The FairValue Option for Financial Assets and Financial Liabilities.’’ SFAS 159 permitsentities to choose to measure many financial instruments, and certain otheritems, at fair value. SFAS 159 also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choosedifferent measurement attributes for similar types of assets and liabilities.SFAS 159 applies to reporting periods beginning afterNovember 15, 2007**. We are currently evaluating the effect, if any,that this pronouncement will have on our future financial results.

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**3.   Loans and OtherLending Investments**

**The aggregate carrying values, allocated by producttype and weighted average coupons of our loans and other lending investments asof March 31, 2007 and December 31, 2006 were as follows:**
| ** **                                           | ** ** | **Carrying Value(1)  ($ in thousands)** | ** ** | **Allocation by  Investment Type** | ** ** | **Fixed Rate:  Average Yield** | ** ** | **Floating Rate:  Average Spread  over LIBOR(2)** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                               | ** ** | **2006**                                     | ** ** | **2007**                                 | ** ** | **2006**                                                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Whole loans, floating  rate                          |       | $                                                      | 1,407,592  |                                         | $          | 1,372,316                                |       | 57                                                               | %          | 63 | % | — |   | — |   | 337 bps |   | 327 bps |   |
| Whole loans, fixed rate                              |       | 134,082                                                |       | 42,376                                       |       | 5                                        | %          | 2                                                                | %          | 9.08 | % | 11.69 | % | — |   | — |   |
| Subordinate interests in  whole loans, floating rate |       | 174,314                                                |       | 236,308                                      |       | 7                                        | %          | 11                                                               | %          | — |   | — |   | 421 bps |   | 445 bps |   |
| Subordinate interests in  whole loans, fixed rate    |       | 49,042                                                 |       | 48,769                                       |       | 2                                        | %          | 2                                                                | %          | 8.21 | % | 8.54 | % | — |   | — |   |
| Mezzanine loans,  floating rate                      |       | 430,809                                                |       | 226,675                                      |       | 18                                       | %          | 10                                                               | %          | — |   | — |   | 577 bps |   | 665 bps |   |
| Mezzanine loans, fixed  rate                         |       | 216,868                                                |       | 216,216                                      |       | 9                                        | %          | 10                                                               | %          | 9.80 | % | 9.92 | % | — |   | — |   |
| Preferred equity, fixed  rate                        |       | 44,272                                                 |       | 44,224                                       |       | 2                                        | %          | 2                                                                | %          | 10.57 | % | 10.68 | % | — |   | — |   |
| Total / Average                                      |       | $                                                      | 2,456,979  |                                         | $          | 2,186,884                                |       | 100                                                              | %          | 100 | % | 9.48 | % | 10.04 | % | 396 bps |   | 384 bps |   |

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

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

As of March 31,2007, our debt investment portfolio had the following maturity characteristics:
| **Year of Maturity** | ** ** | **Number of  Investments  Maturing** | ** ** | **Current  Carrying Value  (In thousands)** | ** ** | **% of Total** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| 2007                           |       | 17                                        |       | 408,781                                               |       | 17                       | %          |
| 2008                           |       | 23                                        |       | 978,891                                               |       | 40                       | %          |
| 2009                           |       | 22                                        |       | 636,497                                               |       | 26                       | %          |
| 2010                           |       | 6                                         |       | 81,863                                                |       | 3                        | %          |
| 2011                           |       | 2                                         |       | 56,930                                                |       | 2                        | %          |
| Thereafter                     |       | 11                                        |       | 294,017                                               |       | 12                       | %          |
| Total                          |       | 81                                        |       | 2,456,979                                             |       | 100                      | %          |
|                           |       |                                      |       |                                                  |       |                     |       |
| Weighted average maturity(1)   |       |                                      |       | 2.3 years                                             |       |                     |       |

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(1)            Thecalculation of weighted average maturity is based upon the remaining initialterm of the investment and does not include option or extension periods or theability to prepay the investment after a negotiated lock-out period, which maybe available to the borrower.

Forthe three ended March 31, 2007 and 2006 the Company’s investment income fromdebt investments was generated by the following investment types:
| ** **                            | ** ** | **Three months ended  March 31, 2007** | ** ** | **Three months ended  March 31, 2006** | ** ** |
|---------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **Investment Type**              | ** ** | **Investment  Income**                                     | ** ** | **% of Total**                                   | ** ** | **Investment  Income** | ** ** | **% of Total** | ** ** |
| Whole loans                           |       | $                                                          | 33,317     |                                                       | 56         | % | $ | 17,360 |   | 55 | % |
| Subordinate  interests in whole loans |       | 6,261                                                      |       | 10                                                         | %          | 9,181 |   | 29 | % |
| Mezzanine loans                       |       | 19,192                                                     |       | 32                                                         | %          | 4,595 |   | 14 | % |
| Preferred equity                      |       | 1,199                                                      |       | 2                                                          | %          | 743 |   | 2 | % |
| Total                                 |       | $                                                          | 59,969     |                                                       | 100        | % | $ | 31,879 |   | 100 | % |

 

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AtMarch 31, 2007 and December 31, 2006, our debt investment portfolio had thefollowing geographic diversification:
| ** ** | ** ** | **2007**            | ** ** | **2006**             | ** ** |
|------------|------------|---------------------|------------|----------------------|------------|
| **Region** | ** ** | **Carrying  Value** | ** ** | **% of  Total** | ** ** | **Carrying  Value** | ** ** | **% of  Total** | ** ** |
| Northeast  |       | $                   | 1,228,737  |                 | 50         | % | $ | 1,169,790 |   | 53 | % |
| West       |       | 626,182             |       | 26                   | %          | 579,568 |   | 27 | % |
| South      |       | 438,228             |       | 18                   | %          | 310,909 |   | 14 | % |
| Midwest    |       | 75,135              |       | 3                    | %          | 41,894 |   | 2 | % |
| Various    |       | 88,697              |       | 3                    | %          | 84,723 |   | 4 | % |
| Total      |       | $                   | 2,456,979  |                 | 100        | % | $ | 2,186,884 |   | 100 | % |

 

In connection witha preferred equity investment, which was repaid in October 2006, we haveguaranteed a portion of the outstanding principal balance of the first mortgageloan that is a financial obligation of the entity in which we have invested inthe event of a borrower default under such loan.  The loan matures in 2032.  This guarantee is considered to be anoff-balance-sheet arrangement and will survive until the repayment of the firstmortgage loan.  As compensation, wereceived a credit enhancement fee of $125 from the borrower, which isrecognized as the fair value of the guarantee and has been recorded on ourbalance sheet as a liability. The liability will be amortized over the life ofthe guarantee using the straight-line method and corresponding fee income willbe recorded.  Our maximum exposure underthis guarantee is approximately $1,437 as of March 31, 2007.  Under the terms of the guarantee, theinvestment sponsor is required to reimburse us for the entire amount paid underthe guarantee until the guarantee expires.

**4. PropertyAcquisitions**

***55 CorporateDrive***

**On June 7, 2006 we closed on theacquisition of a 49.75% TIC interest in 55 Corporate Drive, located inBridgewater, New Jersey, with a 0.25% interest to be acquired in thefuture.  The property is comprised ofthree buildings totaling 670,000 square feet which is 100% net leased to anentity whose obligations are guaranteed by Sanofi-Aventis Group through April2023. The transaction was valued at $236,000 and was financed with a $190,000,10-year, fixed-rate first mortgage loan. The remaining 50% of the property is owned as a TIC interest by SLGreen.   Upon closing the acquisition ofthe property, the $90,000 whole loan previously held by us was repaid in fullusing proceeds from the new mortgage financing. **We recorded our prorata share of net income of the property of $74 for the three months endedMarch 31, 2007.

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

***200 FranklinSquare Drive***

OnSeptember 6, 2005, we closed on the acquisition of a 100% fee interest in200 Franklin Square Drive, located in Somerset, New Jersey. The property is a200,000 square foot building which is 100% net leased to Philips Holding USAInc., a wholly-owned subsidiary of Royal Philips Electronics, through December2021.  The property was acquired for apurchase price of $50,250, excluding closing costs, and financed with a$41,000, 10-year, fixed-rate first mortgage loan.

On March 31, 2006,following the conversion of the entity that owns 200 Franklin Square Drive intoa Delaware statutory trust, or DST, we sold approximately 29.3% of our securityinterests in the DST to a third party. Subsequently, we sold an additional 45.7% of our security interests inthe DST to the same party, reducing our final ownership interest to 25.0%.  We received total cash consideration of$12,800 for these interests and the buyer assumed 75% of the DST’s underlyingmortgage debt.  The disposition resultedin a net gain of $4,530, after transaction costs.  As a result of the disposition, thisinvestment is now classified as an investment in joint venture and accountedfor using the equity method.  As of March31, 2007 the investment has a carrying value of $2,457.  We recorded our pro rata share of net incomeof the joint venture of $31 for the three months ended March 31, 2007.

**6. Investments inUnconsolidated Joint Ventures**

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

**On April 29, 2005, we closed on a$57,503 initial investment in a joint venture with SL Green to acquire, own andoperate the South Building located at One Madison Avenue, New York, New York,or the South Building.  The joint ventureis owned 45% by a wholly-owned subsidiary and 55% by a wholly-owned subsidiaryof SL Green.  The joint venture interestsare *pari passu*.  Also on April 29, 2005,**

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**the joint venture completed theacquisition of the South Building from Metropolitan Life Insurance Company forthe purchase price of approximately $802,800 plus closing costs, financed inpart through a $690,000 first mortgage loan on the South Building.  The first mortgage is non-recourse tous.  The South Building comprisesapproximately 1.2 million square feet and is almost entirely net leased toCredit Suisse Securities (USA) LLC, or CS, pursuant to a lease with a 15-yearremaining term.  As of March 31, 2007 theinvestment has a carrying value of $54,832. We recorded our pro rata share of net losses of the joint venture of$335 and $400 for the three months ended March 31, 2007 and 2006, respectively.**

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

**On November 29, 2005, we closedon the purchase of a 50% interest in an office building in Pasadena, CA.  We also acquired an interest in certainrelated assets as part of the transaction. The 345,000 square foot officeproperty, which is net leased to Bank of America through September 2015,assuming the exercise of options, and related collateral were acquired for$52,000 plus closing costs, using a non-recourse, $50,000, 10-year fixed-ratefirst mortgage loan.  For the threemonths ended March 31, 2007 and 2006, we recorded our pro rata share of netlosses of the joint ventures of $390 and $327, respectively.**

**7. JuniorSubordinated Debentures**

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

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

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

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

**8. Collateralized Debt Obligations**

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

During 2006 we issued anadditional approximately $1,000,000 of CDOs through two newly-formed indirectsubsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006 Issuer,and Gramercy Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. The CDOconsists of $903,750 of investment grade notes, $38,750 of non-investment gradenotes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and$57,500 of preferred shares, which were issued by the 2006 Issuer.  The investment grade notes were issued withfloating rate coupons with a combined weighted average rate of three-monthLIBOR plus 0.37%. We incurred approximately $11,364 of costs related toGramercy Real Estate CDO 2006-1, which are amortized on a level-yield basisover the average life of the CDO.

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

**9.     DebtObligations**

#### **RepurchaseFacilities**

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

The repurchasefacility with Wachovia is a $500,000 facility. This facility was initially established as a $250,000 facility, wasincreased to $350,000 effective January 3, 2005, and was subsequently increasedto $500,000 effective April 22, 2005. On March 21, 2006, we further modifiedthe facility by reducing the interest spreads. As a result of the modifications, the $500,000 facility bears interestat spreads of 1.00% to 2.50% over one-month LIBOR and, based on our expectedinvestment activities, provides for advance rates that vary from 60% to 100%based upon the collateral provided under a borrowing base calculation.  On October 13, 2006, we extended the facility’smaturity date until October 2009.  Thelender has a consent right with respect to the inclusion of investments in thisfacility, determines periodically the market value of the investments, and hasthe right to require additional collateral if the estimated market value of theincluded investments declines.  We had noaccrued interest and borrowings of $166,303 at a weighted average spread toLIBOR of 1.61% as of March 31, 2007, and no accrued interest and borrowings of$151,403 at a weighted average spread to LIBOR of 1.86%, as of December 31,2006.

Borrowings under the Wachovia facility at March 31, 2007 and December 31,2006 were secured by the following investments:

|                          | ** ** | **Carrying Value (1)** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| **Investment Type** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Whole loans              |       | $                                | 115,658    |   | $ | 117,328 |   |
| Mezzanine loans          |       | 108,119                          |       | 139,680 |   |
| Preferred equity         |       | 14,974                           |       | 14,955 |   |
| Total                    |       | $                                | 238,751    |   | $ | 271,963 |   |

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(1)             Approximatesfair value.

We also have arepurchase facility with Goldman.  OnOctober 13, 2006 we increased this facility from $200,000 to $400,000 andextended its maturity date until September 2009.  On March 21, 2006, we modified the pricing onthis facility by reducing the interest spreads. As a result of the modifications, the facility bears interest at spreadsof 1.00% to 2.25% over one-month LIBOR and, based on our expected investmentactivities, provides for advance rates that vary from 40% to 85% based upon thecollateral provided under a borrowing base calculation.  As with the Wachovia facility, the lender hasa consent right to the inclusion of investments in this facility, determinesperiodically the market value of the investments, and has the right to requireadditional collateral if the estimated market value of the included investmentsdeclines.  We had accrued interest of$646 and borrowings of $79,975 at a weighted average spread to LIBOR of 1.22%as of March 31, 2007, and accrued interest of $261 and borrowings of $126,009at a weighted average spread to LIBOR of 1.51% under this facility at December31, 2006.

Borrowings under the Goldman facility at March 31, 2007 and December 31,2006 were secured by the following investments:

|                          | ** ** | **Carrying Value (1)** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| **Investment Type** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Whole loans              |       | $                                | —     |   | $ | 97,795 |   |
| Mezzanine loans          |       | 101,756                          |       | 71,798 |   |
| Total                    |       | $                                | 101,756    |   | $ | 169,593 |   |

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(1)             Approximatesfair value.

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The terms of ourrepurchase facilities (together with any related guarantees) include covenantsthat****(a) limit our maximum totalindebtedness to no more than 85% of total assets under the Wachovia facility ora debt to equity ratio less than or equal to 5:1 under the Goldman facility,(b) require us to maintain minimum liquidity of at least $10,000 for the firsttwo years and $15,000 thereafter under the Goldman facility, and at least$15,000 under the Wachovia facility, (c) require our fixed charge coverageratio to be at no time less than 1.50 to 1.00, (d) require our minimum interestcoverage ratio to be at no time less than 1.75 to 1.00 under the Wachoviafacility, (e) require us to maintain minimum tangible net worth of not lessthan (i) $129,750, plus (ii) 75% of the net proceeds of our subsequent equityissuances following our initial public offering under the Goldman facility andnot less than (i) $400,000, plus (ii) 75% of the proceeds of our subsequentequity issuances following the date of the October 2006 amendment under the Wachoviafacility and (f) restrict the maximum amount of our total indebtedness.  The covenants also restrict us from makingdistributions in excess of a maximum of 100% of our FFO (as defined therein)under the Wachovia facility, except that we may in any case pay distributionsnecessary to maintain our REIT status.  An event of default can be triggered on ourrepurchase facilities if, among other things, GKK Manager LLC is terminated asour Manager.  As of March 31, 2007 andDecember 31, 2006, we were in compliance with all such covenants.

The repurchasefacilities require that we pay down borrowings under these facilities asprincipal payments on the loans and investments pledged to these facilities arereceived.  Assets pledged as collateral under these facilitiesmay include stabilized and transitional whole loans, subordinate interests inwhole loans, mezzanine loans, and rated CMBS or commercial real estate CDOsecurities originated or acquired by us.

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

#### **UnsecuredRevolving Credit Facility**

In May 2006, weclosed on a $100,000 senior unsecured revolving credit facility with KeyBankNational Association, or KeyBank, with an initial term of three years and aone-year extension option.  The facilityis supported by a negative pledge of an identified asset base with advancerates that vary from 30% to 90% of the asset value provided under a borrowingbase calculation.  The lender also hasconsent rights to the inclusion of assets in the borrowing basecalculation.  The facility bears interestat 1.90% over one-month LIBOR to the extent our leverage ratio, defined astotal liabilities to total assets, including our proportionate share of theliabilities and assets of our unconsolidated subsidiaries, is less than 80% and2.10% over one-month LIBOR to the extent out leverage ratio is equal to orgreater than 80%. We had accrued interest of $414 and borrowings of $90,000 ata spread to LIBOR of 2.10% as of March 31, 2007, and accrued interest of $75and borrowings of $15,000 at a spread to LIBOR of 2.10% under this facility atDecember 31, 2006.

The terms of theunsecured revolving credit facility include covenants that****(a) limit our maximum total indebtedness tono more than 85% of total assets, (b) require our fixed charge coverage ratioto be at no time less than 1.50, (c) require our minimum interest coverageratio to be at no time less than 1.70, (d) require us to maintain minimumtangible net worth of not less than $370,000 plus 75% of the net proceeds fromequity offerings completed after the closing of the facility and (e) restrictthe maximum amount of our total indebtedness. The covenants also restrict us from making distributions in excess of amaximum of 100% of our FFO (as defined by the National Association of RealEstate Investment Trusts, or NAREIT), except that we may in any case paydistributions necessary to maintain our REIT status.  Anevent of default can be triggered on our unsecured revolving credit facilityif, among other things, GKK Manager LLC is terminated as our Manager.  As of March 31, 2007 and December 31, 2006,we were in compliance with all such covenants.

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

#### **MortgageLoan**

We have oneconsolidated interest-only mortgage loan in an amount equal to our ownershippercentage in the entity multiplied by the

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outstandingprincipal balance of the mortgage loan, which loan financed the acquisition of55 Corporate Drive in June 2006.  Themortgage has an outstanding principal balance of $190,000, of which we haveconsolidated 49.75% or $94,525, with an effective interest rate of 5.75% and aterm of ten years.

Combined aggregateprincipal maturities of our consolidated CDOs, repurchase facilities, trustpreferred securities, proportionately consolidated mortgage note payablerelated to our TIC interest in 55 Corporate Drive, and unsecured revolvingcredit facility as of March 31, 2007 are as follows:              

|            | ** ** | **CDOs**  | ** ** | **Repurchase  Facilities** | ** ** | **Trust  Preferred  Securities** | ** ** | **Mortgage  Note  Payable** | ** ** | **Unsecured  Revolving  Credit  Facility** | ** ** | **Total** | ** ** |
|------------|------------|-----------|------------|----------------------------|------------|----------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|-----------|------------|
| 2007       |       | $         | —     |                       | $          | —                           |       | $                           | —     |                                       | $          | —    |       | $ | — |   | $ | — |   |
| 2008       |       | —    |       | —                     |       | —                           |       | —                      |       | —                                     |       | —    |       |
| 2009       |       | —    |       | 246,278                    |       | —                           |       | —                      |       | 90,000                                     |       | 336,278   |       |
| 2010       |       | —    |       | —                     |       | —                           |       | —                      |       | —                                     |       | —    |       |
| 2011       |       | —    |       | —                     |       | —                           |       | —                      |       | —                                     |       | —    |       |
| Thereafter |       | 1,714,250 |       | —                     |       | 150,000                          |       | 94,525                      | (1)        | —                                     |       | 1,958,775 |       |
| Total      |       | $         | 1,714,250  |                       | $          | 246,278                          |       | $                           | 150,000    |                                       | $          | 94,525    |       | $ | 90,000 |   | $ | 2,295,053 |   |

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

**10. **Operating Partnership Agreement / Manager

At March 31, 2007,we owned all of the Class A limited partnership interests in our OperatingPartnership.  At March 31, 2007, themajority of the Class B limited partnership interests were owned by our Managerand SL Green Operating Partnership, L.P. Interests were also held by certainofficers and employees of SL Green, including some of whom are our executiveofficers, certain of which interests are subject to performance thresholds.

At March 31, 2007, themajority of the interests in our Manager were held by SL Green OperatingPartnership, L.P. Interests were also held by certain officers and employees ofSL Green, including some of whom are our executive officers, certain of whichinterests are subject to performance thresholds.

**11.  Related Party Transactions**

In connection with our initial public offering, we entered into amanagement agreement with our Manager, which was subsequently amended andrestated in April 2006.  The amended andrestated management agreement provides for a term through December 2009 withautomatic one-year extension options and is subject to certain terminationrights.  We pay our Manager an annualmanagement fee equal to 1.75% of our gross stockholders equity (as defined inthe amended and restated management agreement) inclusive of our trust preferredsecurities.  We incurred expense to ourManager under this agreement of an aggregate of $2,667 and $2,236 for the threemonths ended March 31, 2007 and 2006, respectively.

To provide an incentive to enhance the value of our common stock, theholders of the Class B limited partner interests of our Operating Partnershipare entitled to an incentive return equal to 25% of the amount by which FFOplus certain accounting gains and losses (as defined in the amended andrestated partnership agreement of our Operating Partnership) exceed the productof our weighted average stockholders equity (as defined in the amended andrestated partnership agreement of our Operating Partnership) multiplied by 9.5%(divided by 4 to adjust for quarterly calculations).  We will record any distributions on the ClassB limited partner interests as an incentive distribution expense in the periodwhen earned and when payments of such amounts have become probable andreasonably estimable in accordance with the partnership agreement.  We incurred $2,817 and $1,193 with respect tosuch Class B limited partner interests for the three months ended March 31,2007 and 2006.

We are obligated to reimburse our Manager for its costs incurred underan asset servicing agreement between our Manager and an affiliate of SL GreenOperating Partnership, L.P. and a separate outsourcing agreement between ourManager and SL Green Operating Partnership, L.P.  The asset servicing agreement, which wasamended and restated in April 2006, provides for an annual fee payable to SLGreen Operating Partnership, L.P. by us of 0.05% of the book value of allcredit tenant lease assets and non-investment grade bonds and 0.15% of the bookvalue of all other assets.  The assetservicing fee is reduced by SL Green Operating Partnership, L.P. for

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fees paid directly to outside servicers by us.  The outsourcing agreement currently providesfor an annual fee payable by us, which fee is currently $1,326 per year,increasing 3% annually over the prior year on the anniversary date of theoutsourcing agreement in August of each year. For the three months ended March 31, 2007 and 2006, we realized expenseof $332 and $322, respectively, to our Manager under the outsourcingagreement.  For the three months endedMarch 31, 2007 and 2006, we realized expense of $769 and $460, respectively, toour Manager under the asset servicing agreement.

In connection withthe closing of our first CDO in July 2005, the Issuer, Gramercy Real Estate CDO2005-1 Ltd., entered into a collateral management agreement with our Manager.Pursuant to the collateral management agreement, our Manager has agreed toprovide certain advisory and administrative services in relation to thecollateral debt securities and other eligible investments securing the CDOnotes.  The collateral managementagreement provides for a senior collateral management fee, payable quarterly inaccordance with the priority of payments as set forth in the indenture, equalto 0.15% per annum of the net outstanding portfolio balance, and a subordinatecollateral management fee, payable quarterly in accordance with the priority ofpayments as set forth in the indenture, equal to 0.25% per annum of the netoutstanding portfolio balance.  Netoutstanding portfolio balance is the sum of the (i) aggregate principal balanceof the collateral debt securities, excluding defaulted securities, (ii) aggregateprincipal balance of all principal proceeds held as cash and eligibleinvestments in certain accounts, and (iii) with respect to the defaultedsecurities, the calculation amount of such defaulted securities. Ascompensation for the performance of its obligations as collateral manager underthe first CDO, our Board of Directors has allocated to our Manager thesubordinate collateral management fee paid on securities not held by us.  At March 31, 2007 and December 31, 2006 weowned all of the non-investment grade bonds, preferred equity and equity inboth CDOs.  The senior collateral management fee andbalance of the subordinate collateral management fee is allocated to us.  For the three months ended March 31, 2007 and2006, we realized expense of $507 and $500, respectively, to our Manager undersuch collateral management agreement.

Collateral managerfees paid on our CDO that closed in August 2006 are governed by the amended andrestated management agreement as a “transitional managed” CDO, as defined inthe amended and restated management agreement, consisting primarily of debtinvestments secured by non-stabilized real estate.  The amended and restated management agreementprovides that in connection with formations of collateralized debt obligationsor other securitization vehicles after the execution of the amended andrestated management agreement, if a collateral manager is retained, our Manageror an affiliate will be the collateral manager and will receive the followingfees:  (i) 0.25% per annum of the book value of the assets owned for “transitionalmanaged” CDOs, (ii) 0.15% per annum of the book value of the assets ownedfor “non-transitional managed” CDOs, (iii) 0.10% per annum of the book value ofthe assets owned for static CDOs that own primarily non-investment grade bonds,and (iv) 0.05% per annum of the book value of the assets owned for static CDOsthat own primarily investment grade bonds; limited in each instance by the feesthat are paid to the collateral manager. The balance of the fees paid by theCDOs for collateral management services are paid to us.  For the three months ended March 31, 2007 we realized expense of $565to our Manager under this agreement.

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

**On June 7, 2006 we closed on theacquisition of a 49.75% TIC interest in 55 Corporate Drive, located inBridgewater, New Jersey with a 0.25% interest to be acquired in thefuture.  The remaining 50% of theproperty is owned as a TIC interest by an affiliate of SL Green OperatingPartnership, L.P..  The property iscomprised of three buildings totaling approximately six hundred and seventythousand square feet which is 100% net leased to an entity whose obligations areguaranteed by Sanofi-Aventis Group through April 2023. The transaction wasvalued at $236,000 and was financed with a $190,000, 10-year, fixed-rate firstmortgage loan.**

Commencing May 1, 2005 we are party to a lease agreementwith SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporateoffices at 420 Lexington Avenue, New York, New York.  The lease is for approximately five thousandsquare feet with an option to lease an additional approximately two thousandsquare feet and carries a term of ten years with rents on the entire seventhousand square feet of approximately $249 per annum for year one rising to$315 per annum in year ten.  For thethree months ended March 31, 2007 and 2006, we paid $63 and $62 under thislease, respectively.

**BrightStar Couriers LLC, or Bright Star, provides messenger services to us.  Bright Star is owned by Gary Green, a son ofStephen L. Green, our Chairman.  Theaggregate amount of fees paid by us for such services for the three monthsended March 31, 2007 and 2006,**

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**was $1and less than $1, respectively.**

**On July14, 2005, we closed on the purchase from an SL Green affiliate of a $40,000mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained an interest-onlyparticipation.  We have determined thatthe yield on our mezzanine loan after giving effect to the interest-onlyparticipation retained by the seller is at market.  The mezzanine loan is secured by the equityinterests in an office property in New York, New York.**

**OnFebruary 27, 2006, we closed on the purchase of a $90,000 whole loan, whichbears interest at three month LIBOR plus 2.15%, to a joint venture in which SLGreen is an equity holder.  The loan issecured by 55 Corporate Drive in Bridgewater, New Jersey.  The loan was repaid in full in June 2006 withthe proceeds from new mortgage financing obtained in connection with the saleof the property, 49.75% of which is now owned by us through a TIC structure.**

**On March17, 2006, we closed on the purchase of a $25,000 mezzanine loan, which bearsinterest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green isan equity holder.  The mezzanine loan wasrepaid in full on May 9, 2006, when we originated a $90,287 whole loan, whichbears interest at one-month LIBOR plus 2.75%, to the joint venture.  The whole loan loan is secured by office andindustrial properties in northern New Jersey and has a book value of $90,131and $90,049 as of March 31, 2007 and December 31, 2006, respectively.**

**On August1, 2006, we acquired from a financial institution a 50% pari-passu interest ina $65,000 preferred equity investment secured by an office property in NewYork, New York.  An affiliate of SL Greensimultaneously acquired and owns the other 50% pari-passu interest. The investmentbears interest at a blended fixed rate of 10.52%.**

**OnDecember 20, 2006, we acquired from a financial institution a pari-passuinterest of $125,000 in a $200,000 mezzanine loan, which bears interest at6.384% and is secured by a multi-family portfolio in New York, New York.  An affiliate of SL Green simultaneouslyacquired the remaining $75,000 pari-passu interest in the mezzanine loan.**

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

**OnJanuary 10, 2007, we originated two mezzanine loans totaling $200,000.  The $150,000 loan is secured by a pledge of cashflow distributions and partial equity interests in a portfolio of multi-familyproperties and currently bears interest at one-month LIBOR plus 6.00%.  The $50,000 loan was initially secured by apledge of cash flow distributions and partial equity interests in an officeproperty.  On March 8, 2007 the $50,000 loanwas increased by $31,000 when the existing mortgage loan on the property wasdefeased, upon which event our loan became secured by a first mortgage lien onthe property and was reclassified as a whole loan.  The whole loan currently bears interest atone-month LIBOR plus 6.00% for the initial funding and one-month LIBOR plus1.00% for the subsequent funding.  Atclosing, an affiliate of SL Green acquired from us and currently holds a 15.15%pari-passu interest in the mezzanine loan and the whole loan.  As of March 31, 2007, our interest in themezzanine loan had a carrying value of $127,038 and our interest in the wholeloan had a carrying value of $68,364.**

**On March20, 2007, we closed on the acquisition of a $62,500 pari-passu interest in onetranche of a multiple-level mezzanine structure secured primarily by pledges ofequity and rights to cash distributions, which was used to fund the acquisitionof a large office portfolio.  Theinvestment bears interest at one-month LIBOR plus 2.85%.  At closing, an affiliate of SL Greensimultaneously acquired a $62,500 pari-passu interest in the same tranche ofthe mezzanine structure.  After givingeffect to principal repayments, our investment had a carrying value of $60,360as of March 31, 2007. The investment was repaid in full in May 2007.**

**12.  DeferredCosts**

Deferred costs at March 31, 2007 and December 31, 2006consisted of the following:

|                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Deferred  financing            |       | $        | 37,012     |     | $          | 35,103 |   |
| Deferred  acquisition          |       | 1,008    |       | 2,195    |       |
|                           |       | 38,020   |       | 37,298   |       |
| Less accumulated  amortization |       | (10,206  | )          | (8,571   | )          |
|                           |       | $        | 27,814     |     | $          | 28,727 |   |

 

Deferred financing costsrelate to our existing repurchase facilities with Wachovia and Goldman, ourunsecured revolving credit

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facility with KeyBank,our CDOs, the proportionately consolidated mortgage note payable related to ourTIC interest in 55 Corporate Drive, and the trust preferred securities.  These costs are amortized on a straight-linebasis to interest expense based on the remaining term of the related financing.

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

**13.  Fair Value of FinancialInstruments**

The following discussion of fairvalue was determined by our Manager, using available market information andappropriate valuation methodologies. Considerable judgment is necessary to interpret market data and developestimated fair value.  Accordingly, fairvalues are not necessarily indicative of the amounts we could realize ondisposition of the financial instruments. The use of different market assumptions and/or estimation methodologiesmay have a material effect on estimated fair value amounts.

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

The fair value of our fixed-ratedebt investments as determined by our Manager in consultation with marketdealers of such instruments as of March 31, 2007 is:

|                              | ** ** | **Carrying  Value** | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|---------------------|------------|---------------------|------------|
| Fixed-rate debt  investments |       | $                   | 444,365    |                | $          | 444,365 |   |
|                              |            |                     |            |                     |            |  |  |

 

Disclosure about fair value offinancial instruments is based on pertinent information available to us atMarch 31, 2007.  Although we are notaware of any factors that would significantly affect the reasonable fair valueamounts, such amounts have not been comprehensively revalued for purposes ofthese financial statements since that date and current estimates of fair valuemay differ significantly from the amounts presented herein.

**14.  Stockholders’ Equity**

**Common Stock**

Our authorized capital stock consistsof 125,000,000 shares, $0.001 par value, of which we have authorized theissuance of up to 100,000,000 shares of common stock, $0.001 par value pershare, and 25,000,000 shares of preferred stock, par value $0.001 per share.

As of the date of our formation,April 12, 2004, we had 500,000 shares of common stock outstanding valued atapproximately $200.  On August 2, 2004 wecompleted our initial public offering of 12,500,000 shares of common stockresulting in net proceeds of approximately $172,900, which was used to fundinvestments and commence our operations. As of March 31, 2007, 493,083 restricted shares had also been issuedunder our 2004 Equity Incentive Plan, or the Equity Incentive Plan.  These shares have a vesting period of two tofour years and are not entitled to receive distributions declared by us on ourcommon stock until such time as the shares have vested, or the shares have beendesignated to receive dividends by the Compensation Committee of our Board ofDirectors.

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

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

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

In August 2005 our $350,000shelf registration statement was declared effective by the Securities andExchange Commission, or SEC.  This registration statement provides us withthe ability to issue common and preferred stock, depository shares andwarrants.  We currently have $55,850 available under the shelf.

As of March 31, 2007, 26,044,806shares of common stock and no shares of preferred stock were issued andoutstanding.

**EquityIncentive Plan**

As part of our initial public offering, we institutedour Equity Incentive Plan.  The EquityIncentive Plan, as amended, authorizes (i) the grant of stock options thatqualify as incentive stock options under Section 422 of the Internal RevenueCode of 1986, as amended, or ISOs, (ii) the grant of stock options that do notqualify, or NQSOs, (iii) the grant of stock options in lieu of cash directors’fees and (iv) grants of shares of restricted and unrestricted commonstock.  The exercise price of stockoptions will be determined by the compensation committee, but may not be lessthan 100% of the fair market value of the shares of common stock on the date ofgrant.  At March 31, 2007, approximately648,959 shares of common stock were available for issuance under the EquityIncentive Plan.

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

Asummary of the status of our stock options as of March 31, 2007 and December31, 2006 are presented below:

|                               | ** ** | **March 31, 2007** | ** ** | **December 31, 2006**        | ** ** |
|-------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | **Options  Outstanding**     | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Balance at  beginning of year |       | 830,001                      |       | $                                      | 18.02      |   | 733,584 |   | $ | 16.47 |   |
| Granted                       |       | 419,500                      |       | $                                      | 30.96      |   | 197,500 |   | $ | 23.49 |   |
| Exercised                     |       | (23,332                      | )          | $                                      | 17.73      |   | (63,749 | ) | $ | 15.95 |   |
| Lapsed or  cancelled          |       | (5,000                       | )          | $                                      | 23.18      |   | (37,334 | ) | $ | 20.18 |   |
| Balance at end of  period     |       | 1,221,169                    |       | $                                      | 22.45      |   | 830,001 |   | $ | 18.02 |   |

 

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All options were granted withina price range of $15.00 to $33.54.  Theremaining weighted average contractual life of the options was 8.7 years.  Compensation expense of $1,316 will berecorded over the course of the next 18 months, representing the remainingweighted average vesting period of the option awards as of March 31, 2007.  Compensation expense of $190 and $86 wasrecorded for the three months ended March 31, 2007 and 2006, respectively, relatedto the issuance of stock options.

Through March 31, 2007, 493,083restricted shares had been issued under the Equity Incentive Plan, of which 49%have vested.   The unvested shares arenot currently entitled to receive distributions declared by us on our commonstock until such time as the shares have vested.  Unvested shares may be entitled to receivedividends at the discretion of the Compensation Committee of our Board ofDirectors.  Holders of restricted sharesare prohibited from selling such shares until they vest but are provided theability to vote such shares beginning on the date of grant.  Compensation expense of $2,229 will berecorded over the course of the next 11 months, representing the remaining weightedaverage vesting period of the restricted stock awards as of March 31,2007.  Compensation expense of $1,223 and$356 was recorded for the three months ended March 31, 2007 and 2006,respectively, related to the issuance of restricted shares.

**OutperformancePlan**

In June 2005, the compensation committee of our board of directorsapproved a long-term incentive compensation program, the 2005 OutperformancePlan.  Participants in the 2005Outperformance Plan, all of whom are co-leased employees, will share in a “performancepool” if our total return to stockholders for the period from June 1, 2005through May 31, 2008 exceeds a cumulative total return to stockholders of 30%during the measurement period over a base share price of $20.21 per share.  The size of the pool will be 10% of theoutperformance amount in excess of the 30% benchmark, subject to a maximumlimit equal to the lesser of 4% of our outstanding shares and units of limitedpartnership interest as of the end of the performance period, or 1,200,000shares.  If our total return to stockholdersfrom June 1, 2005 to any subsequent date exceeds 80% and remains at that levelor higher for 30 consecutive days, then a minimum performance pool will beestablished.  In the event the potentialperformance pool reaches the maximum dilution cap before May 31, 2008 andremains at that level or higher for 30 consecutive days, the performance periodwill end early and the pool will be formed on the last day of such 30-dayperiod.  Each participant’s award underthe 2005 Outperformance Plan is designated as a specified percentage of theaggregate performance pool to be allocated to such participant assuming the 30%benchmark is achieved.  Individual awardsunder the 2005 Outperformance Plan will be made in the form of partnershipunits, or LTIP Units, that may ultimately become exchangeable for shares of ourcommon stock or cash, at our election. Under the 2005 Outperformance Plan, LTIP Units have been granted andadditional LTIP Units may be granted in the future prior to the determinationof the performance pool; however, these LTIP Units will only vest uponsatisfaction of performance and other thresholds, and will not be entitled todistributions until after the performance pool, or minimum performance pool, isestablished.  The 2005 OutperformancePlan provides that if a pool is established, each participant will also beentitled to the distributions that would have been paid on the number of LTIPUnits earned, had they been issued at the beginning of the performance period.  Those distributions will be paid in the formof additional LTIP Units.  Once aperformance pool has been established, the earned LTIP Units will receiveregular quarterly distributions on a per unit basis equal to the dividends pershare paid on our common stock, whether or not they are vested.  Any LTIP Units that are not earned upon theestablishment of the performance pool will be automatically forfeited, and theLTIP Units that are earned will be subject to time-based vesting, with 50% ofthe LTIP Units earned vesting in May 2009 and the balance vesting one yearlater based on continued employment with our Manager or SL Green.   We will record the expense of the restrictedstock award in accordance with FASB Statement No. 123(R).  Compensation expense of $383 and $293 was recordedfor the three months ended March 31, 2007 and 2006, respectively, related tothe 2005 Outperformance Plan.

**DeferredStock Compensation Plan for Directors**

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

As of March 31,2007, there were approximately 22,940 phantom stock units outstanding, of which12,940 units are vested.

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**Earnings per Share**

Earnings per share for the threemonths ended March 31, 2007 and 2006 is computed as follows:

|                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| **Numerator (Income)**                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Basic Earnings:                             |       |                                             |       |   |   |
| Net income available to common stockholders |       | $                                                | 17,049     |   | $ | 10,554 |   |
| Effect of dilutive securities               |       | —                                           |       | — |   |
| Diluted Earnings:                           |       |                                             |       |   |   |
| Net income available to common stockholders |       | $                                                | 17,049     |   | $ | 10,554 |   |
|                                        |       |                                             |       |   |   |
| **Denominator (Weighted Average Shares)**   |       |                                             |       |   |   |
| Basic                                       |       |                                             |       |   |   |
| Shares available to common stockholders     |       | 26,027                                           |       | 22,807 |   |
| Effect of Diluted Securities:               |       |                                             |       |   |   |
| Stock-based compensation plans              |       | 1,422                                            |       | 1,178 |   |
| Phantom stock units                         |       | 23                                               |       | 3 |   |
| Diluted Shares                              |       | 27,472                                           |       | 23,988 |   |

 

**15.  BenefitPlans**

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

**16. **Commitmentsand Contingencies

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

Our corporate offices at 420 Lexington Avenue, New York, NewYork are subject to an operating lease agreement with SLG Graybar Sublease LLC,an affiliate of SL Green, effective May 1, 2005.  The lease is for approximately five thousandsquare feet with an option to lease an additional approximately two thousandsquare feet and carries a term of ten years with rents on the entire seventhousand square feet of approximately $249 per annum for year one rising to$315 per annum in year ten.

The following is a schedule of future minimum lease paymentsunder our operating lease as of March 31, 2007.

|                               | ** ** | **Operating  Lease** | ** ** |
|-------------------------------|------------|----------------------|------------|
| 2007                          |       | $                    | 193        |   |
| 2008                          |       | 261                  |       |
| 2009                          |       | 265                  |       |
| 2010                          |       | 283                  |       |
| 2011                          |       | 297                  |       |
| Thereafter                    |       | 1,054                |       |
| Total minimum  lease payments |       | $                    | 2,353      |   |

 

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

FASB No. 133, or SFAS 133, “Accounting for Derivative Instruments andHedging Activities,” which became effective January 1, 2001, requires Gramercyto recognize all derivatives on the balance sheet at fair value.  Derivatives that are not hedges must beadjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge,changes in the fair value of the

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derivative will either beoffset against the change in fair value of the hedged asset, liability, or firmcommitment through earnings, or recognized in other comprehensive income untilthe hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will beimmediately recognized in earnings.  SFAS133 may increase or decrease reported net income and stockholders’ equityprospectively, depending on future levels of LIBOR interest rates and othervariables affecting the fair values of derivative instruments and hedged items,but will have no effect on cash flows, provided the contract is carried throughto full term.

The following tablesummarizes the notional and fair value of our derivative financial instrumentat March 31, 2007.  The notional value isan indication of the extent of our 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  Value** | ** ** |
|--------------------|------------|---------------------------------------------------|------------|---------------------|------------|------------------|------------|---------------------|------------|----------------------|------------|-----------------|------------|
| Interest Rate Swap |       | 3  month LIBOR                                    |       | $                   | 12,000     |             | 9.850      | %                   | 8/2006     |                 | 8/2011     |            | $          | (144 | ) |
| Basis Swap         |       | 1  month PRIME                                    |       | 9,363               |       | +722             | bps        | 8/2006              |       | 12/2007              |       | (2              | )          |
| Interest Rate Swap |       | 3  month LIBOR                                    |       | 39,551              |       | 4.420            | %          | 7/2005              |       | 2/2014               |       | 1,106           |       |
| Interest Rate Swap |       | 1  month LIBOR                                    |       | 31,686              |       | 3.855            | %          | 7/2005              |       | 11/2009              |       | 761             |       |
| Interest Rate Swap |       | 1  month LIBOR                                    |       | 3,465               |       | 4.280            | %          | 7/2005              |       | 12/2009              |       | 47              |       |
| Interest Rate Cap  |       | 3  month LIBOR                                    |       | 23,713              |       | 5.700            | %          | 11/2005             |       | 12/2007              |       | 1               |       |
| Interest Rate Swap |       | 1  month LIBOR                                    |       | 3,960               |       | 4.959            | %          | 12/2005             |       | 12/2015              |       | 7               |       |
| Interest Rate Swap |       | 1  month LIBOR                                    |       | 6,316               |       | 4.760            | %          | 1/2006              |       | 3/2015               |       | 75              |       |
| Interest Rate Swap |       | 3  month LIBOR                                    |       | 3,465               |       | 5.178            | %          | 4/2006              |       | 3/2010               |       | (32             | )          |
| Interest Rate Cap  |       | 3  month LIBOR                                    |       | 20,000              |       | 6.000            | %          | 4/2006              |       | 4/2007               |       | —          |       |
| Interest Rate Swap |       | 3  month LIBOR                                    |       | 24,891              |       | 5.445            | %          | 8/2006              |       | 7/2016               |       | (762            | )          |
| Interest Rate Swap |       | 1  month LIBOR                                    |       | 36,500              |       | 4.837            | %          | 12/2006             |       | 11/2009              |       | (14             | )          |
| Interest Rate Swap |       | 1  month LIBOR                                    |       | 42,718              |       | 4.990            | %          | 1/2007              |       | 1/2017               |       | 95              |       |
| Interest Rate Swap |       | 1  month LIBOR                                    |       | 64,076              |       | 4.990            | %          | 1/2007              |       | 1/2017               |       | 146             |       |
| Interest Rate Swap |       | 1  month LIBOR                                    |       | 39,600              |       | 5.025            | %          | 3/2007              |       | 3/2017               |       | (21             | )          |
| Interest Rate Swap |       | 1  month LIBOR                                    |       | 29,700              |       | 5.025            | %          | 3/2007              |       | 3/2017               |       | (15             | )          |
| Total Return Swap  |       | Lehman  CMBS Investment  Grade 8.5+ Yr Index |       | 36,422              |       | + 22             | bps        | 3/2007              |       | 3/2008               |       | —          |       |
| Total Return Swap  |       | Lehman  CMBS Investment  Grade 8.5+ Yr Index |       | 27,317              |       | +22              | bps        | 3/2007              |       | 3/2008               |       | —          |       |
| Interest Rate Swap |       | 1  month LIBOR                                    |       | 22,275              |       | 5.078            | %          | 4/2007              |       | 4/2017               |       | (104            | )          |
| Total              |       |                                              |       | $                   | 477,018    |             |       |                |       |                 |       |            | $          | 1,144 |   |

 

At March 31, 2007,derivative instruments were reported at their fair value as net assets of$1,144.  Offsetting adjustments arerepresented as deferred gains in Accumulated Other Comprehensive Income of$1,901.  For the three months ended March31, 2007 we recognized a reduction in interest expense of $7 attributable tothe ineffective component of our derivative instruments designated as cash flowhedges.  For the same period wereclassified through earnings (i) $385 representing the gains and lossespreviously reported in Accumulated Other Comprehensive Income, which werereclassified into earnings at the same time that the forecasted transactionsaffect earnings, and (ii) a $1,295 increase in earnings representing the changein value of undesignated derivatives which are not speculative for economicpurposes, one of which was related to a debt investment sold during the threemonths ended March 31, 2007.  Currently,all derivative instruments are designated as cash flow hedging instruments withthe exception of a $20,000 notional cap, and a $9,363 notional Prime-LIBORbasis swap, which are effective economic hedges but have not been designated.  Over time, the realized and unrealized gainsand losses held in Accumulated Other Comprehensive Income will be reclassifiedinto earnings in the same periods in which the hedged interest payments affectearnings.

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

**18. **Income Taxes

We elected to betaxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code beginningwith our taxable year ended December 31, 2004. To qualify as a REIT, we must meet certain organizational andoperational requirements, including a requirement to distribute at least 90% ofour ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax ontaxable income that we distribute to our stockholders.  If we fail to qualify as a REIT in anytaxable year, we will then be subject to federal income taxes on our taxableincome at regular corporate rates and we will not be permitted to qualify fortreatment as a REIT for federal income tax purposes for four years followingthe year during which qualification is lost unless the Internal Revenue Servicegrants us relief under certain statutory provisions.  Such an event could materially adverselyaffect our net income and net cash available for distributions tostockholders.  However, we believe thatwe are organized and will operate in such a

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manner as toqualify for treatment as a REIT and we intend to operate in the foreseeablefuture in such a manner so that we will qualify as a REIT for federal incometax purposes.  We may, however, besubject to certain state and local taxes.

For the three monthsended March 31, 2007 and 2006, we recorded $534 and $47 of income tax expense,respectively, in income from continuing operations for income attributable toour wholly-owned taxable REIT subsidiaries. We have assumed an effective taxrate for the three months ended March 31, 2007 of 41% taking into considerationthe anticipated applicable U.S. federal statutory tax rate at March 31, 2007 of34% and state and local taxes.

**19.  Environmental Matters**

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

**20.  Segment Reporting**

**Statementof Financial Accounting Standard No. 131, or “SFAS No. 131,” establishesstandards for the way that public entities report information about operatingsegments in their annual financial statements. As of March 31, 2007 we were a REIT focused primarily on originating andacquiring loans and securities related to real estate and under the provisionsof SFAS No. 131 operated in only one segment.**

**21**.  SupplementalDisclosure of Non-Cash Investing and Financing Activities

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

The following table represents non-cashactivities recognized in other comprehensive income for the three months endedMarch 31, 2007 and 2006:

|                                                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred gains/(losses)  and other non-cash activity related to derivatives |       | $        | (1,832     | )        | $          | 3,784 |   |
|                                                                             |            |          |            |          |            |  |  |

 

**22.  SubsequentEvents**

**On April 18, 2007, we sold4,600,000 shares of our 8.125% Series A cumulative redeemable preferred stock(including the underwriters’ over-allotment option of 600,000 shares) with amandatory liquidation preference of $25.00 per share. Holders of the Series Acumulative redeemable preferred shares receive annual dividends of $2.03125 pershare paid on a quarterly basis and dividends are cumulative, subject tocertain provisions. On or after April 18, 2012, we may at our option redeem theSeries A cumulative redeemable preferred stock at par for cash. The Series Acumulative redeemable preferred stock was recorded net of underwriters discountand issuance costs.**   Net proceeds from the offering of approximately$110,978 were used to repay amounts outstanding under our repurchase facilities,and for other general corporate purposes.

On April 9, 2007we closed on a $17,492 initial investment through a TIC structure in a jointventure with SL Green to acquire the fee interest in 2 Herald Square in NewYork, New York, or 2 Herald.   On April 11, 2007, the joint venturecompleted the acquisition of the fee interest in 2 Herald for the purchaseprice of approximately $225,000 plus closing costs, financed in part with a$191,250 first mortgage loan.  The firstmortgage is non-recourse to the joint venture or to us. 2 Herald is a354,400 square foot office and retail property located at 1328 Broadway in NewYork, New York, which is subject to a long-term ground lease for a term of 70years.

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** **

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

**Overview**

We are acommercial real estate specialty finance company that focuses on the directorigination and acquisition of whole loans, subordinate interests in wholeloans, mezzanine loans, preferred equity, and net lease investments involvingcommercial properties throughout the United States. We have also established areal estate securities business that will focus on the acquisition, trading andfinancing of commercial mortgage backed securities, or CMBS, and other realestate related securities.  Whenevaluating transactions, we assess our risk-adjusted return and targettransactions with yields that seek to provide excess returns for the risksbeing taken.  We conduct substantiallyall of our operations through our operating partnership, GKK Capital LP, or ourOperating Partnership.  We are externallymanaged and advised by GKK Manager LLC, or our Manager, a majority-ownedsubsidiary of SL Green Realty Corp. (NYSE: SLG), or SL Green.  We have elected to be taxed as a REIT underthe Internal Revenue Code and generally will not be subject to federal incometaxes to the extent we distribute our income to our stockholders.  However, we may establish TRSs to effectvarious taxable transactions.  Those TRSswould incur federal, state and local taxes on the taxable income from theiractivities.  Unless the context requiresotherwise, all references to “we,” “our” and “us” mean Gramercy Capital Corp.

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

Since ourinception, we have completed transactions in a variety of markets and securedby a variety of property types, and the market for commercial real estate debthas continued to demonstrate low rates of default, high relative returns, andinflows of capital.  Consequently, themarket for debt instruments has evidenced declining yields and more flexiblecredit standards and loan structures.  Inparticular, “conduit” originators who package whole loans for resale toinvestors have driven debt yields lower while maintaining substantial liquiditybecause of the strong demand for the resulting securities.  Because of reduced profits in the most liquidsectors of the mortgage finance business, several large institutions have begunoriginating large bridge loans for the purpose of generating interest income,rather than the typical focus on trading profits.  In this environment we have focused on areaswhere we have comparative advantages rather than competing for product merelyon the basis of yield or structure.  Thishas particularly included whole loan origination in markets and transactionswhere we have 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 insecondary market transactions in tranched debt, we generally avoid first lossrisk in larger transactions due to the high current valuation of the underlyingreal estate relative to historic valuation levels.  Because of the significant increase in thevalue of institutional quality assets relative to historic norms, we typicallyfocus on positions in which a conventional refinancing at loan maturity wouldprovide for a complete return of our investment.

Because of thehigh relative valuation of debt instruments in the current market and agenerally increasing rate environment, we have carefully managed our exposureto interest rate changes that could affect our liquidity.  We generally match our assets and liabilitiesin terms of base interest rate (generally one-month LIBOR) and expectedduration.  We have also been active inthe equity and debt markets since 2004 to take advantage of cost effectivesources of capital, maintain liquidity and attractively finance our business.We raised $95,000 of additional equity in December 2004 and January 2005 toreduce our outstanding indebtedness and maintain sufficient liquidity for ourinvestment portfolio.  In September 2005we sold 3,833,333 shares of common stock resulting in net proceeds ofapproximately $97,830 and in May 2006 we sold 3,000,000 shares of common stockresulting in net proceeds of approximately $80,000.  In April 2007 we sold 4,600,000 shares of our8.125% Series A cumulative redeemable preferred stock, resulting in netproceeds of approximately $110,978.  Theproceeds of these offerings were used to fund loan acquisitions and originations,repay outstanding principal amounts under our repurchase facilities orunsecured revolving credit facilities and for general corporate purposes. Wehave also sold a total of $150,000 of trust preferred securities in three$50,000 issuances in May and August 2005 and January 2006 through wholly-ownedsubsidiaries of our Operating Partnership with 30 year terms.  The securities issued in May bear interest ata fixed rate of 7.57% for the first ten years ending, the securities issued inAugust bear interest at a fixed rate of 7.75% for the first ten years and thesecurities issued in January 2006 bear interest at a fixed rate of 7.65% forthe first ten years.  After the first tenyears, the 2005 issuances bear interest at three-month LIBOR plus 300 basis pointswhile the 2006 issuance bears interest at three-month LIBOR plus 270 basispoints.  The proceeds from the issuancesof the trust preferred securities were used to fund existing and futureinvestment opportunities.   In July 2005we closed our first $1,000,000 CDO which extended the term of our liabilitiesand reduced our overall cost of funds with respect to debt investments financedby the CDO and previously financed by 

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our repurchaseagreements, to approximately 49 basis points over LIBOR, excluding transactioncosts.  Our second $1,000,000 CDO wasclosed in August 2006 at a weighted average interest spread of approximately 37basis points over LIBOR, excluding transaction costs.  The proceeds of the CDOs were used to repayour repurchase facilities and to fund additional investment activities.  In May 2006 we also closed on a $100,000unsecured credit facility with an initial term of three years and interestspreads between 1.90% and 2.10%.

As of March 31, 2007, we held loans and otherlending investments of $2,456,979 net of fees, discounts, and unfundedcommitments with an average spread to LIBOR of 396 basis points for ourfloating rate investments, and an average yield of 9.48% for our fixed rateinvestments.  As of March 31, 2007, wealso held interests in four credit tenant lease, or CTL, investmentscomprised of a 49.75% tenancy-in-common, or TIC, interest in 55 Corporate Drivein Bridgewater, New Jersey,and three joint ventureinvestments.

**The aggregate carrying values, allocated by producttype and weighted average coupons of our loans and other lending investments asof March 31, 2007 and December 31, 2006 were as follows:**
| ** **                                           | ** ** | **Carrying Value (1)  ($ in thousands)** | ** ** | **Allocation by  Investment Type** | ** ** | **Fixed Rate:  Average Yield** | ** ** | **Floating Rate:  Average Spread over  LIBOR (2)** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                     | ** ** | **2006**                                     | ** ** | **2007**                                 | ** ** | **2006**                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Whole loans, floating rate                           |       | $                                                            | 1,407,592  |                                         | $          | 1,372,316                                |       | 57                                                                     | %          | 63 | % | — |   | — |   | 337 bps |   | 327 bps |   |
| Whole loans, fixed rate                              |       | 134,082                                                      |       | 42,376                                       |       | 5                                        | %          | 2                                                                      | %          | 9.08 | % | 11.69 | % | — |   | — |   |
| Subordinate  interests in whole loans, floating rate |       | 174,314                                                      |       | 236,308                                      |       | 7                                        | %          | 11                                                                     | %          | — |   | — |   | 421 bps |   | 445 bps |   |
| Subordinate  interests in whole loans, fixed rate    |       | 49,042                                                       |       | 48,769                                       |       | 2                                        | %          | 2                                                                      | %          | 8.21 | % | 8.54 | % | — |   | — |   |
| Mezzanine loans, floating rate                       |       | 430,809                                                      |       | 226,675                                      |       | 18                                       | %          | 10                                                                     | %          | — |   | — |   | 577 bps |   | 665 bps |   |
| Mezzanine loans, fixed rate                          |       | 216,868                                                      |       | 216,216                                      |       | 9                                        | %          | 10                                                                     | %          | 9.80 | % | 9.92 | % | — |   | — |   |
| Preferred equity, fixed rate                         |       | 44,272                                                       |       | 44,224                                       |       | 2                                        | %          | 2                                                                      | %          | 10.57 | % | 10.68 | % | — |   | — |   |
| Total / Average                                      |       | $                                                            | 2,456,979  |                                         | $          | 2,186,884                                |       | 100                                                                    | %          | 100 | % | 9.48 | % | 10.04 | % | 396 bps |   | 384 bps |   |

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

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

**Critical Accounting Policies**

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

### **Loans and Investmentsand Loans Held for Sale**

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

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

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expected capitalizationrate to the stabilized net operating income of the specific property, lessselling costs, all of which are discounted at market discount rates.

If upon completionof the valuation, the fair value of the underlying collateral securing theimpaired loan is less than the net carrying value of the loan, an allowance iscreated with a corresponding charge to the provision for loan losses.  The allowance for each loan is maintained ata level we believe is adequate to absorb probable losses.  We maintained a reserve of $3,708 and $2,460 atMarch 31, 2007 and December 31, 2006, respectively.

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

#### **Classifications ofMortgage-Backed Securities**

Mortgage-backedsecurities, or MBS, are classified as available-for-sale securities.  As a result, changes in fair value will berecorded as a balance sheet adjustment to accumulated other comprehensiveincome, which is a component of stockholders equity, rather than through ourstatement of operations.  Ifavailable-for-sale securities were classified as trading securities, therecould be substantially greater volatility in earnings from period-to-period asthese investments would be marked to market and any reduction in the value ofthe securities versus the previous carrying value would be considered anexpense on our statement of operations. We had no investments as of March 31,2007 that were accounted for as trading securities.

#### **Valuations ofMortgage-Backed Securities**

All MBS arecarried on the balance sheet at fair value. We determine the fair value of MBS based on the types of securities inwhich we have invested.  For liquid,investment-grade securities, we consult with dealers of such securities toperiodically obtain updated market pricing for the same or similarinstruments.  For non-investment gradesecurities, we actively monitor the performance of the underlying propertiesand loans and update our pricing model to reflect changes in projected cashflows.  The value of the securities isderived by applying discount rates to such cash flows based on current marketyields.  The yields employed are obtainedfrom our own experience in the market, advice from dealers and/or informationobtained in consultation with other investors in similar instruments.  Because fair value estimates may vary to somedegree, we must make certain judgments and assumptions about the appropriateprice to use to calculate the fair values for financial reportingpurposes.  Different judgments andassumptions could result in different presentations of value.

When the fairvalue of an available-for-sale security is less than the amortized cost, weconsider whether there is an other-than-temporary impairment in the value ofthe security (for example, whether the security will be sold prior to therecovery of fair value).  If, in ourjudgment, an other-than-temporary impairment exists, the cost basis of thesecurity is written down to the then-current fair value, and this loss isrealized and charged against earnings. The determination of other-than-temporary impairment is a subjectiveprocess, and different judgments and assumptions could affect the timing ofloss realization.

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

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

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

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

In accordance with FASB No. 141, or SFAS 141, “BusinessCombinations,” we allocate the purchase price of real estate to land andbuilding and, if determined to be material, intangibles, such as the value ofabove, below and at-market leases and origination costs associated with thein-place leases.  We depreciate the amount allocated to building and otherintangible assets over their estimated useful lives, which generally range fromthree to 40 years.  The values of the above and below-market leases areamortized and recorded as either an increase (in the case of below-marketleases) or a decrease (in the case of above-market leases) to rental income 

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over the remaining term of the associated lease.  Thevalue associated with in-place leases and tenant relationships are amortizedover the expected term of the relationship, which includes an estimatedprobability of the lease renewal, and its estimated term.  If a tenantvacates its space prior to the contractual termination of the lease and norental payments are being made on the lease, any unamortized balance of therelated intangible will be written off.  The tenant improvements andorigination costs are amortized as an expense over the remaining life of thelease (or charged against earnings if the lease is terminated prior to itscontractual expiration date).  We assess fair value of the leases based onestimated cash flow projections that utilize appropriate discount andcapitalization rates and available market information.  Estimates offuture cash flows are based on a number of factors including the historicaloperating results, known trends, and market/economic conditions that may affectthe property.

**Investmentsin Unconsolidated Joint Ventures**

#### We account for our investments in unconsolidated joint ventures underthe equity method of accounting since we exercise significant influence, but donot unilaterally control, the entities and are not considered to be the primarybeneficiary under FIN 46.  In the joint ventures, the rights of the otherinvestor are protective and participating. Unless we are determined to be theprimary beneficiary, these rights preclude us from consolidating the investments. The investments are recorded initially at cost as an investment inunconsolidated joint ventures, and subsequently are adjusted for equity in netincome (loss) and cash contributions and distributions.  Any differencebetween the carrying amount of the investments on our balance sheet and theunderlying equity in net assets is amortized as an adjustment to equity in netincome (loss) of unconsolidated joint ventures over the lesser of the jointventure term or 40 years.  None of the joint venture debt is recourse tous.  As of March 31, 2007 and December 31,2006, we had investments of$56,779 and $57,567 in unconsolidated joint ventures, respectively.

#### **Revenue Recognition**

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

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

In some instances we may sell all or a portion of our investments to athird party.  To the extent the fairvalue received for an investment exceeds the amortized cost of that investmentand FASB Statement No. 140, or SFAS 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities,” criteria ismet, under which control of the asset that is sold is surrendered making it a “truesale,” a gain on the sale will be recorded through earnings as otherincome.  To the extent an investment thatis sold has a discount or fees, which were deferred at the time the investmentwas made and were being recognized over the term of the investment, theunamortized portion of the discount or fees are recognized at the time of saleand recorded as a gain on the sale of the investment through other income.  For the three months ended March 31, 2007 and2006, we recognized $2,686 and $1,114 in net gains from the sale of debtinvestments or commitments.

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

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

#### **Reserve for PossibleLoan Losses**

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

Where impairment is indicated, a valuation write-down or write-off ismeasured based upon the excess of the recorded investment 

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amount over the net fair value of the collateral, as reduced by sellingcosts.  Any deficiency between thecarrying amount of an asset and the net sales price of foreclosed collateralis charged to the allowance for loan losses. We maintained a reserve for possible loan losses of $3,708 againstinvestments with a carrying value of $141,709 as of March 31, 2007, and areserve for possible loan losses of $2,460 against investments with a carryingvalue of $131,427 as of December 31, 2006.

**StockBased Compensation Plans**

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

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

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

The fair value of each stockoption granted is estimated on the date of grant for awards to co-leasedemployees, and quarterly for options issued to non-employees, using theBlack-Scholes option pricing model with the following weighted averageassumptions for grants in 2007 and 2006.
| ** **                       | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|----------------------------------|------------|-----------|------------|-----------|------------|
| Dividend yield                   |       | 7.5%      |       | 8.0%      |       |
| Expected life of  option         |       | 6.0 years |       | 6.7 years |       |
| Risk-free  interest rate         |       | 4.61%     |       | 4.14%     |       |
| Expected stock price  volatility |       | 22.5%     |       | 21.0%     |       |

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

The Class Blimited partner interests are entitled to receive an incentive return equal to25% of the amount by which funds from operations, or FFO plus certainaccounting gains (as defined in the partnership agreement of our OperatingPartnership which was amended and restated in April 2006) exceed the product ofour weighted average stockholders equity (as defined in the amended and restatedpartnership agreement of our Operating Partnership) multiplied by 9.5% (dividedby 4 to adjust for quarterly calculations). We will record any distributions onthe Class B limited partner interests as an incentive distribution expense inthe period when earned and when payment of such amounts has become probable andreasonably estimable in accordance with the partnership agreement.  These cash distributions will reduce theamount of cash available for distribution to our common unitholders in our OperatingPartnership and to common stockholders. We incurred approximately $2,817 and $1,193 with respect to such Class Blimited partner interests for the three months ended March 31, 2007 and 2006,respectively.

#### **DerivativeInstruments**

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

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

In the normalcourse of business, we are exposed to the effect of interest rate changes andlimit these risks by following established risk management policies andprocedures including the use of derivatives. To address exposure to interest rates, we use derivatives 

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primarily to hedgethe mark-to-market risk of our liabilities with respect to certain of ourassets.  We may also use derivatives tohedge variability in sales proceeds to be received upon the sale of loans heldfor sale.

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

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

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

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

# **Income Taxes**

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

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

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**Resultsof Operations (Amounts in thousands)**

### ***Comparison of thethree months ended March 31, 2007 to the three months ended March 31, 2006***

***Revenues***
| ** **                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **$ Change** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Investment income                                   |       | $        | 59,969     |     | $          | 31,879            |       | $ | 28,090 |   |
| Rental revenue, net                                 |       | 1,736    |       | 914      |       | 822               |       |
| Gain on sales and other  income                     |       | 6,429    |       | 4,197    |       | 2,232             |       |
| Total revenues                                      |       | 68,134   |       | 36,990   |       | $                 | 31,144     |   |
|                                                |       |     |       |     |       |              |       |
| Equity in net loss of unconsolidated joint ventures |       | $        | (695       | )        | $          | (727              | )          | $ | 32 |   |

 

Investment incomeis generated on our whole loans, subordinate interests in whole loans,mezzanine loans, preferred equity interests and real estate securitiesinvestments.  For the three months endedMarch 31, 2007, $10,135 was earned on fixed rate investments while theremaining $49,834 was earned on floating rate investments.  The increase over the prior year is dueprimarily to a larger number of investments in 2007 versus 2006 at moderatelyhigher spreads on our floating rate investments.

**Rental revenue of $1,736 in 2007was earned on our TIC interest in 55 Corporate Drive, which has been held as aproportionately consolidated property since its acquisition in June 2006.Following its acquisition, 55 Corporate Drive was being redeveloped. Theproperty was accounted for as an operating property beginning in the three monthsended December 31, 2006.  Rental revenuein 2007 includes the effect of adjustments for straight-line rent and FASB 141adjustments for below-market leases for 55 Corporate Drive.  Rental revenue of $914 in 2006 was earned ononly 200 Franklin Square Drive.**

Other income of$6,429 for the three months ended March 31, 2007 is comprised primarily ofgains recorded on the sale of one debt investment of $2,686.  The remaining increase over the prior year isprimarily attributable to interest on restricted cash balances in our two CDOs(only one of which was in place in the same period of 2006) and other cashbalances held by us. For the three months ended March 31, 2006, other income of$4,197 was comprised primarily of income recorded on the sale of two fixed ratedebt investments and one debt commitment of $1,114, and the gain on the sale ofsecurity interests in the entity that owns 200 Franklin Square Drive of $1,718.

**The loss on investments inunconsolidated joint ventures of $695 for the three months ended March 31, 2007represents our proportionate share of the losses generated by our joint ventureinterests including $1,947 of real estate-related depreciation andamortization, which when added back, results in a contribution to FFO of$1,252.  The loss on investments inunconsolidated joint venture of $727 for the three months ended March 31, 2006was generated primarily on our investment in One Madison Avenue in New York,New York.  Our use of FFO as an importantfinancial measure is discussed in more detail below.**

***Expenses***
| ** **                             | ** ** | **2007** | ** ** | **2006** | ** ** | **$ Change** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Interest expense                       |       | $        | 36,461     |     | $          | 17,721            |       | $ | 18,740 |   |
| Management fees                        |       | 4,839    |       | 3,523    |       | 1,316             |       |
| Incentive fee                          |       | 2,817    |       | 1,193    |       | 1,624             |       |
| Depreciation and  amortization         |       | 671      |       | 455      |       | 216               |       |
| Marketing,  general and administrative |       | 3,820    |       | 2,770    |       | 1,050             |       |
| Provision for  loan loss/(recovery)    |       | 1,248    |       | —   |       | 1,248             |       |
| Provision for  taxes                   |       | 534      |       | 47       |       | 487               |       |
| Total expenses                         |       | $        | 50,390     |     | $          | 25,709            |       | $ | 24,681 |   |

Interest expense was $36,461 for the three monthsended March 31, 2007 compared to $17,721 for the three months ended March 31,2006.  Interest expense for the threemonths ended March 31, 2007 consisted primarily of $24,826 of interest on theinvestment grade tranches of our two CDOs (only one of which was in placeduring the same period in 2006), $4,178 of interest on borrowings on our masterrepurchase facilities with Wachovia and Goldman, $2,871 of expense on our three$50,000 issuances of trust preferred securities, $1,567 of interest on ourunsecured revolving credit facility, and the amortization of deferred financingcosts related to our CDOs, repurchase facilities and unsecured revolving creditfacility.  The $17,721 of interestexpense during the same period in 2006 was comprised primarily of $10,130 ofinterest on the investment grade tranches of our first CDO, $3,524 of intereston borrowings on our master repurchase facilities, and $2,555 of expenseaccrued against our three $50,000 issuances of trust preferred securities.

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Management feesincreased $1,316 for the three months ended March 31, 2007 to $4,839 versus$3,523 for the same period in 2006 due primarily to an increase in ourstockholder’s equity as a result of additional issuances of common equity andthe full quarter effect of our third issuance of $50,000 of trust preferredsecurities in January 2006, on which base management fees are calculated.  The remaining increase is comprised of $1,071paid or payable to our Manager on investments in our two CDOs (only one ofwhich was in place during the same period in 2005) in accordance with the CDOcollateral management agreements in lieu of the 0.15% fee otherwise payable toSL Green Operating Partnership, L.P. on those investments under the assetservicing agreement, higher fees paid or payable to SL Green Operating Partnership,L.P. under our outsourcing and servicing agreements due to the increase in ourinvestment balances and the scheduled 3% annual increase in the fee payableunder our outsourcing agreement.

We recorded anincentive fee expense of $2,817 during the three months ended March 31, 2007 inaccordance with requirements of the partnership agreement of our OperatingPartnership which entitles owners of Class B limited partner interests in ourOperating Partnership to an incentive return equal to 25% of the amount bywhich FFO plus certain accounting gains (as defined in the amended and restatedpartnership agreement of our Operating Partnership) exceed the product of ourweighted average stockholders equity (as defined in the amended and restatedpartnership agreement of our Operating Partnership) multiplied by 9.5% (dividedby 4 to adjust for quarterly calculations). We also recorded incentive fee expense of $1,193 for the three monthsended March 31, 2006, which reflects a lower FFO recognized during that periodcompared to 2007.

The increase inmarketing, general and administrative expenses to $3,820 for the three monthsended March 31, 2007 versus the same period in 2006 was due primarily to higherequity related compensation, professional fees, insurance and general overheadcosts.  As a percentage of totalrevenues, marketing, general and administrative expenses declined to 5.6% forthe three months ended March 31, 2007 from 7.5% for the same period in 2006.

## **Liquidity and Capital Resources**

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

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

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

**To maintain our status as a REITunder the Internal Revenue Code, we must distribute annually at least 90% ofour taxable income.  These**

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**distribution requirements limit ourability to retain earnings and thereby replenish or increase capital foroperations.  However, we believe that oursignificant capital resources and access to financing, as noted above, willprovide us with financial flexibility at levels sufficient to meet current andanticipated capital requirements, including funding new lending and investmentopportunities.**

## **Cash Flows (Amounts in thousands)**

Net cash providedby operating activities increased $101,574 to $93,500 for the three monthsended March 31, 2007 compared to cash used of $8,074 for same period in2006.  Operating cash flow was generated primarily by interest income onour whole loans, subordinate interests in whole loans, mezzanine loans andpreferred equity interests and gains on loan sales due, in part, to a largernumber of investments in 2007 versus 2006 at a moderately higher spread for ourfloating rate investments in 2007.  Inaddition, we recognized $175,246 of proceeds from the sale of debt investmentsoffset by only $92,238 of cash used for new investments that are held for saleduring the three months ended March 31, 2007 as compared to a net use of cashof $20,441 from the origination and sale of debt investments held for saleduring the same period of 2006.

Net cash used in investing activities increased $21,284 to$336,430 for the three months ended March 31, 2007 compared to $315,146 usedduring the three months ended March 31, 2006.  The primary reason for theadditional use of cash is related to increased debt investment originations of$338,212, offset by higher principal collections on our debt investments of$306,740.

Net cash provided by financing activities decreased $58,599to $240,046 for the three months ended March 31, 2007 compared to $298,645provided during the same period in 2006.  This decrease was due primarilyto the net decrease in the outstanding borrowings on our repurchase facilitiesof $31,134 during the three months ended March 31, 2007 versus additionalborrowings of $259,826 during the same period of 2006.  This is offset by proceeds from our unsecuredrevolving credit facility during 2007 of $75,000, which facility was not inplace during the same period in 2006, and higher cash balances held in our twoCDOs in 2007.

**Capitalization**

Our authorized capital stockconsists of 125,000,000 shares, $0.001 par value, of which we have authorizedthe issuance of up to 100,000,000 shares of common stock, $0.001 par value pershare, and 25,000,000 shares of preferred stock, par value $0.001 per share.

As of the date of our formation,April 12, 2004, we had 500,000 shares of common stock outstanding valued atapproximately $200.  On August 2, 2004 wecompleted our initial public offering of 12,500,000 shares of common stockresulting in net proceeds of approximately $172.9 million, which was used tofund investments and commence our operations. As of March 31, 2007, 493,083 restricted shares had also been issuedunder our 2004 Equity Incentive Plan, or our Equity Incentive Plan.  These shares have a vesting period of two tofour years and are not entitled to receive distributions declared by us on ourcommon stock until such time as the shares have vested, or the shares have beendesignated to receive dividends by the Compensation Committee of our Board ofDirectors.

On December 3, 2004, we sold5,500,000 shares of our common stock resulting in net proceeds of approximately$93.7 million under a private placement exemption from the registrationrequirements of Section 5 of the Securities Act of 1933, as amended, or theSecurities Act.  We subsequentlyregistered the resale of these shares under the Securities Act in August2005.  A total of 4,225,000 shares weresold to various institutional investors and an additional 1,275,000 shares weresold to SL Green Operating Partnership, L.P. pursuant to its contractual rightto choose to maintain a 25% ownership interest in the outstanding shares of ourcommon stock.  Of the 5,500,000 sharessold, 2,000,000 shares were settled on December 31, 2004 and the remaining3,500,000 shares were settled on January 3, 2005.

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

On May 16, 2006, we sold3,000,000 shares of our common stock, at a price of $26.75 per share, resultingin net proceeds of approximately $80.0 million. A total of 2,250,000 shares were sold through a public offering and anadditional 750,000 shares were sold to SL Green Operating Partnership, L.P.pursuant to its contractual right to choose to maintain a 25% ownershipinterest in the outstanding shares of our common stock.  After this offering, SL Green OperatingPartnership, L.P. owned 6,418,333 shares of our common stock.  Net proceeds were used for loan acquisitionsand originations, repayment of outstanding principal under our repurchasefacilities and general corporate purposes.

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**On April 18, 2007, we sold4,600,000 shares of our 8.125% Series A cumulative redeemable preferred stock(including the underwriters’ over-allotment option of 600,000 shares) with amandatory liquidation preference of $25.00 per share. Holders of the Series Acumulative redeemable preferred shares receive annual dividends of $2.03125 pershare paid on a quarterly basis and dividends are cumulative, subject tocertain provisions. On or after April 18, 2012, we may at our option redeem theSeries A cumulative redeemable preferred stock at par for cash. The Series Acumulative redeemable preferred stock was recorded net of underwriters discountand issuance costs.**   Net proceeds from the offering of approximately $110,978were used to repay amounts outstanding under our repurchase facilities, and forother general corporate purposes.

In August 2005, our $350 millionshelf registration statement was declared effective by the Securities andExchange Commission, or SEC.  This registration statement provides us withthe ability to issue common and preferred stock, depository shares andwarrants.  We currently have $55.9 million available under the shelf.

On May 10, 2006,we entered into a sales agreement with Cantor Fitzgerald & Co., as salesagent, to offer and sell up to 1,000,000 shares of our common stock from timeto time through the sales agent. On May 10, 2006, we also entered into aseparate sales agreement with Merrill Lynch & Co., Merrill Lynch, Pierce,Fenner & Smith Incorporated, as sales agent, to offer and sell up to1,000,000 shares of our common stock from time to time through the sales agent.To date we have not issued any shares under either agreement.

As of March 31, 2007,26,044,806 shares of our common stock and no shares of our preferred stock wereissued and outstanding.

**OutperformancePlan (Amounts in thousands except per share data)**

In June 2005, the compensation committee of our board of directorsapproved a long-term incentive compensation program, the 2005 OutperformancePlan.  Participants in the 2005Outperformance Plan, all of whom are co-leased employees, will share in a “performancepool” if our total return to stockholders for the period from June 1, 2005through May 31, 2008 exceeds a cumulative total return to stockholders of 30%during the measurement period over a base share price of $20.21 per share.  The size of the pool will be 10% of theoutperformance amount in excess of the 30% benchmark, subject to a maximumlimit equal to the lesser of 4% of our outstanding shares and units of limitedpartnership interest as of the end of the performance period, or 1,200,000shares.  If our total return tostockholders from June 1, 2005 to any subsequent date exceeds 80% and remainsat that level or higher for 30 consecutive days, then a minimum performancepool will be established.  In the eventthe potential performance pool reaches the maximum dilution cap before May 31,2008 and remains at that level or higher for 30 consecutive days, the performanceperiod will end early and the pool will be formed on the last day of such30-day period.  Each participant’s awardunder the 2005 Outperformance Plan is designated as a specified percentage ofthe aggregate performance pool to be allocated to such participant assuming the30% benchmark is achieved.  Individualawards under the 2005 Outperformance Plan will be made in the form ofpartnership units, or LTIP Units, that may ultimately become exchangeable forshares of our common stock or cash, at our election.  Under the 2005 Outperformance Plan, LTIPUnits have been granted and additional LTIP Units may be granted in the futureprior to the determination of the performance pool; however, these LTIP Unitswill only vest upon satisfaction of performance and other thresholds, and willnot be entitled to distributions until after the performance pool, or minimumperformance pool, is established.  The2005 Outperformance Plan provides that if a pool is established, each participantwill also be entitled to the distributions that would have been paid on thenumber of LTIP Units earned, had they been issued at the beginning of theperformance period.  Those distributionswill be paid in the form of additional LTIP Units.  Once a performance pool has been established,the earned LTIP Units will receive regular quarterly distributions on a perunit basis equal to the dividends per share paid on our common stock, whetheror not they are vested.  Any LTIP Unitsthat are not earned upon the establishment of the performance pool will beautomatically forfeited, and the LTIP Units that are earned will be subject totime-based vesting, with 50% of the LTIP Units earned vesting in May 2009 andthe balance vesting one year later based on continued employment with ourManager or SL Green.   We willrecord the expense of the restricted stock award in accordance with FASBStatement No. 123(R).  Compensationexpense of $383 and $293 was recorded for the three months ended March 31, 2007and 2006, respectively, related to the 2005 Outperformance Plan.

**DeferredStock Compensation Plan for Directors**

Under our Independent Director’s Deferral Program, whichcommenced April 2005, our independent directors may elect to defer up to100% of their annual retainer fee, chairman fees and meeting fees.  Unlessotherwise elected by a participant, fees deferred under the program shall becredited in the form of phantom stock units.  The phantom stock units areconvertible into an equal number of shares of common stock upon such directors’termination of service from the Board of Directors or a change in control byus, as defined by the program.  Phantom stock units are credited to eachindependent director quarterly using the closing price of our common stock onthe applicable dividend record date for the respective quarter.  Eachparticipating independent director who elects to receive fees in the 

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form of phantom stock units has the option to have theiraccount credited for an equivalent amount of phantom stock units based on thedividend rate for each quarter or have dividends paid in cash.

As of March 31,2007, there were approximately 22,940 phantom stock units outstanding, of which12,940 units are vested.

**Market Capitalization**

At March 31, 2007,our CDOs and borrowings under our repurchase facilities, unsecured revolvingcredit facility and mortgage loans (excluding our share of joint venture debtof $341.6 million) represented 73% of our consolidated market capitalization of$2.9 billion (based on a common stock price of $30.68 per share, the closingprice of our common stock on the New York Stock Exchange on March 30,2007).  Market capitalization includesour consolidated debt and common stock.

**Indebtedness**

**The table below summarizesborrowings under our Wachovia and Goldman repurchase facilities, KeyBankunsecured revolving credit facility and any proportionately consolidatedmortgage debt or term loans at March 31, 2007 and December 31, 2006,respectively (amounts in thousands).**
| **Debt Summary:**                       | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Balance:**                                 |       |                     |       |                        |       |
| Fixed rate                                   |       | $                        | 94,525(    | 1)                          | $          | 94,525( | 1) |
| Variable rate                                |       | 336,278                  |       | 292,412                     |       |
| Total                                        |       | $                        | 430,803    |                        | $          | 386,937 |   |
|                                         |       |                     |       |                        |       |
| **Effective  interest rate for the period:** |       |                     |       |                        |       |
| Fixed rate                                   |       | 5.75                     | %          | 5.75                        | %          |
| Variable rate                                |       | LIBOR+1.65               | %          | LIBOR+1.72                  | %          |

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(1)             Wehave a 49.75% interest in the entity that is the obligor under the mortgagenote.

**Repurchase Facilities**

We have tworepurchase facilities with an aggregate of $900,000 of total debtcapacity.  In August 2004 we closed on a$250,000 repurchase facility with Wachovia. This facility was then increased to $350,000 on January 3, 2005 andsubsequently increased to $500,000 on April 22, 2005.  On March 21, 2006 we further modified thefacility by reducing the interest spreads. As a result of the modifications, the $500,000 facility bears interestat spreads of 1.00% to 2.50% over three month LIBOR and, based on our expectedinvestment activities, provides for advance rates that vary from 60% to 100%based upon the collateral provided under a borrowing base calculation.  On October 13, 2006 we extended the facility’smaturity date until October 2009.  Thelender has a consent right with respect to the inclusion of investments in thisfacility, determines periodically the market value of the investments, and hasthe right to require additional collateral if the estimated market value of theincluded investments declines. We had no accrued interest and borrowings of$166,303 at a weighted average spread to LIBOR of 1.61% as of March 31, 2007,and no accrued interest and borrowings of $151,403 at a weighted average spreadto LIBOR of 1.86%, as of December 31, 2006.

On January 3,2005, we closed an additional repurchase facility with Goldman.  On October 13, 2006 we increased thisfacility from $200,000 to $400,000 and extended its maturity date untilSeptember 2009.  On March 21, 2006 wemodified this facility by reducing the interest spreads.  As a result of the modifications, thefacility bears interest at spreads of 1.00% to 2.25% over three month LIBORand, based on our expected investment activities, provides for advance ratesthat vary from 40% to 85% based upon the collateral provided under a borrowingbase calculation.  As with the Wachoviarepurchase facility, the lender has a consent right to the inclusion ofinvestments in this facility, determines periodically the market value of theinvestments, and has the right to require additional collateral if theestimated market value of the included investments declines.  We had accrued interest of $646 andborrowings of $79,975 at a weighted average spread to LIBOR of 1.22% as ofMarch 31, 2007, and accrued interest of $261 and borrowings of $126,009 at aweighted average spread to LIBOR of 1.51% under this facility at December 31,2006.

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

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

**Restrictive Covenants**

The terms of ourrepurchase facilities (together with any related guarantees) include covenantsthat****(a) limit our maximum totalindebtedness to no more than 85% of total assets under the Wachovia facility ora debt to equity ratio less than or equal to 5:1 under the Goldman facility,(b) require us to maintain minimum liquidity of at least $10,000 for the firsttwo years and $15,000 thereafter under the Goldman facility, and at least$15,000 under the Wachovia facility, (c) require our fixed charge coverageratio to be at no time less than 1.50 to 1.00, (d) require our minimum interestcoverage ratio to be at no time less than 1.75 to 1.00 under the Wachoviafacility, (e) require us to maintain minimum tangible net worth of not lessthan (i) $129,750, plus (ii) 75% of the net proceeds of our subsequent equityissuances following our initial public offering under the Goldman facility andnot less than (i) $400,000, plus (ii) 75% of the proceeds of our subsequentequity issuances following the date of the October 2006 amendment under theWachovia facility and (f) restrict the maximum amount of our totalindebtedness.  The covenants alsorestrict us from making distributions in excess of a maximum of 100% of our FFO(as defined therein) under the Wachovia facility, except that we may in anycase pay distributions necessary to maintain our REIT status.  Anevent of default can be triggered on our repurchase facilities if, among otherthings, GKK Manager LLC is terminated as our Manager.  As of March 31, 2007 and December 31, 2006,we were in compliance with all such covenants.

**Unsecured RevolvingCredit Facility**

In May 2006, weclosed on a $100,000 senior unsecured revolving credit facility with KeyBankNational Association, or KeyBank, with an initial term of three years and aone-year extension option.  The facilityis supported by a negative pledge of an identified asset base with advancerates that vary from 30% to 90% of the asset value provided under a borrowingbase calculation.  The lender also hasconsent rights to the inclusion of assets in the borrowing basecalculation.  The facility bears interestat 1.90% over one-month LIBOR to the extent our leverage ratio, defined astotal liabilities to total assets, including our proportionate share of theliabilities and assets of our unconsolidated subsidiaries, is less than 80% and2.10% over one-month LIBOR to the extent out leverage ratio is equal to orgreater than 80%. We had accrued interest of $414 and borrowings of $90,000 ata spread to LIBOR of 2.10% as of March 31, 2007, and accrued interest of $75and borrowings of $15,000 at a spread to LIBOR of 2.10% under this facility atDecember 31, 2006.

The terms of theunsecured revolving credit facility include covenants that****(a) limit our maximum total indebtednessto no more than 85% of total assets, (b) require our fixed charge coverageratio to be at no time less than 1.50, (c) require our minimum interestcoverage ratio to be at no time less than 1.70, (d) require us to maintainminimum tangible net worth of not less than $370,000 plus 75% of the netproceeds from equity offerings completed after the closing of the facility and(e) restrict the maximum amount of our total indebtedness.  The covenants also restrict us from makingdistributions in excess of a maximum of 100% of our FFO (as defined by theNational Association of Real Estate Investment Trusts, or NAREIT), except thatwe may in any case pay distributions necessary to maintain our REITstatus.  An event of default can be triggered on our unsecured revolving creditfacility if, among other things, GKK Manager LLC is terminated as ourManager.  As of March 31, 2007 and December31, 2006, we were in compliance with all such covenants.

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

#### **Mortgage Loan**

We have oneconsolidated interest-only mortgage loan in an amount equal to our ownershippercentage in the entity multiplied by the outstanding principal balance of themortgage loan, which loan financed the acquisition of 55 Corporate Drive inJune 2006.  The mortgage has anoutstanding principal balance of $190,000, of which we have consolidated 49.75%or $94,525, with an effective interest rate of 5.75% and a term of ten years.

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**Collateralized Debt Obligations**

During 2005 we issued approximately $1,000,000 of CDOs through twoindirect 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 consistsof $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 ofpreferred shares, which were issued by the 2005 Issuer.  The investment grade notes were issued withfloating rate coupons with a combined weighted average rate of three-monthLIBOR plus 0.49%.  We incurredapproximately $11,957 of costs related to Gramercy Real Estate CDO 2005-1,which are amortized on a level- yield basis over the average life of the CDO.

During 2006 we issued anadditional approximately $1,000,000 of CDOs through two newly-formed indirectsubsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006 Issuer,and Gramercy Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. The CDOconsists of $903,750 of investment grade notes, $38,750 of non-investment gradenotes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and$57,500 of preferred shares, which were issued by the 2006 Issuer.  The investment grade notes were issued withfloating rate coupons with a combined weighted average rate of three-monthLIBOR plus 0.37%. We incurred approximately $11,364 of costs related toGramercy Real Estate CDO 2006-1, which are amortized on a level-yield basisover the average life of the CDO.

We retained allnon-investment grade securities, the preferred shares and the common shares inthe Issuer of each CDO.  The Issuer ineach CDO holds assets, consisting primarily of whole loans, subordinateinterests in whole loans, mezzanine loans and preferred equity investments,which serve as collateral for the CDO. Each CDO may be replenished, pursuant to certain rating agencyguidelines relating to credit quality and diversification, with substitutecollateral for loans that are repaid during the first five years of the CDO.Thereafter, the CDO securities will be retired in sequential order fromsenior-most to junior-most as loans are repaid. The financial statements of the Issuer of each CDO are consolidated inour financial statements. The investment grade notes are treated as a securedfinancing, and are non-recourse to us. Proceeds from the sale of the investmentgrade notes issued in each CDO were used to repay substantially all outstandingdebt under our repurchase agreements and to fund additional investments.

**Junior Subordinated Debentures**

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

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

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

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

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**Contractual Obligations**

Combined aggregate principal maturities of our CDOs, repurchasefacilities, trust preferred securities, proportionately consolidated mortgagenote related to our TIC interest in 55 Corporate Drive, unsecured revolvingcredit facility and our obligations under our management agreement, outsourcingagreement, CDO collateral management agreement and operating lease as of March31, 2007 are as follows (amounts in thousands):
| ** ** | ** ** | **CDOs**  | ** ** | **Repurchase  Facilities** | ** ** | **Trust  Preferred  Securities** | ** ** | **Mortgage  Note  Payable(1)** | ** ** | **Revolving  Credit  Facility** | ** ** | **Outsourcing  and  Management  Agreements(2)** | ** ** | **CDO  Collateral  Management  Agreements** | ** ** | **Operating  Lease** | ** ** | **Total** | ** ** |
|------------|------------|-----------|------------|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|---------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|----------------------|------------|-----------|------------|
| 2007       |       | $         | —     |                       | $          | —                           |       | $                              | —     |                            | $          | —                                          |       | $                                           | —     |                 | $          | 9,167     |       | $ | 3,214 |   | $ | 193 |   | $ | 12,574 |   |
| 2008       |       | —    |       | —                     |       | —                           |       | —                         |       | —                          |       | 12,208                                          |       | 4,286                                       |       | 261                  |       | 16,755    |       |
| 2009       |       | —    |       | 246,278                    |       | —                           |       | —                         |       | 90,000                          |       | 12,250                                          |       | 4,286                                       |       | 265                  |       | 353,079   |       |
| 2010       |       | —    |       | —                     |       | —                           |       | —                         |       | —                          |       | —                                          |       | 3,351                                       |       | 283                  |       | 3,634     |       |
| 2011       |       | —    |       | —                     |       | —                           |       | —                         |       | —                          |       | —                                          |       | 1,469                                       |       | 297                  |       | 1,766     |       |
| Thereafter |       | 1,714,250 |       | —                     |       | 150,000                          |       | 94,525                         |       | —                          |       | —                                          |       | —                                      |       | 1,054                |       | 1,959,829 |       |
| Total      |       | $         | 1,714,250  |                       | $          | 246,278                          |       | $                              | 150,000    |                            | $          | 94,525                                          |       | $                                           | 90,000     |                 | $          | 33,625    |       | $ | 16,606 |   | $ | 2,353 |   | $ | 2,347,637 |   |

 

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

(2)          Management fee is calculated as 1.75% ofour gross stockholders equity (as defined in the amended and restated managementagreement) on March 31, 2007, inclusive of the trust preferred securitiesissued on May 20, 2005, August 9, 2005 and January 27, 2006.

**Off-Balance-SheetArrangements**

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

**Dividends**

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

**RelatedParty Transactions (Amounts in thousands)**

In connection with our initial public offering, we entered into amanagement agreement with our Manager, which was subsequently amended andrestated in April 2006.  The amended andrestated management agreement provides for a term through December 2009 withautomatic one-year extension options and is subject to certain terminationrights.  We pay our Manager an annualmanagement fee equal to 1.75% of our gross stockholders equity (as defined inthe amended and restated management agreement) inclusive of our trust preferredsecurities.  We incurred expense to ourManager under this agreement of an aggregate of $2,667 and $2,236 for the threemonths ended March 31, 2007 and 2006, respectively.

To provide an incentive to enhance the value of our common stock, theholders of the Class B limited partner interests of our Operating Partnershipare entitled to an incentive return equal to 25% of the amount by which FFOplus certain accounting gains and losses (as defined in the amended andrestated partnership agreement of our Operating Partnership) exceed the productof our weighted average stockholders equity (as defined in the amended andrestated partnership agreement of our Operating Partnership) multiplied by 9.5%(divided by 4 to adjust for quarterly calculations).  We will record any distributions on the ClassB limited partner interests as an incentive distribution expense in the periodwhen earned and when payments of such amounts have become probable andreasonably estimable in accordance with the partnership agreement.  We incurred $2,817 and $1,193 with respect tosuch Class B limited partner interests for the three months ended March 31,2007 and 2006.

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** **

We are obligated to reimburse our Manager for its costs incurred underan asset servicing agreement between our Manager and an affiliate of SL GreenOperating Partnership, L.P. and a separate outsourcing agreement between ourManager and SL Green Operating Partnership, L.P.  The asset servicing agreement, which wasamended and restated in April 2006, provides for an annual fee payable to SLGreen Operating Partnership, L.P. by us of 0.05% of the book value of allcredit tenant lease assets and non-investment grade bonds and 0.15% of the bookvalue of all other assets.  The assetservicing fee is reduced by SL Green Operating Partnership, L.P. for fees paiddirectly to outside servicers by us.  Theoutsourcing agreement currently provides for an annual fee payable by us, whichfee is currently $1,326 per year, increasing 3% annually over the prior year onthe anniversary date of the outsourcing agreement in August of each year.  For the three months ended March 31, 2007 and2006, we realized expense of $332 and $322, respectively, to our Manager underthe outsourcing agreement.  For the threemonths ended March 31, 2007 and 2006, we realized expense of $769 and $460, respectively,to our Manager under the asset servicing agreement.

In connection withthe closing of our first CDO in July 2005, the Issuer, Gramercy Real Estate CDO2005-1 Ltd., entered into a collateral management agreement with our Manager.Pursuant to the collateral management agreement, our Manager has agreed toprovide certain advisory and administrative services in relation to thecollateral debt securities and other eligible investments securing the CDOnotes.  The collateral managementagreement provides for a senior collateral management fee, payable quarterly inaccordance with the priority of payments as set forth in the indenture, equalto 0.15% per annum of the net outstanding portfolio balance, and a subordinatecollateral management fee, payable quarterly in accordance with the priority ofpayments as set forth in the indenture, equal to 0.25% per annum of the netoutstanding portfolio balance.  Netoutstanding portfolio balance is the sum of the (i) aggregate principal balanceof the collateral debt securities, excluding defaulted securities, (ii)aggregate principal balance of all principal proceeds held as cash and eligibleinvestments in certain accounts, and (iii) with respect to the defaultedsecurities, the calculation amount of such defaulted securities. Ascompensation for the performance of its obligations as collateral manager underthe first CDO, our Board of Directors has allocated to our Manager thesubordinate collateral management fee paid on securities not held by us.  At March 31, 2007 and December 31, 2006we owned all of the non-investment grade bonds, preferred equity and equity inboth CDOs.  The senior collateral management fee andbalance of the subordinate collateral management fee is allocated to us.  For the three months ended March 31, 2007 and2006, we realized expense of $507 and $500, respectively, to our Manager undersuch collateral management agreement.

Collateral managerfees paid on our CDO that closed in August 2006 are governed by the amended andrestated management agreement as a “transitional managed” CDO, as defined inthe amended and restated management agreement, consisting primarily of debtinvestments secured by non-stabilized real estate.  The amended and restated management agreementprovides that in connection with formations of collateralized debt obligationsor other securitization vehicles after the execution of the amended andrestated management agreement, if a collateral manager is retained, our Manageror an affiliate will be the collateral manager and will receive the followingfees:  (i) 0.25% per annum of the book value of the assets owned for “transitionalmanaged” CDOs, (ii) 0.15% per annum of the book value of the assets ownedfor “non-transitional managed” CDOs, (iii) 0.10% per annum of the book value ofthe assets owned for static CDOs that own primarily non-investment grade bonds,and (iv) 0.05% per annum of the book value of the assets owned for static CDOsthat own primarily investment grade bonds; limited in each instance by the feesthat are paid to the collateral manager. The balance of the fees paid by theCDOs for collateral management services are paid to us.  For the three months ended March 31, 2007 we realized expense of $565to our Manager under this agreement.

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

**On June 7, 2006 we closed on theacquisition of a 49.75% TIC interest in 55 Corporate Drive, located inBridgewater, New Jersey with a 0.25% interest to be acquired in thefuture.  The remaining 50% of theproperty is owned as a TIC interest by an affiliate of SL Green OperatingPartnership, L.P..  The property iscomprised of three buildings totaling approximately six hundred and seventythousand square feet which is 100% net leased to an entity whose obligationsare guaranteed by Sanofi-Aventis Group through April 2023. The transaction wasvalued at $236,000 and was financed with a $190,000, 10-year, fixed-rate firstmortgage loan.**

Commencing May 1, 2005 we are party to a lease agreementwith SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporateoffices at 420 Lexington Avenue, New York, New York.  The lease is for approximately five thousandsquare feet with an option to lease an additional approximately two thousandsquare feet and carries a term of ten years with rents on the entire seven 

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thousand square feet of approximately $249 per annum foryear one rising to $315 per annum in year ten. For the three months ended March 31, 2007 and 2006, we paid $63 and $62under this lease, respectively.

**BrightStar Couriers LLC, or Bright Star, provides messenger services to us.  Bright Star is owned by Gary Green, a son ofStephen L. Green, our Chairman.  Theaggregate amount of fees paid by us for such services for the three monthsended March 31, 2007 and 2006, was $1 and less than $1, respectively.**

**On July14, 2005, we closed on the purchase from an SL Green affiliate of a $40,000mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained an interest-onlyparticipation.  We have determined thatthe yield on our mezzanine loan after giving effect to the interest-onlyparticipation retained by the seller is at market.  The mezzanine loan is secured by the equityinterests in an office property in New York, New York.**

**OnFebruary 27, 2006, we closed on the purchase of a $90,000 whole loan, whichbears interest at three month LIBOR plus 2.15%, to a joint venture in which SLGreen is an equity holder.  The loan issecured by 55 Corporate Drive in Bridgewater, New Jersey.  The loan was repaid in full in June 2006 withthe proceeds from new mortgage financing obtained in connection with the saleof the property, 49.75% of which is now owned by us through a TIC structure.**

**On March17, 2006, we closed on the purchase of a $25,000 mezzanine loan, which bearsinterest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green isan equity holder.  The mezzanine loan wasrepaid in full on May 9, 2006, when we originated a $90,287 whole loan, whichbears interest at one-month LIBOR plus 2.75%, to the joint venture.  The whole loan loan is secured by office andindustrial properties in northern New Jersey and has a book value of $90,131and $90,049 as of March 31, 2007 and December 31, 2006, respectively.**

**On August1, 2006, we acquired from a financial institution a 50% pari-passu interest ina $65,000 preferred equity investment secured by an office property in NewYork, New York.  An affiliate of SL Greensimultaneously acquired and owns the other 50% pari-passu interest. Theinvestment bears interest at a blended fixed rate of 10.52%.**

**OnDecember 20, 2006, we acquired from a financial institution a pari-passuinterest of $125,000 in a $200,000 mezzanine loan, which bears interest at6.384% and is secured by a multi-family portfolio in New York, New York.  An affiliate of SL Green simultaneouslyacquired the remaining $75,000 pari-passu interest in the mezzanine loan.**

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

**OnJanuary 10, 2007, we originated two mezzanine loans totaling $200,000.  The $150,000 loan is secured by a pledge of cashflow distributions and partial equity interests in a portfolio of multi-familyproperties and currently bears interest at one-month LIBOR plus 6.00%.  The $50,000 loan was initially secured by apledge of cash flow distributions and partial equity interests in an officeproperty.  On March 8, 2007 the $50,000loan was increased by $31,000 when the existing mortgage loan on the propertywas defeased, upon which event our loan became secured by a first mortgage lienon the property and was reclassified as a whole loan.  The whole loan currently bears interest atone-month LIBOR plus 6.00% for the initial funding and one-month LIBOR plus1.00% for the subsequent funding.  Atclosing, an affiliate of SL Green acquired from us and currently holds a 15.15%pari-passu interest in the mezzanine loan and the whole loan.  As of March 31, 2007, our interest in themezzanine loan had a carrying value of $127,038 and our interest in the wholeloan had a carrying value of $68,364.**

**On March20, 2007, we closed on the acquisition of a $62,500 pari-passu interest in onetranche of a multiple-level mezzanine structure secured primarily by pledges ofequity and rights to cash distributions, which will be used to fund theacquisition of a large office portfolio. The investment bears interest at one-month LIBOR plus 2.85%.  At closing, an affiliate of SL Greensimultaneously acquired a $62,500 pari-passu interest in the same tranche ofthe mezzanine structure.  After givingeffect to principal repayments, our investment had a carrying value of $60,360as of March 31, 2007. The investment was repaid in full in May 2007.**

**Fundsfrom Operations**

We present FFO because we consider it an important supplemental measureof our operating performance and believe that it is frequently used bysecurities analysts, investors and other interested parties in the evaluationof REITS.  We also use FFO for thecalculation of the incentive fee payable to the holders of Class B limitedpartner interests in our Operating Partnership and as one of several criteriato determine performance-based incentive compensation for members of our seniormanagement, which may be payable in cash or equity awards.  The revised White Paper on FFO approved bythe Board of Governors of the National Association of Real Estate InvestmentTrusts, or NAREIT, in April 2002 defines FFO as net income (loss) (computed inaccordance with GAAP), 

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excluding gains (or losses) from items which are not a recurring partof our business, such as debt restructurings, and sales of properties, plusreal estate-related depreciation and amortization and after adjustments forunconsolidated partnerships and joint ventures. We consider gainsand losses on the sales of debt investments and real estate investmentsincluding tenancy-in-common investments to be a normal part of our recurringoperations and therefore include such gains and losses when arriving atFFO.  FFO does not represent cashgenerated from operating activities in accordance with GAAP and should not beconsidered as an alternative to net income (determined in accordance withGAAP), as an indication of our financial performance, or to cash flow fromoperating activities (determined in accordance with GAAP) as a measure of ourliquidity, nor is it entirely indicative of funds available to fund our cashneeds, including our ability to make cash distributions.  Our calculation of FFO may be different fromthe calculation used by other companies and, therefore, comparability may belimited.

FFOfor the three months ended March 31, 2007 and 2006 are as follows (amounts inthousands):

|                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Net  income available to common stockholders** |       | $                                                | 17,049     |   | $ | 10,554 |   |
| Add:                                             |       |                                             |       |   |   |
| Depreciation and amortization                    |       | 2,419                                            |       | 1,422 |   |
| FFO adjustment for unconsolidated joint ventures |       | 1,947                                            |       | 1,879 |   |
| Less:                                            |       |                                             |       |   |   |
| Non real estate depreciation and amortization    |       | (1,836                                           | )          | (1,184 | ) |
| **Funds  from operations**                       |       | $                                                | 19,579     |   | $ | 12,671 |   |
| ** **                                       |       |                                             |       |   |   |
| **Funds  from operations per share—basic**  |       | $                                                | 0.75       |   | $ | 0.55 |   |
| **Funds from operations per share—diluted** |       | $                                                | 0.71       |   | $ | 0.53 |   |

 

**Cautionary Note RegardingForward-Looking Information**

This report contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, or the Act, and Section 21E of the Securities Exchange Act of 1934, asamended, or the Exchange Act.  You canidentify forward-looking statements by the use of forward-looking expressionssuch as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,”“intend,” “plan,” “project,” “continue,” or any negative or other variations onsuch expressions.  Forward-lookingstatements include information concerning possible or assumed future results ofour operations, including any forecasts, projections, plans and objectives forfuture operations.  Although we believethat our plans, intentions and expectations as reflected in or suggested bythose forward-looking statements are reasonable, we can give no assurance thatthe 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-lookingstatements we make in this report.  Theserisks, uncertainties and contingencies include, but are not limited to, thefollowing:

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

·                  economicconditions generally and in the commercial finance and real estate marketsspecifically;

·                  the performanceand financial condition of borrowers and corporate customers;

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

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

·                  availability ofqualified personnel;

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

·                  the adequacy ofour cash reserves and working capital;

·                  unanticipatedincreases in financing and other costs, including a rise in interest rates;

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

·                  risks ofstructured finance investments;

·                  GKK Manager LLCremaining as our Manager;

·                  environmentaland/or safety requirements;

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

·                  competition withother companies;

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

·                  changes ingovernmental regulations, tax rates and similar matters;

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

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

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

The risks included here are not exhaustive.  Other sections of this report may includeadditional factors that could adversely affect our business and financialperformance.  Moreover, we operate in avery competitive and rapidly changing environment.  New risk factors emerge from time to time andit is not possible for management to predict all such risk factors, nor can itassess the impact of all such risk factors on our business or the extent towhich any factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.  Given these risks and uncertainties,investors should not place undue reliance on forward-looking statements as aprediction of actual results.

**RecentlyIssued Accounting Pronouncements**

**In February 2006, the FASB issuedStatement of Financial Accounting Standard No. 155, or SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments — an amendment of FASB Statements No.133 and 140.” SFAS No. 155 (1) permits fair value re-measurement for any hybridfinancial instrument that contains an embedded derivative that would otherwiserequire bifurcation, (2) clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of FASB Statement No.133, (3) establishes a requirement to evaluate interests in securitizedfinancial assets to identify interests that are freestanding derivatives orthat are hybrid financial instruments that contain an embedded derivativerequiring bifurcation, (4) clarifies that concentrations of credit risk in theform of subordination are not embedded derivatives, and (5) amends FASBStatement No. 140 to eliminate the prohibition on a qualifying special-purposeentity from holding a derivative financial instrument that pertains to abeneficial interest in other than another derivative financial instrument. SFASNo. 155 is effective January 1, 2007 and did not have a material effect on ourfinancial results for the three months ended March 31, 2007.**

**In June of 2006 the FASB issuedFinancial Interpretation No. 48, or FIN 48.  This interpretation clarifiesthe accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FAS 109. This interpretation prescribesa recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. This interpretation was effective January 1, 2007 for the Company.The adoption of FIN 48 did not have a material impact on our financial resultsfor the three months ended March 31, 2007.**

**In September 2006, the Securitiesand Exchange Commission issued Staff Accounting Bulletin No. 108, or SAB 108,which became effective beginning on January 1, 2007. SAB 108 provides guidanceon the consideration of the effects of prior period misstatements inquantifying current year misstatements for the purpose of a materialityassessment. SAB 108 provides for the quantification of the impact of correctingall misstatements, including both the carryover and reversing effects of prioryear misstatements, on the current year financial statements. If a misstatementis material to the current year financial statements, the prior year financialstatements should also be corrected, even though such revision was, andcontinues to be, immaterial to the prior year financial statements. Correctingprior year financial statements for immaterial errors would not requirepreviously filed reports to be amended. Such correction should be made in thecurrent period filings. The implementationof SAB 108 did not have an impact on our financial results for the three monthsended March 31, 2007.**

**In September 2006, the FASBissued Statement No. 157, Fair Value Measurements, or SFAS 157. SFAS No. 157provides guidance for using fair value to measure assets and liabilities. Thisstatement clarifies the principle that fair value should be based on theassumptions that market participants would use when pricing the asset orliability. SFAS No. 157 establishes a fair value hierarchy, giving the highestpriority to quoted prices in active markets and the lowest priority tounobservable data. SFAS No. 157 applies whenever other standards require assetsor liabilities to be measured at fair value. This statement is effective infiscal years beginning after November 15, 2007. We believe that the adoption ofthis standard on January 1, 2008 will not have a material effect on financialresults.**

**In February 2007, the FASBissued Statement No. 159, or SFAS 159, ‘‘The Fair Value Option for FinancialAssets and Financial**

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**Liabilities.’’ SFAS 159 permitsentities to choose to measure many financial instruments, and certain otheritems, at fair value. SFAS 159 also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choosedifferent measurement attributes for similar types of assets and liabilities.SFAS 159 applies to reporting periods beginning afterNovember 15, 2007.**We are currently evaluating the effect, if any, thatthis pronouncement will have on our future financial results.

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

**Market Risk**

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

**Real Estate Risk**

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

**Interest Rate Risk**

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

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

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

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**The aggregate carrying values, allocated by producttype and weighted average coupons of our loans and other lending investments asof March 31, 2007 and December 31, 2006 were as follows:**
| ** **                                           | ** ** | **Carrying Value (1)   ($ in thousands)** | ** ** | **Allocation by   Investment Type** | ** ** | **Fixed Rate:  Average Yield** | ** ** | **Floating Rate:  Average Spread over   LIBOR (2)** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                           | ** ** | **2006**                                           | ** ** | **2007**                                 | ** ** | **2006**                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Whole loans,  floating rate                          |       | $                                                                  | 1,407,592  |                                               | $          | 1,372,316                                |       | 57                                                                           | %          | 63 | % | — |   | — |   | 337 bps |   | 327 bps |   |
| Whole loans,  fixed rate                             |       | 134,082                                                            |       | 42,376                                             |       | 5                                        | %          | 2                                                                            | %          | 9.08 | % | 11.69 | % | — |   | — |   |
| Subordinate  interests in whole loans, floating rate |       | 174,314                                                            |       | 236,308                                            |       | 7                                        | %          | 11                                                                           | %          | — |   | — |   | 421 bps |   | 445 bps |   |
| Subordinate  interests in whole loans, fixed rate    |       | 49,042                                                             |       | 48,769                                             |       | 2                                        | %          | 2                                                                            | %          | 8.21 | % | 8.54 | % | — |   | — |   |
| Mezzanine loans,  floating rate                      |       | 430,809                                                            |       | 226,675                                            |       | 18                                       | %          | 10                                                                           | %          | — |   | — |   | 577 bps |   | 665 bps |   |
| Mezzanine loans,  fixed rate                         |       | 216,868                                                            |       | 216,216                                            |       | 9                                        | %          | 10                                                                           | %          | 9.80 | % | 9.92 | % | — |   | — |   |
| Preferred  equity, fixed rate                        |       | 44,272                                                             |       | 44,224                                             |       | 2                                        | %          | 2                                                                            | %          | 10.57 | % | 10.68 | % | — |   | — |   |
| Total / Average                                      |       | $                                                                  | 2,456,979  |                                               | $          | 2,186,884                                |       | 100                                                                          | %          | 100 | % | 9.48 | % | 10.04 | % | 396 bps |   | 384 bps |   |

** **

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

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

As of March 31,2007, our debt investment portfolio had the following maturity characteristics:

| Year of Maturity     | ** ** | **Number of   Investments   Maturing** | ** ** | **Current   Carrying Value   (In thousands)** | ** ** | **% of Total** | ** ** |
|--------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------|------------|
| 2007                           |       | 17                                                    |       | 408,781                                                           |       | 17                       | %          |
| 2008                           |       | 23                                                    |       | 978,891                                                           |       | 40                       | %          |
| 2009                           |       | 22                                                    |       | 636,497                                                           |       | 26                       | %          |
| 2010                           |       | 6                                                     |       | 81,863                                                            |       | 3                        | %          |
| 2011                           |       | 2                                                     |       | 56,930                                                            |       | 2                        | %          |
| Thereafter                     |       | 11                                                    |       | 294,017                                                           |       | 12                       | %          |
| Total                          |       | 81                                                    |       | 2,456,979                                                         |       | 100                      | %          |
|                           |       |                                                  |       |                                                              |       |                     |       |
| Weighted average  maturity (1) |       |                                                  |       | 2.3 years                                                         |       |                     |       |

 

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(1)          The calculation of weighted average maturity is based upon the remaininginitial term of the investment and does not include option or extension periodsor the ability to prepay the investment after a negotiated lock-out period,which may be available to the borrower.

46

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Combined aggregateprincipal maturities of our consolidated CDOs, repurchase facilities, trustpreferred securities, proportionately consolidated mortgage note payablerelated to our TIC interest in 55 Corporate Drive, and unsecured revolvingcredit facility as of March 31, 2007 are as follows:

|            | ** ** | **CDOs**  | ** ** | **Repurchase   Facilities** | ** ** | **Trust   Preferred   Securities** | ** ** | **Mortgage   Note   Payable** | ** ** | **Unsecured   Revolving  Credit  Facility** | ** ** | **Total** | ** ** |
|------------|------------|-----------|------------|----------------------------------|------------|----------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------|------------|-----------|------------|
| 2007       |       | $         | —     |                             | $          | —                                       |       | $                                       | —     |                                             | $          | —    |       | $ | — |   | $ | — |   |
| 2008       |       | —    |       | —                           |       | —                                       |       | —                                  |       | —                                           |       | —    |       |
| 2009       |       | —    |       | 246,278                          |       | —                                       |       | —                                  |       | 90,000                                           |       | 336,278   |       |
| 2010       |       | —    |       | —                           |       | —                                       |       | —                                  |       | —                                           |       | —    |       |
| 2011       |       | —    |       | —                           |       | —                                       |       | —                                  |       | —                                           |       | —    |       |
| Thereafter |       | 1,714,250 |       | —                           |       | 150,000                                      |       | 94,525                                  | (1)        |                                             |       | 1,958,775 |       |
| Total      |       | $         | 1,714,250  |                             | $          | 246,278                                      |       | $                                       | 150,000    |                                             | $          | 94,525    |       | $ | 90,000 |   | $ | 2,295,053 |   |

 

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

The following table summarizes the notional and fairvalue of our derivative financial instrument at March 31, 2007.  The notional value is an indication of theextent of our involvement in this instrument at that time, but does notrepresent exposure to credit, interest rate or market risks:
| ** **          | ** ** | **Benchmark Rate**                       | ** ** | **Notional  Value** | ** ** | **Strike  Rate** | ** ** | **Effective  Date** | ** ** | **Expiration  Date** | ** ** | **Fair  Value** | ** ** |
|---------------------|------------|-----------------------------------------------|------------|---------------------|------------|------------------|------------|---------------------|------------|----------------------|------------|-----------------|------------|
| Interest Rate  Swap |       | 3  month LIBOR                                |       | $                   | 12,000     |             | 9.850      | %                   | 8/2006     |                 | 8/2011     |            | $          | (144 | ) |
| Basis Swap          |       | 1  month PRIME                                |       | 9,363               |       | +722             | bps        | 8/2006              |       | 12/2007              |       | (2              | )          |
| Interest Rate  Swap |       | 3  month LIBOR                                |       | 39,551              |       | 4.420            | %          | 7/2005              |       | 2/2014               |       | 1,106           |       |
| Interest Rate  Swap |       | 1  month LIBOR                                |       | 31,686              |       | 3.855            | %          | 7/2005              |       | 11/2009              |       | 761             |       |
| Interest Rate  Swap |       | 1  month LIBOR                                |       | 3,465               |       | 4.280            | %          | 7/2005              |       | 12/2009              |       | 47              |       |
| Interest Rate Cap   |       | 3  month LIBOR                                |       | 23,713              |       | 5.700            | %          | 11/2005             |       | 12/2007              |       | 1               |       |
| Interest Rate  Swap |       | 1  month LIBOR                                |       | 3,960               |       | 4.959            | %          | 12/2005             |       | 12/2015              |       | 7               |       |
| Interest Rate  Swap |       | 1  month LIBOR                                |       | 6,316               |       | 4.760            | %          | 1/2006              |       | 3/2015               |       | 75              |       |
| Interest Rate  Swap |       | 3  month LIBOR                                |       | 3,465               |       | 5.178            | %          | 4/2006              |       | 3/2010               |       | (32             | )          |
| Interest Rate Cap   |       | 3  month LIBOR                                |       | 20,000              |       | 6.000            | %          | 4/2006              |       | 4/2007               |       | —          |       |
| Interest Rate  Swap |       | 3  month LIBOR                                |       | 24,891              |       | 5.445            | %          | 8/2006              |       | 7/2016               |       | (762            | )          |
| Interest Rate  Swap |       | 1  month LIBOR                                |       | 36,500              |       | 4.837            | %          | 12/2006             |       | 11/2009              |       | (14             | )          |
| Interest Rate  Swap |       | 1  month LIBOR                                |       | 42,718              |       | 4.990            | %          | 1/2007              |       | 1/2017               |       | 95              |       |
| Interest Rate  Swap |       | 1  month LIBOR                                |       | 64,076              |       | 4.990            | %          | 1/2007              |       | 1/2017               |       | 146             |       |
| Interest Rate  Swap |       | 1  month LIBOR                                |       | 39,600              |       | 5.025            | %          | 3/2007              |       | 3/2017               |       | (21             | )          |
| Interest Rate  Swap |       | 1  month LIBOR                                |       | 29,700              |       | 5.025            | %          | 3/2007              |       | 3/2017               |       | (15             | )          |
| Total Return Swap   |       | Lehman  CMBS  Investment Grade  8.5+ Yr Index |       | 36,422              |       | + 22             | bps        | 3/2007              |       | 3/2008               |       | —          |       |
| Total Return Swap   |       | Lehman  CMBS  Investment Grade  8.5+ Yr Index |       | 27,317              |       | +22              | bps        | 3/2007              |       | 3/2008               |       | —          |       |
| Interest Rate  Swap |       | 1  month LIBOR                                |       | 22,275              |       | 5.078            | %          | 4/2007              |       | 4/2017               |       | (104            | )          |
| Total               |       |                                          |       | $                   | 477,018    |             |       |                |       |                 |       |            | $          | 1,144 |   |

 

47

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**ITEM 4. Controls and Procedures**

**Evaluation of Disclosure Controls and Procedures**

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand 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, asappropriate, to allow timely decisions regarding required disclosure basedclosely on the definition of “disclosure controls and procedures” in Rule13a-15(e).  Notwithstanding theforegoing, a control system, no matter how well designed and operated, canprovide only reasonable, not absolute, assurance that it will detect or uncoverfailures within the Company to disclose material information otherwise requiredto be set forth in the Company’s periodic reports.  Also, we may have investments in certainunconsolidated entities.  As we do notcontrol these entities, our disclosure controls and procedures with respect tosuch entities are necessarily substantially more limited than those we maintainwith respect to our consolidated subsidiaries.

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

**Changes in Internal Controls over FinancialReporting**

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

48

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** **
| **PART II**                                                                                                                                                                                                     | ** ** | **OTHER INFORMATION**                                            |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|
| ** **                                                                                                                                                                                                      | ** ** | ** **                                                       |
| **ITEM 1.**                                                                                                                                                                                                     | ** ** | **LEGAL PROCEEDINGS**                                            |
| ** **                                                                                                                                                                                                      | ** ** | ** **                                                       |
| We incorporate by reference the information required  by this Item 1 of Part II to the information regarding litigation in Note 16  to the Consolidated Financial Statements contained in Part I of this report |
|                                                                                                                                                                                                            |
| **ITEM 1A.**                                                                                                                                                                                                    | ** ** | **RISK FACTORS**                                                 |
| ** **                                                                                                                                                                                                      | ** ** | ** **                                                       |
| There have been no material changes to the risk  factors disclosed in Item 1A of Part I in our Annual Report on Form 10-K/A  for the year ended December 31, 2006.                                              |
|                                                                                                                                                                                                            |
| **ITEM 2.**                                                                                                                                                                                                     | ** ** | **UNREGISTERED SALES OF EQUITY SECURITIES AND USE  OF PROCEEDS** |
| ** **                                                                                                                                                                                                      | ** ** | ** **                                                       |
| None                                                                                                                                                                                                            |       |                                                             |
|                                                                                                                                                                                                            |       |                                                             |
| **ITEM 3.**                                                                                                                                                                                                     | ** ** | **DEFAULTS UPON SENIOR SECURITIES**                              |
| ** **                                                                                                                                                                                                      | ** ** | ** **                                                       |
| None                                                                                                                                                                                                            |       |                                                             |
|                                                                                                                                                                                                            |       |                                                             |
| **ITEM 4.**                                                                                                                                                                                                     | ** ** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**         |
| ** **                                                                                                                                                                                                      | ** ** | ** **                                                       |
| None                                                                                                                                                                                                            |       |                                                             |
|                                                                                                                                                                                                            |       |                                                             |
| **ITEM 5.**                                                                                                                                                                                                     | ** ** | **OTHER INFORMATION**                                            |
| ** **                                                                                                                                                                                                      | ** ** | ** **                                                       |
| None                                                                                                                                                                                                            |       |                                                             |

 

49

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**ITEM 6.  EXHIBITS**

(a)          Exhibits:
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                        |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 3.1*        |       | Articles of Incorporation of the Company  (incorporated by reference to Exhibit 3.1 of the Company’s Amendment No. 5 to  its Registration Statement on Form S-11/A (No. 333-114673), which was filed  with the Commission on July 26, 2004 and declared effective by the Commission  on July 27, 2004)                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 3.2*        |       | Articles Supplementary designating the Company’s  8.125% Series A Cumulative Redeemable Preferred Stock, liquidation preference  $25.00 per share, par value $.001 per share (incorporated by reference to  Exhibit 3.1 of the Company’s Form 8-K (No. 001-32248) which was filed with  the Commission on April 18, 2007).                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 3.3*        |       | Bylaws of the Company (incorporated by reference to  Exhibit 3.2 of the Company’s Amendment No. 2 to its Registration Statement on  Form S-11/A (No. 333-114673), which was filed with the Commission on June 23,  2004 and declared effective by the Commission on July 27, 2004)                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 4.1*        |       | Form of specimen stock certificate evidencing the  common stock of the Company, par value $.001 per share (incorporated by  reference to Exhibit 4.1 of the Company’s Form 8-K (No. 001-32248) which was filed  with the Commission on April 18, 2007).                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 4.2*        |       | Form of stock certificate evidencing the 8.125%  Series A Cumulative Redeemable Preferred Stock of the Company, liquidation  preference $25.00 per share, par value $.001 per share (incorporated by reference  to Exhibit 4.2 of the Company’s Form 8-K (No. 001-32248) which was filed with  the Commission on April 18, 2007).                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1*       |       | Underwriting Agreement, dated April 13, 2007, by and  among Gramercy Capital Corp., GKK Capital LP, GKK Manager LLC and Wachovia  Capital Markets, LLC, as representative of the several underwriters named  therein (incorporated by reference to Exhibit 1.1 of the Company’s Form 8-K  (No. 001-32248) which was filed with the Commission on April 18, 2007). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2*       |       | First Amendment to the Third Amended and Restated  Agreement of Limited Partnership of GKK Capital Corp (incorporated by  reference to Exhibit 3.2 of the Company’s Form 8-K (No. 001-32248) which was  filed with the Commission on April 18, 2007).                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1+       |       | Certification by the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2+       |       | Certification by the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 32.1+       |       | Certification by the Chief Executive Officer pursuant  to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                   |
| 32.2+       |       | Certification by the Chief Financial Officer  pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                |

----

*                    Incorporated by reference.

+                    Filed herewith.

50

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**SIGNATURES**

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.
|                                     | GRAMERCY CAPITAL CORP. |
|-------------------------------------|------------------------|
|                                |                   |
|                                |                   |
|                                |                   |
|                                |                   |
|                                | By:                    |     /s/ Robert R. Foley |   |
|                                |                   | Robert R. Foley |   |
|                                |                   | Chief Financial Officer |   |
|                                |                   |
|                                |                   |
|                                |                   |
| Date:  May 10,  2007 |                   |

 

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