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

FORM 10-K

|ý                                                                   | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2007                        
|or                                                                 
|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 No. 1-32248

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

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

420 Lexington Avenue, New York, NY 10170(Address of principal executive offices - zip code)

(212) 297-1000(Registrant's telephone number, including area code)

Securities
registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $0.001 Par Value

New York Stock ExchangeSeries A Cumulative Redeemable Preferred Stock, $0.001 Par Value

New York Stock Exchange


Securities
registered pursuant to section 12(g) of the Act:None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o

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

|Large accelerated filer o |  | Accelerated filer ý |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

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

As of March 17, 2008, there were 34,853,911 shares of the Registrant's common stock outstanding. The aggregate market value of common stock held by
non-affiliates of the registrant (19,654,138 shares) at June 30, 2007 was $541,274,961. The aggregate market value was calculated by using the closing price of the common stock as
of that date on the New York Stock Exchange, which was $27.54 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for its 2008 Annual Stockholders' Meeting expected to be filed within 120 days after the close of the
registrant's fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.



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GRAMERCY CAPITAL CORP.  FORM 10-K  TABLE OF CONTENTS

10-K PART AND ITEM NO.

|PART I   |  |                                                                                               
|-------- |  | ----------------------------------------------------------------------------------------------
|1.       |  | Business                                                                                      
|1A.      |  | Risk Factors                                                                                  
|1B.      |  | Unresolved Staff Comments                                                                     
|2.       |  | Properties                                                                                    
|3.       |  | Legal Proceedings                                                                             
|4.       |  | Submission of Matters to a Vote of Security Holders                                           
|PART II  |  |                                                                                               
|5.       |  | Market for Registrant's Common Equity and Related Stockholders Matters                        
|6.       |  | Selected Financial Data                                                                       
|7.       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations         
|7A.      |  | Quantitative and Qualitative Disclosures about Market Risk                                    
|8.       |  | Financial Statements and Supplemental Data                                                    
|9.       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          
|9A.      |  | Controls and Procedures                                                                       
|9B.      |  | Other Information                                                                             
|PART III |  |                                                                                               
|10.      |  | Directors, Executive Officers and Corporate Governance of the Resgistrant                     
|11.      |  | Executive Compensation                                                                        
|12.      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|13.      |  | Certain Relationships and Related Transactions and Director Independence                      
|14.      |  | Principal Accounting Fees and Services                                                        
|PART IV  |  |                                                                                               
|15.      |  | Exhibits, Financial Statements and Schedules                                                  
|         |  | SIGNATURES                                                                                    

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PART I

ITEM 1.    BUSINESS

General

Gramercy Capital Corp. is a commercial real estate specialty finance company that focuses on the direct origination and acquisition of whole loans, subordinate
interests in whole loans, mezzanine loans, bridge loans, preferred equity, and net lease investments involving commercial properties throughout the United States. We have also established a real
estate securities business that focuses on the acquisition, trading and financing of commercial mortgage backed securities, or CMBS, and other real estate related securities. When evaluating
transactions, we assess our risk-adjusted return and target transactions with yields that seek to provide excess returns for the risks being taken. We have elected to be taxed as a real
estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be subject to federal income taxes to the extent we
distribute our income to our stockholders. We have in the past established, and may establish in the future, taxable REIT subsidiaries, or TRSs, to effect various taxable transactions. Those TRSs
would incur federal, state and local taxes on the taxable income from their activities.

Gramercy
was formed in April 2004 as a Maryland corporation and we completed our initial public offering in August 2004. Substantially all of Gramercy's operations are conducted through
GKK Capital LP, a Delaware limited partnership, or our Operating Partnership. Gramercy, as the sole general partner of, and currently the holder of 100% of the common Class A limited
partner units of our Operating Partnership, has responsibility and discretion in the management and control of our Operating Partnership, and the limited partners of our Operating Partnership, in such
capacity, have no
authority to transact business for, or participate in the management activities of, our Operating Partnership. Accordingly, we consolidate the accounts of our Operating Partnership.

We
are externally managed and advised by GKK Manager LLC, or our Manager, a majority-owned subsidiary of SL Green Realty Corp. (NYSE: SLG), or SL Green. At December 31,
2007, SL Green also owned approximately 22% of the outstanding shares of our common stock.

As
of December 31, 2007, we held loans, other lending investments, and CMBS of approximately $3.4 billion, net of fees, discounts, and unfunded commitments with an average
spread to LIBOR of 397 basis points for our floating rate investments, and an average yield of 7.02% for our fixed rate investments. As of December 31, 2007, we also held interests in three
credit tenant net lease investments, or CTL investments, two interests in joint ventures that own fee positions on properties subject to long-term ground leases and a 100% fee interest in
a property subject to a long-term ground lease.

On
November 2, 2007, we entered into a definitive merger agreement to acquire American Financial Realty Trust (NYSE: AFR), or American Financial, for approximately
$3.5 billion, including the assumption of certain of American Financial's outstanding indebtedness. American Financial is a self-administered, self-managed real estate
investment trust that acquires properties from, and leases properties to, regulated financial institutions, and through its operating partnership and various affiliates, owns and manages its assets
primarily under long-term triple net and bond net leases with banks. The merger agreement provides that we will acquire all of American Financial's common stock for per share consideration
of $5.50 in cash and 0.12096 shares of our common stock. At closing of the merger, American Financial's shareholders will also be entitled to receive (i) the regular quarterly dividend declared
and paid by us in respect of the first quarter of 2008, if any, and (ii) a portion of any special dividend declared by us before closing of the merger. The merger agreement also provides that
if the net proceeds received on the sales of specified properties prior to closing exceed agreed levels, an additional cash payment of half of such excess amount, if any (but no more than $0.25 per
share), will be made at closing to American Financial's shareholders. The sales process is subject to various

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uncertainties,
and no assumption should be made of any such payment. Upon closing of the merger, American Financial's shareholders are expected to own approximately 31% of Gramercy's outstanding
shares.

As
part of the merger we expect to assume approximately $1.20 billion of American Financial's outstanding debt. We have also obtained a commitment letter from Goldman Sachs
Mortgage Company, Citigroup Global Markets Realty Corp. and SL Green, to provide debt financing for the cash component of the consideration in an amount of up to $850.0 million, subject to
certain customary conditions. This commitment will terminate in the event that we do not complete our merger with American Financial on or prior to April 1, 2008. Further, in connection with
the closing of the merger, we also expect to consummate various financings and close on the sale of various individual American
Financial assets currently under contract. However there can be no assurance that any or all of these financing transactions will close.

Our
pending merger with American Financial will combine the existing operating platforms of American Financial with our own, to create an integrated commercial real estate finance and
operating company, and will transform us from primarily a specialty finance company into a $7.6 billion diversified real estate enterprise with complementary business lines consisting of
commercial real estate finance and net lease property investments. Upon closing of the merger, we expect to own approximately 27 million square feet of commercial real estate in 37 states to
add to our current investment portfolio. The acquisition is expected to be completed on or about March 31, 2008, but is subject to customary closing conditions. The stockholders of both
Gramercy and American Financial approved the merger on February 13, 2008.

Our
corporate offices are located in midtown Manhattan at 420 Lexington Avenue, New York, New York 10170. We do not currently have any employees. We may, however, hire employees as a
result of the acquisition of American Financial. Our executive officers are all employed by our Manager or SL Green. We can be contacted at (212) 297-1000. We maintain a website at
www.gramercycapitalcorp.com. On our website, you can obtain, free of charge, a copy of our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
practicable after we file such material electronically with, or furnish it to, the Securities and Exchange Commission, or the SEC. We have also made available on our website our audit committee
charter, compensation committee charter, nominating and corporate governance committee charter, code of business conduct and ethics and corporate governance principles. You can also read and copy
materials we file with the SEC at its Public Reference Room at 100 F Street, NE, Washington, DC 20549 (1-800-SEC-0330). The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding the issuers that file electronically with the SEC.

Unless
the context requires otherwise, all references to "we," "our," and "us" in this annual report means Gramercy Capital Corp., a Maryland corporation, and one or more of its
subsidiaries, including GKK Capital LP, a Delaware limited partnership.

Corporate Structure

Substantially all of our assets are held by, and all of our operations are conducted through, our Operating Partnership. We are the sole general partner and sole
owner of the Class A limited partner interests of our Operating Partnership. At December 31, 2007, the majority of the Class B limited partnership interests were owned by our
Manager and SL Green Operating Partnership, L.P. Interests were also held by certain officers and employees of SL Green, including some of whom are our executive officers, which interests are
subject to performance thresholds. To provide an incentive to enhance the value of our common stock, the holders of the Class B limited partner interests of our

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Operating
Partnership are entitled to an incentive return equal to 25% of the amount by which funds from operations, or FFO, plus certain accounting gains and losses (as defined in the partnership
agreement of our Operating Partnership) exceed the product of our weighted average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5%
(divided by 4 to adjust for quarterly calculations).

As
of December 31, 2007, the majority of the interests in our Manager were held by SL Green Operating Partnership, L.P. Interests in our Manager were also held by certain
of our executive officers and by certain employees of SL Green including some of whom are our executive officers, which interests are subject to performance thresholds. We pay to our Manager a base
management fee equal to one and three-quarters of one percent (1.75%) of our gross stockholders' equity (as defined in the management agreement with our Manager) inclusive of the trust preferred
securities issued in May 2005, August 2005 and January 2006. In addition, we are obligated to reimburse our Manager for its costs incurred under an asset servicing agreement between our Manager and an
affiliate of SL Green Operating Partnership, L.P. and a separate outsource agreement between our Manager and SL Green Operating Partnership, L.P. The asset servicing agreement provides
for an annual fee payable to SL Green Operating Partnership, L.P. by us of 0.05% of the book value of all credit tenant lease assets and non-investment grade bonds, and 0.15% of the
book value of all other assets. The asset servicing fee can be reduced by SL Green Operating Partnership, L.P. for fees paid directly to outside servicers by us. The outsource agreement
currently provides for an annual fee payable by us, which fee is approximately $1.4 million per year, increasing 3% annually over the prior year on the anniversary date of the outsource
agreement in August of each year. Payments under the outsource agreement will increase upon closing of the American Financial merger to reflect higher costs resulting from the increased size and
number of assets of the combined company. The asset servicing and outsource agreements allow us to leverage the experience, resources and relationships SL Green has established.

Our
collateralized debt obligations, or CDOs, were closed in July 2005, August 2006 and August 2007. The CDO that closed in 2005 was issued through two indirect subsidiaries, Gramercy
Real Estate CDO 2005-1 Ltd., or the 2005 Issuer, and Gramercy Real Estate CDO 2005-1 LLC, or the 2005 Co-Issuer. The CDO that closed in 2006 was also
issued through two indirect subsidiaries, Gramercy Real Estate CDO 2006-1 Ltd., or the 2006 Issuer, and Gramercy Real Estate CDO 2006-1 LLC, or the 2006
Co-Issuer. The CDO that closed in 2007 was also issued through two indirect subsidiaries, Gramercy Real Estate CDO 2007-1 LTD., or the 2007 Issuer, and Gramercy
Real Estate CDO 2007-1 LLC, or the 2007 Co-Issuer. The 2005 Issuer, 2006 Issuer, 2007 Issuer, 2005 Co-Issuer, 2006 Co-Issuer, and 2007
Co-Issuer are subsidiaries of our private REITs, Gramercy Investment Trust and Gramercy Investment Trust II. Our Operating Partnership holds all shares of common stock and controls all of
the management and operations of the private REIT's. At December 31, 2007, the private REITs and all subsidiaries of the private REITs were consolidated into our financial results.

In
connection with the closing of our first CDO in July 2005, the 2005 Issuer entered into a collateral management agreement with our Manager. Pursuant to the collateral management
agreement, our Manager has agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The
collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum
of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per
annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted
securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the
calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under the first CDO, our

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Board
of Directors has allocated to our Manager the subordinate collateral management fee paid on securities issued by the CDO but not held by us. At December 31, 2007 and December 31,
2006, we owned all of the non-investment grade bonds, preferred equity and equity in each of our three CDOs. The senior collateral management fee and balance of the subordinate collateral
management fee is allocated to us. For the years ended December 31, 2007, 2006 and 2005, we realized expense of approximately $2.1 million, $2.1 million and $0.9 million,
respectively, to our Manager under such collateral management agreement.

Except
for the 2005 CDO, fees payable in connection with CDOs or other securitization vehicles are governed by the amended and restated management agreement. Pursuant to that agreement,
if a collateral manager is retained as part of the formation of a CDO or other securitization vehicle, our Manager or an affiliate will be the collateral manager and will receive the following fees:
(i) 0.25% per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with us or our Manager, which CDO is
structured to own loans secured by transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a managed non-transitional
CDO that are owned by third-party investors unaffiliated with us or our Manager, which CDOs structured to own loans secured by non-transitional properties, (iii) 0.10% per annum of
the principal amount outstanding of bonds issued by a static CDO that are owned by third party investors unaffiliated with us or our Manager, which CDO is structured to own non-investment
grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with us or our Manager, which CDO
is structured to own investment grade bonds. For the purposes of the management agreement, a "managed transitional" CDO means a CDO that is actively managed, has a reinvestment period and is
structured to own debt collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net operating income growth, and a "managed
non-transitional" CDO means a CDO that is actively
managed, has a reinvestment period and is structured to own debt collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net operating
income growth, and a "managed non-transitional" CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by stabilized
real estate assets that are not expected to experience substantial net operating income growth. Both "managed transitional" and "managed non-transitional" CDOs may at any given time during
the reinvestment period of the respective vehicles invest in and own non-debt collateral (in limited quantity) as defined by the respective indentures. If any fees are paid to the
collateral manager in excess of the fee structure provided for above, such fees are paid to us. For the year ended December 31, 2007 and 2006 we realized expense of approximately
$2.3 million and $0.8 million, respectively, to our Manager under this agreement related to the 2006 CDO. With respect to the CDO which closed in August, 2007, we realized expense of
approximately $0.3 million to our Manager.

Business and Growth Strategies

We invest in a diversified portfolio of real estate loans, including whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, distressed
debt, CMBS, preferred equity, and net lease investments involving commercial properties throughout the United States. We have also established a real estate securities business that focuses on the
acquisition, trading and financing of commercial mortgage backed securities, or CMBS, and other real estate related securities. When evaluating transactions, we assess our risk-adjusted
return and target transactions with yields that seek to provide excess returns for the risks being taken.

We
generate income principally from the spread between the yields on our assets and the cost of our borrowing and hedging activities. We leverage our investments to enhance returns to
stockholders equity. We finance, or may finance in the future, assets through a variety of techniques, including repurchase agreements, secured and unsecured credit facilities, CDOs, unsecured junior
subordinated

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corporate
debt, issuances of CMBS, and other structured financings. In addition, we match fund interest rates with like-kind debt (i.e., fixed-rate assets are financed
with fixed-rate debt, and floating rate assets are financed with floating rate debt), through the use of hedges such as interest rate swaps, caps, or through a combination of these
strategies. This allows us to reduce the impact of changing interest rates on our cash flow and earnings. We actively manage our positions, using our credit, structuring and asset management skills to
enhance returns. We intend to grow our business using prudent levels of debt financing, syndication of loan interests and structured financing when feasible, rather than relying solely on equity
capital, in order to increase earnings per share.

We
attempt to actively manage and maintain the credit quality of our portfolio by using our management team's expertise in structuring and repositioning investments to improve the
quality and yield on managed investments. When investing in higher leverage transactions, we use guidelines and
standards developed and employed by senior management of the Manager and SL Green, including the underwriting of collateral performance and valuation, a review of the creditworthiness of the equity
investors, additional forms of collateral and strategies to effect repayment. If defaults occur, we employ SL Green's asset management skills to mitigate the severity of any losses and seek to
optimize the recovery from assets in the event that we foreclose upon them. SL Green will manage these assets and has the right to purchase properties in metropolitan New York and Washington, D.C.
that we acquire in foreclosure. In other geographic markets, we often use long-standing relationships of senior management or SL Green with local operators or investors to enhance our
ability to underwrite transactions or mitigate defaults when making or managing investments.

We
seek to control the negotiation and structure of the debt transactions in which we invest, which enhances our ability to mitigate our losses, to control the negotiation and drafting
of loan documents that afford us appropriate rights and control over our collateral, and to have the right to control the debt that is senior to our position. We believe that this level of control,
when obtainable, allows us to achieve attractive risk-adjusted returns within a real estate debt capital structure. We generally avoid investments where we cannot secure adequate control
rights, unless we believe the default risk is very low and the transaction involves high-quality sponsors. Our flexibility to invest in all or any part of a debt capital structure enables
us to participate in many transactions and to retain only the investments that meet our investment parameters.

We
believe that our ability to provide a wide range of financing products and our ability to customize financing structures to meet borrowers' needs differentiates us from our
competitors. We can provide real estate financing solutions throughout the entire capital structure from the most senior capital positions through subordinate interests to equity participations. Our
senior management team has substantial experience in responding to unique borrower needs by crafting financial products that are tailored to meet the business plan of a property owner.

We
focus on certain types of investments where we believe we have a competitive advantage and that offer appropriate risk-adjusted returns. For properties that we believe
have stable values or where we have specific asset management capabilities to mitigate losses, we will target higher leverage investments. If we conclude that a property to be financed will have more
volatile values or cash flows under a variety of market conditions, we target a less leveraged investment. In such transactions we may seek a second-loss or more senior position in the
capital structure. We also target the origination of larger financings, including whole loans, to afford us the opportunity to syndicate and securitize our investments, create retained instruments
with above-market returns, and realize gains on the sale of these positions. We originate investments in direct transactions with borrowers, we co-originate with or acquire existing assets
from third parties, primarily financial institutions, and we co-invest with SL Green and its affiliates.

In
addition, our pending merger with American Financial will combine the existing operating platforms of American Financial with our own to create an integrated commercial real estate
finance and operating company, and will transform us from primarily a specialty finance company into a $7.6 billion diversified real estate enterprise with complementary business lines
consisting of commercial real estate finance and net lease property investments.

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Our targeted investments include the following:

Whole LoansWe originate fixed-rate permanent whole loans with terms of up to 15 years. We may separate
certain of these loans into tranches, which can be securitized and resold. When we do so, we occasionally retain that component of the whole loan that we believe has the most advantageous
risk-adjusted returns. The retained interest can be the senior interest, a subordinate interest, a mezzanine loan or a preferred equity interest created in connection with such whole loan
origination. We expect the stated maturity of our whole loan investments to range from five years to 15 years. We may sell these investments prior to maturity.

Bridge LoansWe offer floating rate bridge whole loans to borrowers who are seeking debt capital with a final term to maturity
of not more than five years to be used in the acquisition, construction or redevelopment of a property. Typically, the borrower has identified a property in a favorable market that it believes to be
poorly managed or undervalued. Bridge financing enables the borrower to employ short-term financing while improving the operating performance and physical aspects of the property and avoid
burdening it with restrictive long-term debt. The bridge loans we originate are predominantly secured by first mortgage liens on the property and currently provide interest rates ranging
from 175 to greater than 400 basis points over applicable index rate indexes. We expect the stated maturity of our bridge loans to range from two years to five years, and we frequently hold these
investments to maturity.

We
believe our bridge loans will lead to additional financing opportunities in the future, as bridge facilities are often a first step toward permanent financing or a sale of the
underlying real estate. We generally view securitization as a financing rather than a trading activity. We have pooled together smaller bridge loans and retained the resulting
non-investment grade interests (and interest-only certificates, if any) resulting from these securitizations, which to-date have taken the form of CDOs.

Subordinate Interests in Whole LoansWe purchase from third parties, and may retain from whole loans we originate and
co-originate and securitize or sell, subordinate interests in whole loans. Subordinate interests are participation interests in mortgage notes or loans secured by a lien subordinated to a
senior interest in the same loan. The subordination is generally evidenced by a co-lender or participation agreement between the holders of the related senior interest and the subordinate
interest. In some instances, the subordinate interest lender may additionally require a security interest in the stock or partnership interests of the borrower as part of
the transaction. When we originate whole loans, we may divide them, and securitize or sell the senior interest and keep a subordinate interest for investment, or the opposite.

Subordinate
interests in whole loans typically bear interest at a rate of 300 to 900 basis points over the applicable interest rate index and have last-dollar
loan-to-value ratios between 65% and 85%. Subordinate interest lenders have the same obligations, collateral and borrower as the senior interest lender, but typically are
subordinated in recovery upon a default. Subordinate interests in whole loans share certain credit characteristics with second mortgages, in that both are subject to greater credit risk with respect
to the underlying mortgage collateral than the corresponding senior interest.

Subordinate
interests created from bridge loans generally will have terms matching those of the whole loan of which they are a part, typically two to five years. Subordinate interests
created from whole loans generally will have terms of five years to fifteen years. We expect to hold subordinate interests in whole loans to their maturity.

When
we acquire subordinate interests in whole loans from third parties, we may earn income on the investment, in addition to the interest payable on the subordinate piece, in the form
of fees charged to the borrower under that note (recently, approximately 0.75% to 1.50% of the note amount) or by receiving principal payments in excess of the discounted price (below par value) we
paid to acquire the note. When we originate subordinate interests out of whole loans and then sell the senior

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interest,
we allocate our basis in the whole loan among the two (or more) components to reflect the fair market value of the new instruments. We may realize a profit on sale if our allocated value is
below the sale price or we may realize a loss on sale if our allocated value is above the sale price. Our ownership of a subordinate interest with controlling class rights, which typically means we
have the ability to determine when, and in what manner, to exercise the rights and remedies afforded the holder of the senior interest, may, in the event the financing fails to perform according to
its terms, cause us to elect to pursue our remedies as owner of the subordinate interest, which may include foreclosure on, or modification of, the note. In some cases, usually restricted to
situations where the appraised value of the collateral for the debt falls below agreed levels relative to the total outstanding debt, the owner of the senior interest may be able to foreclose or
modify the note against our wishes as holder of the subordinate interest. As a result, our economic and business interests may diverge from the interests of the holders of the senior interest. These
divergent interests among the holders of each investment may result in conflicts of interest.

Mezzanine LoansWe originate mezzanine loans that are senior to the borrower's equity in, and subordinate to a mortgage loan
on, a property. These loans are secured by pledges of ownership interests, typically in whole but occasionally in part (but usually with effective sole control over all the ownership interests), in
entities that directly or indirectly own the real property. In addition, we may require other collateral to secure mezzanine loans, including letters of credit, personal guarantees, or collateral
unrelated to the property. We typically structure our mezzanine loans to receive a stated coupon (benchmarked usually against LIBOR, or occasionally against a Treasury index
or a swap index). We may in certain select instances structure our mezzanine loans to receive a stated coupon plus a percentage of gross revenues and a percentage of the increase in the fair market
value of the property securing the loan, payable upon maturity, refinancing or sale of the property.

These
investments typically have terms from two to ten years and typically bear interest at a rate of 400 to 800 basis points over the applicable interest rate index. Some transactions
entail the issuance of more than one tranche or class of mezzanine debt. Mezzanine loans usually have last-dollar loan-to-value ratios between 65% and 90%, although
these measures have declined more recently. Mezzanine loans frequently have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms. We expect to hold
these investments to maturity.

Distressed DebtWe may also invest in distressed debt, most often sub- and non-performing real estate
loans acquired from financial institutions. We make these investments when we believe our underwriting, credit, financing and asset management experience enable us to generate above-average
risk-adjusted returns by resolving these distressed loans expeditiously through refinancings, negotiated repayments with borrowers or foreclosure and subsequent sale of the underlying
property. A sub-performing loan is a loan with a very high loan-to-value ratio, with a low debt service coverage ratio, and which is likely to default at maturity
because the property securing the loan cannot support a refinancing of the loan's entire unpaid principal balance. A non-performing loan is a loan that is in default of its covenants, is
past due in interest payments, or is past its final maturity date and has not been repaid. Sub- and non-performing loans are typically purchased at a discount to the note
balance. Our investment return results from a combination of current cash flow from the note or underlying property, plus any eventual recovery of loan principal.

We
expect the maturity of our distressed debt investments to range from several months to up to ten years. Such investments will usually be held until resolution, which may entail a
bankruptcy and foreclosure process, which can require months or years to complete.

Commercial Mortgage-Backed Securities (CMBS)Through our Real Estate Securities Group ("RESG"), we acquire CMBS that are
created when commercial loans are pooled and securitized. CMBS are secured by or evidenced by ownership interests in a single commercial mortgage loan or a pool of mortgage loans secured by commercial
properties. We expect a majority of our CMBS to be

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rated
by at least one rating agency. CMBS are generally pass-through certificates that represent beneficial ownership interests in common law trusts whose assets consist of defined
portfolios of one or more commercial mortgage loans. They are typically issued in multiple tranches whereby the more senior classes are entitled to priority distributions from the trust's income to
make specified interest and principal payments on such tranches. Losses and other shortfalls from expected amounts to be received on the mortgage pool are borne by the most subordinate classes, which
receive payments only after the more senior classes have received all principal and/or interest to which they are entitled.

The
credit quality of CMBS depends on the credit quality of the underlying mortgage loans, which is a function of factors such as:



Expected
maturities of our CMBS investments range from several months to up to ten years. We expect to hold our CMBS investments to maturity.

Preferred EquityWe originate preferred equity investments in entities that directly or indirectly own commercial real estate.
Preferred equity is not secured, but holders have priority relative to common equity holders on cash flow distributions and proceeds from capital events. In addition, preferred holders can often
enhance their position and protect their equity position with covenants that limit the entity's activities and grant us the exclusive right to control the property after an event of default.
Occasionally, the first mortgage on a property prohibits additional liens and a preferred equity structure provides an attractive financing alternative. With preferred equity investments, we may
become a special limited partner or member in the ownership entity and may be entitled to take certain actions, or cause liquidation, upon a default. Preferred equity typically is more highly
leveraged, with last-dollar loan-to-value ratios of 85% to more than 90%. We expect our preferred equity to have mandatory redemption dates (that is, maturity
dates) that range from three years to five years, and we expect to hold these investments to maturity.

Other Real Estate-Related InvestmentsWe may also make investments in other types of commercial or multi-family real estate
assets. These may include acquisitions of real property and debt issued by REITs or other real estate companies. We have authority to issue our common stock or other equity or debt securities in
exchange for assets. Subject to gross income and asset tests necessary for REIT qualification, we may also invest in securities of other REITs, or other entities engaged in real estate activities or
securities of other issuers, including for the purpose of exercising control over such entities.

Some
of these investments may be equity interests in properties with no stated maturity or redemption date, or long-term leasehold interests with expiration dates as long as
40 years beyond the date of our investment. We expect to hold these investments for between several months and up to ten years, depending upon the risk profile of the investment and our
investment rationale. The timing of our sale of these investments, or of their repayment, will frequently be tied to certain events involving the underlying property, such as leases to new tenants or
a re-financing on superior terms.

Our
pending acquisition of American Financial is an example of such an investment, and is the natural extension of the investments in net leased commercial properties undertaken by us
since our inception.

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The
aggregate carrying values allocated by product type and weighted average coupons of our loans, other lending investments, and CMBS as of December 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)
|--------------------------------------------------- | -------------------------- | ---------------------------------- | --------- | ----------------------------- | - | ------------------------- | --------- | -------------------------------------------
|
|Whole loans, floating rate                          |                            | $                                  | 1,594,338 |                               | $ | 1,372,316                 |           | 60                                         
|Whole loans, fixed rate                             |                            |                                    | 204,192   |                               |   | 42,376                    |           | 8                                          
|Subordinate interests in whole loans, floating rate |                            |                                    | 146,901   |                               |   | 236,308                   |           | 6                                          
|Subordinate interests in whole loans, fixed rate    |                            |                                    | 61,890    |                               |   | 48,769                    |           | 2                                          
|Mezzanine loans, floating rate                      |                            |                                    | 413,813   |                               |   | 226,675                   |           | 16                                         
|Mezzanine loans, fixed rate                         |                            |                                    | 203,753   |                               |   | 216,216                   |           | 8                                          
|Preferred equity, fixed rate                        |                            |                                    | 11,858    |                               |   | 44,224                    |           |                                           
|                                                    |                            |                                    |           |                               |   |                           |           |                                            
|                                                    | Subtotal/ Weighted average |                                    | $         | 2,636,745                     |   | $                         | 2,186,884 |                                            
|                                                    |                            |                                    |           |                               |   |                           |           |                                            
|CMBS, floating rate                                 |                            |                                    | 23,817    |                               |   |                          |           | 3                                          
|CMBS, fixed rate                                    |                            |                                    | 768,166   |                               |   |                          |           | 97                                         
|                                                    |                            |                                    |           |                               |   |                           |           |                                            
|                                                    | Subtotal/ Weighted average |                                    |           | 791,983                       |   |                           |          |                                            
|                                                    |                            |                                    |           |                               |   |                           |           |                                            
|Total                                               |                            | $                                  | 3,428,728 |                               | $ | 2,186,884                 |           | 100                                        
|                                                    |                            |                                    |           |                               |   |                           |           |                                            

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We
have conducted our operations and intend to continue to conduct our operations so as not to become regulated as an investment company under the Investment Company Act of 1940, as
amended, or the Investment Company Act. We believe that there are a number of exclusions or exemptions under the Investment Company Act that may be applicable to us. We will either be excluded from
the definition of investment company under Section 3(a)(1)(C) of the Investment Company Act, by owning or proposing to acquire "investment securities" having a value not exceeding 40% of the
value of the our total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, or by qualifying for the exclusions from registration provided by
Sections 3(c)(5)(C) and/or 3(c)(6) of the Investment Company Act. We will monitor our portfolio periodically and prior to each acquisition to confirm that we continue to qualify for the
relevant exclusion or exemption.

Qualifying
for the Section 3(c)(5)(C) exemption requires that at least 55% of our portfolio be comprised of "qualifying assets," and a total of at least 80% of our portfolio be
comprised of "qualifying assets" and "real estate-related assets," a category that includes qualifying assets. We generally expect whole loans, CTL investments, and Tier 1 mezzanine loans to be
qualifying assets. The treatment of distressed debt securities as qualifying assets is based on the characteristics of the particular type of loan, including its foreclosure rights. Junior (first
loss) interest in MBS pools may constitute qualifying assets under Section 3(c)(5)(C), provided that we have the unilateral right to foreclose, directly or indirectly, on the mortgages in the
pool and that we may act as the controlling class or directing holder of the pool. Tier 1 mezzanine loans are loans granted to a mezzanine borrower that directly owns interests in the entity
that owns the property being financed. Subordinate interests in whole loans may constitute qualifying assets under Section 3(c)(5)(C), provided that we

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have
the unilateral right to foreclose, directly or indirectly, on the mortgage and that we may act as the controlling class or directing holder of the note. We generally do not treat preferred equity
investments as qualifying assets. In relying on the exemption provided by Section 3(c)(5)(C), we also make investments so that at least 80% of our portfolio is comprised of
real-estate, we expect that all of these classes of investments will be considered real estate-related assets under the Investment Company Act for purposes of the 80% investment threshold.

Qualification
for the Section 3(a)(1)(C), Section 3(c)(5)(C) and/or Section 3(c)(6) exclusions or exemptions will limit our ability to make certain investments. To
the extent that the staff of the SEC provides more specific guidance regarding the treatment of assets as qualifying assets or real estate-related assets, we may be required to adjust our investment
strategy accordingly. Any additional guidance from the staff of the SEC could provide additional flexibility to us, or it could further inhibit our ability to pursue the investment strategy we have
chosen.

On
occasion, we utilize a special servicer, which in some instances may be an affiliate of us or may be the rated special servicer affiliate of SL Green, to manage, modify and resolve
loans and other investments that fail to perform under the terms of the loan agreement, note, indenture, or other governing documents. We will typically negotiate for the right to appoint a special
servicer as part of the origination or purchase of an investment. Special servicers are most frequently employed in connection with whole loans, subordinate interests in whole loans and
first-loss classes of CMBS. The rights of the special servicer, which are typically subject to a servicing standard that requires the special servicer to pursue remedies that maximize the
recovery of investment principal, typically include, among other things, the right to foreclose upon the loan collateral after an event of default.

Our
rights, including foreclosure rights we hold, are found in the agreements among the lenders or holders of notes, such as intercreditor or participation agreements. Where we hold
unilateral foreclosure rights, those rights generally become exercisable upon the occurrence of an event of default, such as nonpayment of the debt. In certain circumstances we may lose our
foreclosure rights. For example, where the appraised value of the collateral for the debt falls below agreed levels relative to the total outstanding debt, we may lose our foreclosure rights, which
are then exercisable by the holder of more senior debt. Generally, we do not expect SL Green or its affiliates to hold these types
of senior debt where we hold a more junior instrument. If we were to lose our foreclosure rights, the Investment Company Act status of the particular investment could change.

While
we intend to hold our investments to maturity, we may sell an investment prior to its stated maturity for reasons of risk management, liquidity, changing investment objectives, or
regulatory requirements.

Financing Strategy

We use debt financing in various forms in an effort to increase the size of our portfolio and potential returns to our stockholders. Access to
low-cost capital is important to our business, since we earn income based on the spread between the yield on our investments and the cost of our borrowings.

Our
financing strategy focuses on the use of match-funded financing structures. This means that we seek whenever possible to match the maturities of our financial obligations with the
maturities of our investments to minimize the risk that we have to refinance our liabilities prior to the maturities of our assets, and to reduce the impact of changing interest rates on our cash flow
and earnings. We generally fund our intermediate and long-term assets, which consist primarily of investment-grade rated CMBS, using our long-term liabilities, especially the
most recently issued $1.1 billion CDO that matures in 2017. We attempt whenever possible to use our repurchase facilities, which have initial maturities in September 2009 and October 2009 (and
are extendable subject to certain conditions), to fund short-term and intermediate-term loan investments that typically have maturities of between two and four years. At
December 31, 2007, the weighted average remaining term of the loans financed using

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our
repurchase agreements was 1.7 years. In addition, we seek whenever possible to match fund interest rates with like-kind debt (i.e., fixed-rate assets are
financed with fixed-rate debt, and floating rate assets are financed with floating rate debt), through the use of hedges such as interest rate swaps, caps, or through a combination of
these strategies. This allows us to reduce the impact on our cash flow and earnings of changing interest rates. At December 31, 2007, approximately 64% of our investments, when measured by
carrying value, were floating rate instruments based on LIBOR. The remaining 36% of our investments carried fixed rates of interest, although we have entered into swap contracts that convert
substantially all of the floating rate financing expenses against these assets to fixed rate expenses to eliminate basis risk. Our investments had a weighted average remaining term to initial maturity
of 4.0 years.

We
use short-term financing in the form of our repurchase agreements, unsecured revolving credit facilities and bridge financings in conjunction with or prior to the
implementation of longer-term match-funded financing. At December 31, 2007, we had approximately
$200.2 million outstanding under our repurchase facilities with Wachovia Capital Markets, LLC, or Wachovia, and Goldman Sachs Mortgage Company, or Goldman. Our lenders under these
facilities have consent rights with respect to the inclusion of investments, determine periodically the market value of the investments, and have the right to require additional collateral or require
partial repayment of advances under the facilities (margin calls) if the estimated market value of the included investments declines. An event of default can be triggered on our repurchase facilities
if, among other things, GKK Manager LLC is terminated as our manager.

For
longer-term funding, we have historically utilized securitization structures, including CDOs, as well as other match-funded financing structures. CDOs are multiple class
debt securities, or bonds, secured by pools of assets, such as CMBS, bridge loans, permanent loans, subordinate interests in whole loans, mezzanine loans and REIT debt. In a CDO the assets are pledged
to a trustee for the benefit of the holders of the bonds. The bonds may be rated by one or more rating agencies. One or more classes of the bonds are marketed to a wide variety of fixed income
investors, which enables the CDO sponsor to achieve a relatively low cost of long-term financing. We believe that CDOs are a suitable long-term financing vehicle for our
investments because they enable us to maintain our strategy of funding substantially all of our assets and related liabilities using the same, or similar, LIBOR benchmark, lock-in a
long-term cost of funds tied to LIBOR, and reduce the risk that we have to refinance our liabilities prior to the maturities of our investments.

During
2005 we issued approximately $1.0 billion of CDOs through two newly-formed indirect subsidiaries, or the 2005 Issuer and the 2005 Co-Issuer. The CDO consists of
$810.5 million of investment grade notes, $84.5 million of non-investment grade notes, which were co-issued by the 2005 Issuer and the 2005 Co-Issuer,
and $105.0 million of preferred shares, which were issued by the 2005 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of
three-month LIBOR plus 0.49%. We incurred approximately $11.9 million of costs related to Gramercy Real Estate CDO 2005-1, which are amortized on a level- yield basis over the
average life of the CDO.

During
2006 we issued approximately $1.0 billion of CDOs through two newly-formed indirect subsidiaries, or the 2006 Issuer and the 2006 Co-Issuer. The CDO consists of
$903.75 million of investment grade notes, $38.75 million of non-investment grade notes, which were co-issued by the 2006 Issuer and the 2006
Co-Issuer, and $57.5 million of preferred shares, which were issued by the 2006 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted
average rate of three-month LIBOR plus 0.37%. We incurred approximately $11.3 million of costs related to Gramercy Real Estate CDO 2006-1, which are amortized on a level-yield basis
over the average life of the CDO.

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In
August 2007 we issued $1.1 billion of CDOs through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 Issuer and,
together with the 2005 Issuer and the 2006 Issuer, the Issuers, and the 2007 Co-Issuer and, together with the 2005 Co-Issuer and the 2006 Co-Issuer, the
Co-Issuers. The CDO consists of approximately $1,045.55 million of investment grade notes, $22.0 million of non-investment grade notes, which were
co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32.45 million of preferred shares, which were issued by the 2007 Issuer. The investment grade notes were issued
with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.45%. We incurred approximately $16.82 million of costs related to Gramercy Real Estate CDO
2007-1, which are amortized on a level-yield basis over the average life of the CDO.

We
retained all non-investment grade securities, the preferred shares and the common shares in the Issuers and Co-Issuers. The Issuers and the
Co-Issuers hold assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity investments, and CMBS which serve as collateral for the
CDO. Each CDO may be replenished, pursuant to certain limitations and rating agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid
during the first five years of the CDO. Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as loans are repaid. The financial
statements of the Issuers are consolidated in our financial statements. The investment grade notes are treated as a secured financing, and are non-recourse to us. Proceeds from the sale of
the investment grade notes issued in each CDO were used to repay outstanding debt under our repurchase agreements and to fund additional investments.

We
use different levels of leverage depending on the specific risk-return characteristics of each investment type. Usually, the level of financial leverage employed varies
inversely with the loan-to-value ratio of the underlying debt investment being financed. For example, we generally use more leverage with whole loans than mezzanine loans. We
anticipate our overall leverage will be 70% to 85% of the carrying value of our assets; but our actual leverage depends on our mix of assets. As of December 31, 2007, our leverage as a
percentage of total balance sheet assets was 73%, excluding the trust preferred securities, which are discussed in more detail below.

Our
charter and bylaws do not limit the amount of indebtedness we can incur. Our current policy is to leverage up to 80% of the carrying value of our assets. Our board of directors has
discretion to deviate from or change our indebtedness policy at any time. However, we seek to maintain an adequate capital base to protect against various business environments in which our financing
and hedging costs might exceed the interest income from our investments. These conditions could occur, for example, due to credit losses or when, due to interest rate fluctuations, interest income on
our investment lags behind interest rate increases on our borrowings, which are predominantly variable rate. We use leverage for the sole purpose of financing our portfolio and not for the purpose of
speculating on changes in interest rates.

In
addition, we continuously evaluate other sources of long-term debt and hybrid debt/equity capital, including perpetual preferred equity and trust preferred equity, which
may be available to us on competitive market pricing and terms.

We
have historically relied on the securitization markets as a source of efficient match-funded financing structures for our portfolio of commercial real estate loans and CMBS investment
portfolio. While we expect to continue to utilize existing CDOs and other such structured finance transactions to finance our investments in the future, the current state of the global capital markets
make it unlikely that in the near term we will be able to issue liabilities similar to our existing CDOs. This capital markets environment has led to increased cost of funds and reduced availability
of efficient debt capital, factors which have caused us to reduce our investment activity.

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Origination, Underwriting and Asset Management

Our Manager and SL Green provide all of our critical investment selection, asset management, servicing, portfolio management and reporting functions from loan
origination to disposition. Our origination and underwriting is based on careful review and preparation, and generally proceeds as follows:



The
affirmative vote of all members of a credit committee consisting of all senior officers of our Manager plus our chief executive officer is necessary to approve all transactions over
$3 million. Our chief investment officer may approve investments of less than $3 million. The investment committee of our board of directors must unanimously approve all transactions
involving investments of (i) $50 million or more with respect to CMBS investments, (ii) $35 million or more with respect to whole loans,
(iii) $30 million or more with respect to subordinate interests in whole loans, and (iv) $20 million or over with respect to mezzanine loans, preferred equity, and CTL
investments. The full board of directors must approve investments (i) over $75 million with respect to whole loans and CMBS investments, (ii) over $65 million with respect
to subordinate interests in whole loans, (iii) over $55 million with respect to mezzanine loans, and (iv) over $50 million with respect to preferred equity and CTL
investments. The Manager has full discretion to make investments on our behalf under (i) $50 million with respect to CMBS investments, (ii) $35 million with respect to
whole loans, (iii) $30 million with respect to subordinate interests in whole loans, and (iv) $20 million with respect to mezzanine loans, preferred equity and CTL
investments. Approval limits are based on the investment amount less any origination fees, discounts or other up-front fees we receive in connection with the investment.

The
stages of the investment process are described in more detail below.



Our Manager is primarily responsible for originating all of our assets. Our Manager utilizes an extensive national network of relationships with property owners,
developers, mortgage loan brokers, commercial and investment banks and institutional investors. This network has been developed by the senior managers of our Manager and senior executives of SL Green
more than 20 years. We originate investments in direct transactions with borrowers, we co-originate with or acquire existing loan assets from third parties, primarily financial
institutions, and we may occasionally co-invest with SL Green and its affiliates. We continue to grow our national platform through the creation of strategic partnerships, expansion of our
origination teams, and our offices in New York, New York and Los Angeles, California. Once potential investment opportunities have been identified, our Manager determines which financing products best
meet the borrower's needs. Our Manager works to optimize pricing and structure and create a favorable transaction for us while meeting our borrower's needs. After identifying a suitable structure, our
Manager works with the borrower to prepare a loan application and an initial review of the investment before committing underwriting resources. Once a loan is identified as suitable, it is
underwritten by our Manager's team of experienced underwriters.



Once a potential investment has been identified, our Manager's underwriters perform comprehensive financial, structural, operational and legal due diligence to
assess the risks of the investment. Our Manager's underwriters analyze the loan application package and conduct follow-up due diligence on each borrower as part of the underwriting
process. Our Manager's underwriters generally review the following criteria as part of the underwriting process:



13

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Key
factors that are considered in credit decisions include, but are not limited to, debt service coverage, loan-to-value ratios and property and financial
operating performance. Consideration is also given to other factors such as the experience, financial strength, reputation, and investment track record of the borrower and individual sponsors,
additional forms of collateral and identified likely strategies to effect repayment. Our Manager will continue to refine its underwriting criteria based upon actual loan portfolio experience and as
market conditions and investor requirements evolve. Once diligence is completed and our Manager has reviewed the Underwritten Net Cash Flow, sponsorship and the deal structure, our Manager determines
the level in the capital structure at which an investment will be made, the pricing for such an investment, and the required legal and structural protections.



SL Green services substantially all of our assets through a sub-contract with our Manager. The loan servicing platform is designed to provide timely,
responsive customer service as well as accurate and timely information for account follow-up, financial reporting, collateral and portfolio risk management and management review. In
addition, the servicing operations include enforcement of the

14

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loan
documents and standard asset management functions, including monitoring of property performance and condition and market analysis. The asset management group monitors the investments to identify
any potential underperformance of the asset and work with the borrower and co-lenders, if any, to remedy the situation in an expeditious manner in order to mitigate any effects of
underperformance. The asset manager is responsible for understanding the borrower's business plan with respect to each collateral property and monitoring performance measured against that plan. We
differentiate ourselves by leveraging our Manager's real estate knowledge and proactive approach to asset management by providing approvals and processing requests on a timely and efficient basis. We
believe that asset management is a vital component of the borrower-lender relationship because it enables us to be responsive, timely, anticipate changes to a borrower's financing requirements, and
generally develop a strong relationship that can lead to repeat business.

Operating Policies



We operate pursuant to the following general guidelines for our investments and borrowings:



These
investment guidelines may be changed by our board of directors without the approval of our stockholders.

The
affirmative vote of all members of a credit committee consisting of all senior officers of our Manager plus our chief executive officer is necessary to approve all transactions over
$3 million. Our chief investment officer may approve investments of less than $3 million. The investment committee of our board of directors must unanimously approve all transactions
involving investments of (i) $50 million or more with respect to CMBS investments, (ii) $35 million or more with respect to whole loans, (iii) $30 million or
more with respect to subordinate interests in whole loans, and (iv) $20 million or over with respect to mezzanine loans, preferred equity, and CTL investments. The full board of
directors must approve investments (i) over $75 million with respect to whole loans and CMBS investments, (ii) over $65 million with respect to subordinate interests in
whole loans, (iii) over $55 million with respect to mezzanine loans, and (iv) over $50 million with respect to preferred equity and CTL investments. Our Manager has full
discretion to make investments on our behalf under (i) $50 million with respect to CMBS investments, (ii) $35 million with respect to whole loans,
(iii) $30 million with respect to subordinate interests in whole loans, and (iv) $20 million with respect to mezzanine loans, preferred equity and CTL investments. Approval
limits are based on the investment amount less any origination fees, discounts or other up-front fees we receive in connection with the investment.

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Origination Agreement

We entered into an amended and restated origination agreement with SL Green Operating Partnership, L.P. on April 19, 2006 that is effective during
the term of the management agreement. Pursuant to this agreement, SL Green and any of its subsidiaries will not originate, acquire or participate in fixed income investments in the United States,
subject to certain conditions and exclusions described below. Fixed income investments include debt obligations or interests in debt obligations bearing a fixed-rate of return and
collateralized by real property or interests in real property. SL Green has also agreed not to acquire, originate or participate in preferred equity investments which bear a fixed rate of return in
the United States, unless we have determined not to pursue that opportunity.

Under
the agreement, SL Green has the following rights:



We
have agreed that we will not:



We
have also agreed that, when we acquire direct or indirect ownership interests in property in metropolitan New York or Washington D.C. by foreclosure or similar conveyance, SL Green
will have the right to purchase the property at a price equal to our unpaid asset balance on the date we foreclosed or acquired the asset, plus unpaid interest at the last stated contract
(non-default) rate and,

16

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to
the extent payable by the borrower under the initial documentation evidencing the property, legal costs incurred by us directly related to the conveyance and the fee, if any, due upon the repayment
or prepayment of the investment which is commonly referred to as an "exit fee" (but not including default interest, late charges, prepayment penalties, extension fees or other premiums of any kind)
through the date of SL Green's purchase. We refer to this amount as "Par Value". If we seek to sell the asset and receive a bona fide third party offer to acquire the asset for cash that we desire to
accept, SL Green may purchase the asset at the lower of the Par Value or the third party's offer price. If the asset is not sold within one year, SL Green has the right to purchase the property at its
appraised value. The appraised value will be determined as follows: we will select an appraiser and SL Green will select an appraiser, who will each appraise the property. These two appraisers jointly
will select a third appraiser, who will then choose one of the two appraisals as the final appraised value. These rights may make it more difficult to sell such assets because third parties may not
want to incur the expense and effort to bid on assets when they perceive that SL Green may acquire them at the lower of the same terms proposed by the third party or Par Value. As a result, we may not
receive the same value on the sale of such assets as we might receive from an independent third party submitting an offer through a competitive bidding process.

SL
Green has a right of first offer to acquire any distressed debt which we decide to sell.

If
at any time SL Green plans to sell to a third party any fixed income investment or preferred equity investment, we will have the right to purchase the offered investment within ten
business days on the terms and conditions offered by the third party. If SL Green is required to obtain any other party's consent in connection with the sale of any investment, our right of first
offer will be subject to such consent. If we choose not to exercise our right to purchase the offered investment, SL Green has the right to sell it to a third party within six months at not less than
99% of the price offered to us. If the investment is not sold within six months, it will again be subject to our right of first offer.

Under
this agreement, we agreed to sell to SL Green up to 25% of the shares sold in our initial public offering. We have also agreed that, during the term of this origination agreement,
SL Green will have the right to purchase up to 25% of the shares in any future offering of common stock, at the same price as other purchasers, in order to maintain its percentage ownership interest
in us after our initial public offering. This right will also apply to issuances of units in our Operating Partnership.

In
the event the management agreement is terminated for cause by us or if neither SL Green nor any of its affiliates shall be the managing member of our Manager, then the
non-compete
provisions in the origination agreement will survive such termination for a period of one year with respect only to potential investments by us as to which our Manager has commenced due diligence.

Hedging Activities

Subject to maintaining an qualification as a REIT, we use a variety of commonly used derivative instruments that are considered conventional, or "plain vanilla"
derivatives, including interest rate swaps, caps, collars and floors, in our risk management strategy to limit the effects of changes in interest rates on our operations. Our primary hedging strategy
consists of entering into interest rate swap contracts. Additionally, we may in certain select instances choose to hedge our exposure to fluctuations in CMBS credit spreads by purchasing swaps written
against a broad-based CMBS index. The value of our derivatives may fluctuate over time in response to changing market conditions, and will tend to change inversely with the value of the risk in our
liabilities that we intend to hedge. Hedges are sometimes ineffective because the correlation between changes in value of the underlying investment and the derivative instrument is less than was
expected when the hedging transaction was undertaken. Since most of our hedging activity covers the period between origination or purchase of loans and their eventual sale or securitization, unmatched
losses in our hedging program will tend to occur when the planned securitization fails to occur, or if the hedge proves to be ineffective. We

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continuously
monitor the effectiveness of our hedging strategies and adjust our strategies as appropriate. These transactions may include interest rate swaps, the purchase or sale of interest rate
collars, caps or floors, options, other hedging instruments and such other hedging instruments as may be developed in the future and which we determine are suitable to achieve our hedging objectives.

We
have retained the services of an outside financial services firm with expertise in the use of derivative instruments to advise us on our overall hedging strategy, to effect hedging
trades, and to provide the appropriate designation and accounting of all hedging activities from a GAAP and tax accounting and reporting perspective.

These
instruments are used to hedge as much of the interest rate risk as our Manager determines is in the best interest of our stockholders, given the cost of such hedges and the need to
maintain our qualifications as a REIT. To the extent that we enter into a hedging contract to reduce interest rate risk on indebtedness incurred to acquire or carry real estate assets, any income that
we derive from the contract is not considered income for purposes of the REIT 95% gross income test and is non-qualifying for the 75% gross income test. Our Manager can elect to have us
bear a level of interest rate risk that could otherwise be hedged when it believes, based on all relevant facts, that bearing such risk is advisable.

Disposition Policies

Our Manager evaluates our assets on a regular basis to determine if they continue to satisfy our investment criteria. Subject to certain restrictions applicable
to REITs, our Manager may cause us to sell our investments opportunistically and use the proceeds of any such sale for debt reduction, additional acquisitions or working capital purposes.

Equity Capital Policies

Subject to applicable law, our board of directors has the authority, without further stockholder approval, to issue additional authorized common stock and
preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate.

We
may, under certain circumstances, repurchase our common stock in private transactions with our stockholders if those purchases are approved by our board of directors. Our board of
directors has no present intention of causing us to repurchase any shares, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for
qualifying as a REIT, for so long as our board of directors concludes that we should remain a qualified REIT.

Other Policies

We operate in a manner that we believe will not subject us to regulation under the Investment Company Act. We may invest in the securities of other issuers for
the purpose of exercising control over such issuers. We do not underwrite the securities of other issuers.

Future Revisions in Policies and Strategies

Our board of directors has the power to modify or waive our investment guidelines, policies and strategies. Among other factors, developments in the market that
either affect the policies and strategies mentioned herein or that change our assessment of the market may cause our board of directors to revise our investment guidelines, policies and strategies.
However, if such modification or waiver involves the relationship of, or any transaction between, us and our Manager or any affiliate of our Manager, the approval of a majority of our independent
directors is also required. We may not, however, amend our charter to change the requirement that a majority of our board of directors consist

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of
independent directors or requirement that a majority of our independent directors approve related party transactions without the approval of two-thirds of the votes entitled to be cast
by our stockholders.

Competition

Our net income depends, in large part, on our ability to originate investments with spreads over our borrowing cost. In originating these investments, we compete
with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, hedge funds, institutional investors, investment
banking firms, private equity firms, other lenders, governmental bodies and other entities, which may have greater financial resources and lower costs of capital available to them than we have. In
addition, there are numerous mortgage REITs with asset acquisition objectives similar to ours, and others may be organized in the future, which may increase competition for the available investments
suitable for us. Competitive variables include market presence and visibility, size of loans offered and underwriting standards.

To
the extent that a competitor is willing to risk larger amounts of capital in a particular transaction or to employ more liberal underwriting standards when evaluating potential loans
than we are, our origination volume and profit margins for our investment portfolio could be adversely affected. Our competitors may also be willing to accept lower returns on their investments and
may succeed in originating or acquiring the assets that we have targeted for origination or acquisition. Although we believe that we are well positioned to compete effectively in each facet of our
business, there is considerable competition in our market sector and there can be no assurance that we will compete effectively or that we will not encounter further increased competition in the
future that could limit our ability to conduct our business effectively.

Current Market Conditions

During 2007, the global capital markets experienced unprecedented volatility, resulting in dramatic increases in credit spreads, declines in prices of financial
assets, decreases in liquidity and the availability of debt and equity capital, and increases in the cost of debt and equity capital. The impact has been most severe in the single-family residential
real estate mortgage markets in the United States, but has more recently affected the commercial real estate debt markets in which we invest. In particular, subsequent to the issuance of our third CDO
in August 2007, the commercial real estate securitizations markets have experienced severe declines in transaction activity, reductions in short-term and long-term liquidity,
and widening credit spreads. We have historically relied on the securitization markets as a source of efficient match-funded financing structures for our portfolio of commercial loans and CMBS
investment portfolio. Currently, the new issue market for structured finance transactions including commercial real estate CDOs is dormant. This capital markets environment has led to increased cost
of funds and reduced availability of efficient debt capital, factors which have caused us to reduce our investment activity. These conditions have also materially adversely impacted the ability of
commercial property owners to service their debt and refinance their loans as they mature. While delinquencies in the commercial real estate market remain low in comparison to historical measures, the
lack of liquidity in the CMBS and other commercial real estate finance markets, and worries about weakening fundamentals in commercial real estate due to slowing economic activity, are harming sales
and financing activity. It is widely believed that the credit crisis and slowing economic activity may contribute to a decline in the operating performance and value of commercial real estate. We
believe these risks are most pronounced in connection with loans involving certain property types, including construction loans generally, residential land, commercial land, and residential
condominiums. We further believe these risks are most pronounced in regions that recently experienced rapid growth in population, employment and real estate development, including California, Nevada,
Arizona, and Florida.

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We
believe our businesses will benefit in the long run from a market environment where assets are priced and structured more conservatively. In addition, our pending merger with American
Financial will combine the existing operating platforms of American Financial with our own to create an integrated commercial real estate finance and operating company, and will transform us from
primarily a specialty finance company into a $7.6 billion diversified real estate enterprise with complementary business lines consisting of commercial real estate finance and net lease
property investments.

Industry Segments

Statement of Financial Accounting Standard No. 131, or "SFAS No. 131," establishes standards for the way that public entities report information
about operating segments in their annual financial
statements. We are a REIT focused primarily on originating and acquiring loans and securities related to real estate and currently operate in only one segment. We expect our pending merger with
American Financial will cause us to modify our disclosures in future periods to reflect the increased materiality to us of our net CTL investments.

Employees

We do not currently have any employees. Our executive officers and other staff are all employed by our Manager or SL Green and leased by us pursuant to the
management agreement with the Manager and the outsource agreement with SL Green. We may, however, hire employees as a result of the acquisition of American Financial.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner of real estate (including, in certain
circumstances, a secured lender that succeeds to ownership or control of a property) may become liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, under or
in its property. Those laws typically impose cleanup responsibility and liability without regard to whether the owner or control party knew of or was responsible for the release or presence of such
hazardous or toxic substances. The costs of investigation, remediation or removal of those substances may be substantial. The owner or control party of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental contamination emanating from a site. Certain environmental laws also impose liability in connection with the handling of or
exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners of real properties for personal injuries associated with asbestos-containing materials. Absent
succeeding to ownership or control of real property, a secured lender is not likely to be subject to any of these forms of environmental liability. We are not currently aware of any environmental
issues which could materially affect the Company.

ITEM 1A.    RISK FACTORS

Risks Related to Our Management and Our Relationship with SL Green

We are dependent on our Manager and its key employees and may not find a suitable replacement if the Manager terminates the management agreement or the
key personnel are no longer available to us.

We have no direct employees. We may, however, hire employees as a result of the American Financial merger. We are completely reliant on our Manager, which has
significant discretion as to the implementation of our operating policies and strategies. We have entered into a management agreement with our Manager that terminates in December 2009, subject to
automatic, one-year renewals. We are subject to the risk that our Manager will terminate the management agreement and that no suitable replacement will be found to manage us. We believe
that our success depends to a significant extent upon the experience of our Manager's executive officers, whose continued service is not guaranteed. If our Manager terminates the management agreement,
or if any of its key employees cease to work for our Manager, we may not be able to execute our business plan.

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There are conflicts of interest in our relationship with the Manager, which could result in decisions that are not in the best interest of holders of
our securities.

We are subject to potential conflicts of interest arising out of our relationship with SL Green and our Manager. Several of SL Green's executive officers are also
directors and executive officers of the Manager and us. Specifically, our chairman and each of our executive officers also serve as officers of our Manager or SL Green. As a result, the management
agreement was not negotiated at arm's-length and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

In
addition, our Manager and our executives may have conflicts between their duties to us and their duties to, and interests in, SL Green and/or our Manager. Our Manager is not required
to devote a specific amount of time to our operations. There may also be conflicts in allocating investments which are suitable both for us and SL Green. SL Green has agreed generally that it will not
acquire fixed income or preferred equity investments during the term of the management agreement. However, there are several exceptions, including debt instruments with equity characteristics,
distressed debt and refinancings of existing SL Green debt investments. As a result, SL Green may compete with us with respect to certain investments which we may want to acquire, and as a result we
may either not be presented with the opportunity or have to compete with SL Green to acquire these investments. Our Manager and our executive officers may choose to allocate favorable investments to
SL Green instead of to us.

We
pay our Manager substantial base management fees regardless of the performance of our portfolio. SL Green, the Manager and certain other parties, including certain of our officers,
also own Class B limited partner interests in our operating partnership, which entitles them to receive quarterly distributions based on financial performance. In evaluating investments and
other management strategies, this may lead our Manager to place emphasis on the maximization of revenues at the expense of other criteria, such as preservation of capital. Investments with higher
yield potential are generally riskier or more speculative. This could result in increased risk to the value of our invested portfolio.

Termination
of or failure to renew the management agreement without cause requires us to pay substantial amounts of termination fees and redeem the Class B limited partner
interests. If the management agreement is terminated or not renewed other than for cause, we will be required to pay a termination fee equal to two times the higher of the total annual fees paid in
either of the two
calendar years prior to the termination, unless we become self-managed, in which event this amount will be reduced by 50%. We are also required to redeem the Class B limited partner
interests upon termination of the management agreement. These provisions may increase the effective cost to us of terminating or failing to renew the management agreement, thereby adversely affecting
our ability to terminate or not renew the management agreement without cause.

Our assets that we acquire by foreclosure or by similar conveyance may be subject to purchase rights or rights of first offer in favor of SL Green,
which could reduce their marketability or value.

Pursuant to our origination agreement with SL Green, we have granted SL Green purchase rights with respect to certain of our assets. When we acquire a direct or
indirect ownership interest in real property or interests in real property located in metropolitan New York or Washington, D.C. by foreclosure or similar conveyance or transfer, SL Green has the right
to purchase such ownership interest at a price equal to the sum of (i) our unpaid principal balance on the date we foreclosed on or acquired the asset, (ii) interest through the date of
SL Green's purchase and (iii) legal costs incurred by us directly related to the conveyance of the property and the exit fee due upon prepayment or repayment, both to the extent payable by the
borrower under the initial loan documentation. We refer to this amount as the "par value". If we seek to sell the asset and receive a bona fide offer to acquire

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the
asset for cash that we desire to accept, SL Green may purchase the asset at the lower of the par value and the third party's offer price.

Similarly,
our agreements with SL Green in connection with our commercial property investments in 55 Corporate Drive, 885 Third Avenue, and Two Herald Square, contain a
buy-sell provision that can be triggered by us in the event we and SL Green are unable to agree upon a major decision that would materially impair the value of the assets. Such major
decisions involve the sale or refinancing of the assets, any extensions or modifications to the net leases with the tenant therein or any material capital expenditures.

These
rights may make it more difficult to sell such assets because third parties may not want to incur the expense and effort to bid on assets when they perceive that SL Green may
acquire them at the lower of the same terms proposed by the third party or par value. As a result, we may not receive the same value on the sale of such assets as we might receive from an independent
third party submitting an offer through a competitive bidding process.

Our financial condition and results of operations depend on our ability to manage future growth effectively.

Our ability to achieve our investment objective depends on our ability to grow, which depends, in turn, on our Manager's ability to identify and invest in debt
investments or other securities that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our Manager's structuring of the investment
process, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms. The senior management team of our Manager has substantial
responsibilities under the management agreement. We can offer no assurance that the senior management team of our Manager or any of the other employees of our Manager will contribute to our growth.
Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition, results of operations, and our ability to make distributions to our
stockholders.

Our board of directors has approved very broad investment guidelines for the Manager and does not approve each investment decision made by the Manager.

Our Manager is authorized to follow very broad investment guidelines. Our directors review our investment guidelines and our investment portfolio annually and as
often as they deem necessary. However, our board of directors does not review each proposed investment. The investment committee of our board of directors must unanimously approve all transactions
involving investments of (i) $50 million or more with respect to CMBS investments, (ii) $35 million or more with respect to whole loans, (iii) $30 million or
more with respect to subordinate interests in whole loans, and (iv) $20 million or over with respect to mezzanine loans, preferred equity, and CTL investments. The full board of
directors must approve investments (i) over $75 million with respect to whole loans and CMBS investments, (ii) over $65 million with respect to subordinate interests in
whole loans, (iii) over $55 million with respect to mezzanine loans, and (iv) over $50 million with respect to preferred equity and CTL investments. Our Manager has full
discretion to make investments on our behalf under (i) $50 million with respect to CMBS investments, (ii) $35 million with respect to whole loans,
(iii) $30 million with respect to subordinate interests in whole loans, and (iv) $20 million with respect to mezzanine loans, preferred equity and CTL investments. Our
chief investment officer may approve investments of less than $3 million. Approval limits are based on the investment amount less any origination fees, discounts or other up-front
fees we receive in connection with the investment. In addition, in conducting periodic reviews, the directors rely primarily on information provided to them by our Manager. Our Manager has great
latitude within the broad parameters of our investment guidelines in determining the types of assets it may decide are proper investments for us. Decisions made and investments entered into by our
Manager may not fully reflect the stockholder's best interests.

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We may change our investment and operational policies without stockholder consent.

We may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness,
capitalization and distributions, at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the types of
investments described in this filing. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could
adversely affect our ability to make distributions.

Risks Related to Our Business

Maintenance of our Investment Company Act exclusions and exemptions imposes limits on our operations.

We believe that there are a number of exclusions and exemptions under the Investment Company Act that may be applicable to us and we have conducted and intend to
continue to conduct our operations so as not to become regulated as an investment company under the Investment Company Act. We will either be excluded from the definition of investment company under
Section 3(a)(1)(C) of the Investment Company Act, by owning or proposing to acquire "investment securities" having a value not exceeding 40% of the value of our total assets (exclusive of U.S.
Government securities and cash items) on an unconsolidated basis, or exempted by qualifying for the exemptions from registration provided by Sections 3(c)(5)(C) and/or 3(c)(6) of the Investment
Company Act. For example, Section 3(c)(5)(C) exempts from the definition of "investment company" any person who is "primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate." Additionally, Section 3(c)(6) exempts from the definition of "investment company" any company primarily engaged, directly or through
majority-owned subsidiaries, in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. The assets that we have acquired and may acquire in the
future, therefore, are limited by the provisions of the Investment Company Act and the exclusions and exemptions on which we rely. In addition, we could, among other things, be required either
(a) to change the manner in which we conduct our operations to
avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on our business and our ability to pay
dividends.

To
maintain our qualification for an exclusion from registration under the Investment Company Act pursuant to Section 3(c)(5)(C) and 3(c)(6)at least 55% of our portfolio, or the
assets of our majority-owned subsidiaries, must be comprised of qualifying assets under Section 3(c)(5)(C) of the Investment Company Act, and 80% of our portfolio, or the assets of our
majority-owned subsidiaries, must be comprised of qualifying assets and real estate-related assets under Section 3(c)(5)(C) of the Investment Company Act. In addition, we may not issue
redeemable securities. To comply with the Section 3(c)(5)(C) exemption, we may from time to time buy RMBS and other qualifying assets. We generally expect that mortgage loans, whole pool CMBS,
CTL investments, certain distressed debt securities and Tier 1 mezzanine loans to be qualifying assets under the Section 3(c)(5)(C) exemption from the Investment Company Act.
Tier 1 mezzanine loans are loans granted to a mezzanine borrower that directly owns interests in the entity that owns the property being financed. The treatment of distressed debt securities as
qualifying assets is, and will be, based on the characteristics of the particular type of loan, including its foreclosure rights. Junior (first loss) interests in CMBS pools may constitute qualifying
assets under Section 3(c)(5)(C) provided that we have the unilateral right to foreclose, directly or indirectly, on the mortgages in the pool and that we may act as the controlling class or
directing holder of the pool. Similarly, subordinate interests in whole loans may constitute qualifying assets under Section 3(c)(5)(C) provided that we have the unilateral right to foreclose,
directly or indirectly, on the mortgage and that we may act as the controlling class or directing holder of the note. We generally do not treat non-Tier 1 mezzanine loans and
preferred equity investments as qualifying assets. Although we monitor our portfolio periodically and prior to each origination or

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acquisition
of a new asset or disposition of an existing asset, there can be no assurance that we will be able to maintain an exclusion or exemption from registration. Further, we may not be able to
invest in sufficient qualifying and/or real estate-related assets and future revisions, or interpretations of the Investment Company Act may cause us to lose our exclusion or exemption or force us to
re-evaluate our portfolio and our business strategy. Such changes may prevent us from operating our business successfully. To the extent that the staff of the SEC provides more specific
guidance regarding the treatment of assets as qualifying assets or real estate-related assets, we may be required to adjust our investment strategy accordingly. Any additional guidance from the staff
of the SEC could provide additional flexibility to us, or it could further inhibit our ability to pursue the investment strategy we have chosen.

As
part of its duties under the management agreement, our Manager in consultation with legal and tax advisors, periodically evaluates our assets, and also evaluates prior to an
acquisition or origination the structure of each prospective investment or asset, to determine whether we meet the qualifications for the exclusion from the definition of investment company in
Section 3(a)(1)(C) and/or whether our Manager believes the investment will be a qualifying asset for purposes of maintaining the exemptions found in Sections 3(c)(5)(C) and/or 3(c)(6)
from registration under the Investment Company Act. We consult with counsel to verify such determination as appropriate. If we are obligated to register as an investment company, we would have to
comply with a variety of substantive requirements under the Investment Company Act, including limitations on capital structure, restrictions on specified investments; prohibitions on transactions with
affiliates, changes in the composition of the board of directors and compliance with reporting, record keeping, voting, proxy disclosure and other rules and
regulations that would significantly change our operations. In addition, the terms of our management agreement would need to be substantially revised or such agreement would need to be terminated. If
the management agreement is terminated, we will, among other things, be in default under our repurchase or other financing facilities and financial institutions will have the right to terminate those
facilities and their obligation to advance funds to us to finance our future investments. In addition, we may not be able to identify a replacement manager on favorable terms or at all.

The current dislocations in the residential mortgage sector, and the current weakness in the broader financial market, could adversely affect us and one
or more of our lenders, which could result in increases in our borrowing costs, reduction in our liquidity and reductions in the value of the investments in our portfolio.

The continuing dislocations in the sub-prime mortgage sector and the current weakness in the broader financial market could adversely affect our
counterparties providing repurchase agreements funding for our loan or CMBS investments, and could cause such counterparty to be unwilling or unable to provide us with additional financing. This could
potentially limit our ability to finance our investments and operations, increase our financing costs and reduce our liquidity. If one or more major market participants fails or withdraws from the
market, it could negatively impact the marketability of all fixed income securities, and this could reduce the value of the securities in our portfolio, thus reducing our net book value. Furthermore,
if our counterparties are unwilling to or unable to provide us with ongoing financing, we could be forced to sell our investments at a time when prices are depressed. If this were to occur, it could
prevent us from complying with the REIT asset and income tests necessary to fulfill our REIT qualification requirements or could cause us not to qualify for an exemption from the Investment Company
Act, and otherwise materially harm our results of operation and financial outlook.

Recent
developments in the market for many types of mortgage products have resulted in reduced liquidity for these assets. Although this reduction in liquidity has been most acute with
regard to residential assets, there has been an overall reduction in liquidity across the credit spectrum of mortgage products.

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If we are unable to generate sufficient funds or obtain financing for future capital commitments, we may not be able to repay indebtedness or fund our
other liquidity needs, which could have a material adverse effect on us.

At December 31, 2007, we had future funding commitments of approximately $297.7 million related to real estate debt investments we held. Our ability
to fund future capital commitments will depend, to a
certain extent, on general economic, financial, competitive and other factors that may be beyond our control. We cannot be certain that our business will generate sufficient cash flow from operations,
that we will be able to raise funds in the capital markets or that future borrowings will be available to us in an amount sufficient to enable to us to fund our liquidity needs. Our inability to fund
future commitments may cause borrowers to take legal action against us, which could have a material adverse effect on us. However, as of December 31, 2007, we believe our cash flows from
operations, available cash and cash equivalents and available borrowings will be adequate to meet our future liquidity needs. For more information on our contractual commitments, see "Management's
Discussion and Analysis of Financial Condition and Results of OperationsContractual Obligations" and the notes to the consolidated financial statements in this Annual Report on
Form 10-K.

Liquidity in the capital markets is essential to our businesses and future growth and we rely on external sources to finance significant portion of our
operations.

Liquidity is essential to our business and our ability to grow and to fund existing obligations. A primary source of liquidity for us has been the equity and debt
capital markets, including issuing common equity, perpetual preferred equity and trust preferred securities. We depend on external financing to fund the growth of our business mainly because one of
the requirements for the Internal Revenue Code for a REIT is that it distributes 90% of its taxable income to its shareholders, including taxable income where we do not receive corresponding cash. Our
access to equity or debt financing depends on the willingness of third parties to make equity investments in us and provide us with corporate level debt. It also depends on conditions in the capital
markets generally. Companies in the real estate industry, including us, are currently experiencing, and have at times historically experienced, limited availability of capital, and new capital sources
may not be available on acceptable terms. Our ability to raise capital could be impaired if the capital markets have a negative perception of our long-term and short-term
financial prospects or the prospects for mortgage REITs and the commercial real estate market generally. We cannot be certain that sufficient funding or capital will be available to us in the future
on terms that are acceptable to us. If we cannot obtain sufficient funding on acceptable terms, we will not be able to grow our business, which would likely have a negative impact on the market price
of our common stock and our ability to make distributions to our stockholders.

In
addition, the liquidity in our portfolio may also be adversely affected by possible margin calls under our repurchase agreements. Our repurchase agreements allow the counterparties,
to varying degrees, to determine a new market value of the collateral to reflect current market conditions. If such counterparties determine that the value of the collateral has decreased, it may
initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding borrowing. A significant increase in margin calls as a result of
spread widening could harm our liquidity, results of operation, financial condition, business prospects, and our ability to make distributions to our stockholders. Additionally, in order to obtain
cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses and adversely affect our results of operations, financial
condition, and may impair our ability to maintain our current level of dividends.

For
information about our available sources of funds, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
Resources" and the notes to the consolidated financial statements in this Annual Report on Form 10-K.

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We utilize a significant amount of debt to finance our portfolio, which may subject us to an increased risk of loss, adversely affecting the return on
our investments and reducing cash available for distribution.

We utilize a significant amount of debt to finance our operations, which can compound losses and reduce the cash available for distributions to our stockholders.
We generally leverage our portfolio through the use of secured and unsecured bank credit facilities, repurchase agreements, securitizations, including the issuance of CDOs and other borrowings. The
leverage we employ varies depending on our ability to obtain financing, the loan-to-value and debt service coverage ratios of our assets, the yield on our assets, the targeted
leveraged return we expect from our portfolio and our ability to meet ongoing covenants related to our asset mix and financial performance. Substantially all of our assets are pledged, or subject to a
negative pledge, as collateral for our secured borrowings or to support our unsecured borrowings. Our return on our investments and cash available for distribution to our stockholders may be reduced
to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we acquire. For example, we have purchased, and
expect to purchase in the future should we issue additional CDO's, subordinate classes of bonds in our CDOs which represent leveraged investments in the collateral debt securities and other underlying
assets. The use of leverage through such CDOs create the risk for the holders of the subordinate classes of bonds of increased exposure to losses on a leveraged basis as a result of defaults with
respect to such collateral debt securities. As a result, the occurrence of defaults with respect to only a small portion of the collateral debt securities could result in the complete loss of the
investment of the holders of the subordinate classes of bonds.

Our
debt service payments, including payments in connection with any CDOs, reduce the net income available for distributions. Moreover, we may not be able to meet our debt service
obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations. Under our repurchase agreements, our lenders take
title to our assets and may have an ability to liquidate our assets through an expedited process. Currently, neither our charter nor our bylaws impose any limitations on the extent to which we may
leverage our assets.

The recent downturn in the credit markets has increased the cost of borrowing and has made financing difficult to obtain, which has negatively impacted
our business, and may have a material adverse effect on us.

During 2007, the sub prime residential lending and single family housing markets began to experience accelerating default rates, declining real estate values and
increasing backlog of housing supply. The residential sector issues quickly spread more broadly into the asset-backed, corporate and other credit and equity markets. Since the sub prime meltdown,
volatility and risk premiums in most credit and equity markets have increased dramatically while liquidity has decreased. These issues have continued into the beginning of fiscal 2008. Increasing
concerns regarding the U.S. and world economic outlook, such as large asset write-downs at banks, rising oil prices, declining business and consumer confidence and increased unemployment, are
compounding these issues and risk premiums in most capital markets remain near historical all-time highs. Although we do not have any direct sub prime exposure or direct exposure to the
single family mortgage market, the factors described above have resulted in substantially reduced commercial mortgage loan originations and securitizations, and are precipitating more generalized
credit market dislocations and a significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and investors, are finding it
difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt.

Due
to these conditions, the commercial real estate finance market has experienced higher volatility and less liquidity despite continued relatively strong credit performance across the
sector. Credit has become more expensive and difficult to obtain for the Company and its competitors. The cost of financing as well as overall market-demanded risk premiums in commercial lending have
increased. Most lenders are imposing more stringent restrictions on the terms of credit and there is a

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general
reduction in the amount of credit available in the markets in which we conduct business. The negative impact on the tightening of the credit markets, further declines in real estate values in
the U.S. and continuing credit and liquidity concerns may have a material adverse effect on us. Additionally, there is no assurance that the increased financing costs, financing with increasingly
restrictive terms or the increase in risk premiums that are demanded by investors will not have a material impact on our future profitability measures. However, we expect that a portion of the impact
of increased capital costs will be offset by increased yields on newly-originated assets, particularly if assets in our existing commercial real estate CDOs are repaid.

If GKK Manager LLC ceases to be the Manager pursuant to the management agreement, financial institutions providing our repurchase facilities may
not provide future financing to us.

The financial institutions that finance our investments pursuant to our repurchase agreements require that GKK Manager LLC remain our Manager pursuant to
the management agreement. If GKK Manager LLC ceases to be our Manager, it is an event of default and the financial institutions under these facilities have the right to terminate the facilities
and their obligation to advance funds to us to
finance our future investments. If GKK Manager LLC ceases to be our Manager for any reason and we are unable to obtain financing under these or replacement credit and repurchase facilities, our
growth may be limited.

Our repurchase agreements and our CDO financing agreements may limit our ability to make investments.

In order to borrow money to make investments under our repurchase agreements, our repurchase lenders, Wachovia and Goldman, have the right to review the potential
investment for which we are seeking financing. We may be unable to obtain the consent of our lenders to make investments that we believe are favorable to our company. In the event that Wachovia or
Goldman do not consent to the inclusion of the potential asset in the respective repurchase facility, we may be unable to obtain alternate financing for that investment. Our lender's consent rights
with respect to our repurchase agreements may limit our ability to execute our business plan.

Each
CDO financing that we engage in will contain certain eligibility criteria with respect to the collateral that we seek to acquire and sell to the CDO issuer. If the collateral does
not meet the eligibility criteria for eligible collateral as set forth in the transaction documents of such CDO transaction, we may not be able to acquire and sell such collateral to the CDO issuer.
The inability of the collateral to meet eligibility requirements with respect to our CDOs may limit our ability to execute our business plan.

We may not be able to issue CDO securities on attractive terms or at all, which may require us to seek more costly financing for our investments or to
liquidate assets.

Conditions in the capital markets may make the issuance of a CDO less attractive or unavailable to us even in instances when we have a sufficient pool of eligible
collateral. If we are unable to issue a CDO to finance these assets, or if doing so is not economical, we may be required to seek other forms of potentially less attractive financing or otherwise to
liquidate the collateral.

Investor demand for commercial real estate CDOs has been substantially curtailed.

The recent turmoil in the structured finance markets, in particular the sub-prime residential loan market, has negatively impacted the credit markets
generally, and, as a result, investor demand for commercial real estate CDOs has been substantially curtailed. In recent years, we have relied, to a substantial extent, on CDO financings to obtain
match funded financing for our investments. Until the market for commercial real estate CDOs recovers, we may be unable to utilize CDOs to finance our investments and we may need to utilize less
favorable sources of financing to finance our investments

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on
a long-term basis. If such other forms of long-term financing are unavailable, it may be necessary to fund our investments using shorter term debt financing, in which case we would not
meet our objective of match funding for substantially all of our investments. There can be no assurance as to whether or when demand for commercial real estate CDOs will return or the terms of such
securities investors will demand or whether we will be able to issue CDOs to finance our investments on terms beneficial to us.

We may not be able to access financing sources on favorable terms, or at all, which could adversely affect our ability to execute our business plan and
our ability to distribute dividends.

We finance our assets over the long-term through a variety of means, including repurchase agreements, secured and unsecured credit facilities, CDOs
and other structured financings. We have also financed our investments through the issuance of $150 million of trust preferred securities. Our ability to execute this strategy depends on
various conditions in the markets for financing in this manner which are beyond our control, including lack of liquidity and wider credit spreads. We cannot be certain that these markets, especially
the structured finance markets, will provide an efficient source of long-term financing for our assets. Our ability to finance through CDOs is subject to a level of investor demand which
has been significantly curtailed in the second half of 2007 and in 2008 to date. If our strategy is not viable, we will have to attempt to find alternative forms of long-term financing for
our assets, as secured revolving credit facilities and repurchase facilities, if available, may not accommodate long-term financing. This could subject us to more recourse indebtedness and
the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, to service our debt thereby reducing cash available for distribution to our
stockholders, funds available for operations as well as for future business opportunities.

In
addition, we depend upon the availability of adequate financing sources and capital for our operations. As a REIT, we are required to distribute at least 90% of our REIT taxable
income, determined without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders and are therefore not able to retain our earnings for new investments.
However, our taxable REIT subsidiaries are able to retain (and likely will retain) earnings for investment in new
capital, subject to maintaining our qualification as a REIT. We cannot be certain that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us.

Furthermore,
if the minimum dividend distribution required to maintain our REIT qualification becomes large relative to our cash flow due to our taxable income exceeding our cash flow
from operations, then we could be forced to borrow funds, sell assets or raise capital on unfavorable terms, if we are able to at all, in order to maintain our REIT qualification. In the event that we
cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the market price of our common shares and our ability to distribute dividends.

Lack of diversification in number of investments increases our dependence on individual investments.

If we acquire larger loans or property interests, our portfolio will be concentrated in a smaller number of assets, increasing the risk of loss to stockholders if
a default or other problem arises.

Interest rate fluctuations could reduce our ability to generate income on our investments.

The yield on our investments in real estate securities and loans is sensitive to changes in prevailing interest rates and changes in prepayment rates. Changes in
interest rates can affect our net interest income, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these
investments. We tend to price loans at a spread to either United States Treasury obligations, swaps or LIBOR. A decrease in these indexes will lower the yield on our investments, except to the extent
certain of our loans contain floors below

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which
the interest rate cannot decline. Conversely, if these indexes rise materially, borrowers may be unable to meet their debt service requirements and borrow the higher-leverage loans that we
target.

In a period of rising interest rates, our interest expense could increase while the interest we earn on our fixed-rate assets would not
change, which would adversely affect our profitability.

Our operating results depend in large part on differences between the income from our assets, net of credit losses, and financing costs. In most cases, for any
period during which our assets are not match-funded, the income from such assets will respond more slowly to interest rate fluctuations than the cost
of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income. Increases in these rates will tend to
decrease our net income and market value of our assets. Interest rate fluctuations resulting in our interest expense exceeding our interest income would result in operating losses for us and may limit
or eliminate our ability to make distributions to our stockholders.

If credit spreads widen before we obtain long-term financing for our assets, the value of our assets may suffer.

We price our assets based on our assumptions about future credit spreads for financing of those assets. We have obtained, and may obtain in the future, longer
term financing for our assets using structured financing techniques. Such issuances entail interest rates set at a spread over a certain benchmark, such as the yield on United States Treasury
obligations, swaps or LIBOR. If the spread that investors are paying on our current structured finance vehicles and will pay on future structured finance vehicles we may engage in over the benchmark
widens and the rates we are charging or will charge on our securitized assets are not increased accordingly, our income may be reduced or we could suffer losses which could affect our ability to make
distributions to our stockholders.

The repurchase agreements and credit facilities that we use to finance our investments may require us to provide additional collateral.

We use credit facilities and repurchase agreements to finance some of our debt investments, primarily on an interim basis. If the market value of the loans
pledged or sold by us to a funding source declines in value, we may be required by the lending institution to provide additional collateral or repay a portion of the funds advanced. We may not have
the funds available to pay down our debt, which could result in defaults. Posting additional collateral to support our repurchase and credit facilities will reduce our liquidity and limit our ability
to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate our indebtedness, increase interest rates and terminate our
ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for protection under the United States Bankruptcy Code.

Further,
facility providers may require us to maintain a certain amount of cash uninvested or set aside unlevered assets sufficient to maintain a specified liquidity position, which
would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we
are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.

Lenders may require us to enter into restrictive covenants relating to our operations.

When we obtain financing, lenders impose restrictions on us that affect our ability to incur additional debt, our capability to make distributions to stockholders
and our flexibility to determine our operating policies. Loan documents we execute contain negative covenants that limit, among other things, our ability to repurchase stock, distribute more than a
certain amount of our funds from operations, and employ leverage beyond certain amounts.

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We may not be able to find suitable replacement investments for CDOs with reinvestment periods.

Some of our CDOs have periods where principal proceeds received from assets securing the CDO can be reinvested only for a defined period of time, commonly
referred to as a reinvestment period. Our ability to find suitable investments during the reinvestment period that meet the criteria set forth in the CDO documentation and by rating agencies may
determine the success of our CDO investments. Our potential inability to find suitable investments may cause, among other things, lower returns, interest deficiencies, hyper-amortization of the senior
CDO securities and may cause us to reduce the life of our CDOs and accelerate the amortization of certain fees and expenses.

The use of CDO financings with coverage tests may have a negative impact on our operating results and cash flows.

We have purchased, and expect to purchase in the future should we issue additional CDOs, subordinate classes of bonds issued by certain of our subsidiaries. The
terms of the CDO securities issued by us include and will include coverage tests, including interest coverage and over-collateralization tests, used primarily to determine whether and to
what extent principal and interest proceeds on the underlying collateral debt securities and other assets may be used to pay principal of and interest on the subordinate classes of bonds in the CDO.
In the event the coverage tests are not satisfied, interest and principal that would otherwise be payable on the subordinate classes may be re-directed to pay principal on the senior bond
classes. Therefore, failure to satisfy the coverage tests could adversely affect our operating results and cash flows. Although these coverage tests are currently being met, we cannot be certain that
the coverage tests will continue to be satisfied in the future.

Certain
coverage tests (based on delinquency levels or other criteria) may also restrict our ability to receive net income from assets pledged to secure the CDOs. We cannot be certain,
in advance of completing negotiations with the rating agencies or other key transaction parties on any future CDOs, to the extent available, as to the actual terms of the delinquency tests,
over-collateralization terms, cash flow release mechanisms or other significant factors regarding the calculation of net income to us. Failure to obtain favorable terms with regard to
these matters may materially and adversely affect the availability of net income to us. If our assets fail to perform as anticipated, our over-collateralization or other credit enhancement
expense associated with our CDOs will increase.

If we issue senior securities we will be exposed to additional restrictive covenants and limitations on our operating flexibility, which could adversely
affect our ability to pay dividends.

If we decide to issue senior securities in the future, it is likely that they will be governed by an indenture or other instrument containing covenants
restricting our operating flexibility. Holders of senior securities may be granted specific rights, including but not limited to: the right to hold a perfected security interest in certain of our
assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to require approval to sell assets. Additionally, any convertible or exchangeable
securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We, and indirectly our stockholders, will bear the cost of issuing and
servicing such securities.

We may be required to repurchase loans that we have sold or to indemnify holders of our CDOs.

If any of the loans we originate or acquire and sell or securitize do not comply with representations and warranties that we make about certain characteristics of
the loans, the borrowers and the underlying properties, we may be required to repurchase those loans (including from a trust vehicle used to facilitate a structured financing of the assets through
CDOs) or replace them with substitute loans. In addition, we may elect to repurchase loans from our CDOs, although we are not

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required
to do so. In addition, in the case of loans that we have sold instead of retained, we may be required to indemnify persons for losses or expenses incurred as a result of a breach of a
representation or warranty. Repurchased loans typically require a significant allocation of working capital to carry on our balance sheet, and our ability to borrow against such assets is limited. Any
significant repurchases or indemnification payments could materially and adversely affect our financial condition and operating results and our ability to make distributions to our stockholders.

Our hedging transactions may limit our gains or result in losses.

Subject to maintaining our qualification as a REIT, we use a variety of derivative instruments that are considered conventional "plain vanilla" derivatives,
including interest rate swaps, caps, collars and floors, in our risk management strategy to limit the effects of changes in interest rates on our operations. Our primary hedging strategy consists of
entering into interest rate swap contracts. Additionally, we, in certain select instances, choose to hedge our exposure to fluctuations in CMBS credit spreads by purchasing swaps written against a
broad-based CMBS index. The value of our derivatives may fluctuate over time in response to changing market conditions, and will tend to change inversely with the value of the risk in our liabilities
that we intend to hedge. Hedges are sometimes ineffective because the correlation between changes in value of the underlying investment and the derivative instrument is less than was expected when the
hedging transaction was undertaken. Since a portion of our hedging activity is intended to cover the period between origination or purchase of loans and their eventual sale or securitization,
unmatched losses in our hedging program can occur when the planned securitization fails to occur, or if the hedge proves to be ineffective.

Our
hedging transactions, which are intended to limit losses, may actually limit gains and increase our exposure to losses. The use of derivatives to hedge our liabilities carries
certain risks, including the risk that losses on a hedge position will reduce the cash available for distribution to stockholders and that these losses may exceed the amount invested in such
instruments. A hedge may not be effective in eliminating all of the risks inherent in any particular position and could result in higher interest rates than we would otherwise have. In addition, there
will be many market risks against which we may not be able to hedge effectively. Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates, and
our qualification as a REIT may limit our ability to effectively hedge our interest rate exposure. Our profitability may be adversely affected during any period as a result of the use of derivatives.
Also, mark-to-market adjustments on our hedging transactions may require us to post additional collateral or make a cash deposit that reduces our available liquidity.

Our reserves for loan losses may prove inadequate, which could have a material adverse effect on us.

We maintain and regularly evaluate financial reserves to protect against potential future losses. Our reserves reflect management's judgment of the probability
and severity of losses. We cannot be certain that our judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses because of unanticipated
adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate or markets in which our borrowers or their properties are located. If
our reserves for credit losses prove inadequate we could suffer losses which would have a material adverse effect on our financial performance, the market price of our common stock and our ability to
make distributions to our stockholders.

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We are subject to the risk that provisions of our loan agreements may be unenforceable.

Our rights and obligations with respect to our loans are governed by written loan agreements and related documentation. It is possible that a court could
determine that one or more provisions of a loan agreement are unenforceable, such as a loan prepayment provision or the provisions governing our security interest in the underlying collateral. If this
were to happen with respect to a material asset or group of assets we could be adversely affected.

We are subject to significant competition and we may not compete successfully.

We have significant competition with respect to our acquisition and origination of assets with many other companies, including other mortgage REITs, insurance
companies, commercial banks, private investment funds, hedge funds, specialty finance companies and other investors. Some competitors may have a lower cost of funds and access to funding sources that
are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and
establish more relationships than us. We cannot be certain that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of
operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to
identify and make investments that are consistent with our investment objective.

Rapid changes in the values of our CMBS and other real estate related investments may make it more difficult for us to maintain our qualification as a
REIT or exemption from the Investment Company Act.

If the market value or income potential of our CMBS and other real estate-related investments declines as a result of increased interest rates, prepayment rates
or other factors, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exemption from
the Investment Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid
nature of many of our
non-real estate assets. We may have to make investment decisions that we otherwise would not make absent the REIT and Investment Company Act considerations.

If we fail to achieve adequate operating cash flow, our ability to make distributions will be adversely affected.

As a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid
and excluding net capital gain. Our ability to make and sustain cash distributions is based on many factors, including the return on our investments, operating expense levels and certain restrictions
imposed by Maryland law. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay future dividends. No assurance can be given as to our ability to pay
distributions to our stockholders.

Terrorist attacks and other acts of violence or war may affect the market for our common stock, the industry in which we conduct our operations and our
profitability.

Terrorist attacks may harm our results of operations and the stockholder's investment. We cannot be certain that there will not be further terrorist attacks
against the U.S. or U.S. businesses. These attacks or armed conflicts may directly impact the property underlying our asset-based securities or the securities markets in general. Losses resulting from
these types of events are uninsurable.

More
generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy.
Adverse economic conditions could harm the value of the property underlying our asset-backed securities or the

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securities
markets in general which could harm our operating results and revenues and may result in the volatility of the value of our securities.

We are required to make a number of judgments in applying accounting policies and different estimates and assumptions in the application of these
policies could result in changes to our reporting of financial condition and results of operations.

Material estimates that are particularly susceptible to significant change relate to the determination for loan losses, the effectiveness of derivatives and other
hedging activities, the fair value of certain
financial instruments (debt obligations, CMBS, loan assets, securities, derivatives, and privately held investments), CTL investments, deferred income tax assets or liabilities, share-based
compensation, and accounting for acquisitions, including the fair value determinations and the analysis of goodwill impairment. While we have identified those accounting policies that are considered
critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could result in material changes to our reports of financial
condition and results of operations.

We are highly dependent on information systems and third parties, and systems failures could significantly disrupt our business, which may, in turn,
negatively affect the market price of our common stock and our ability to pay dividends.

Our business is highly dependent on communications and information systems, some of which are provided by third parties. Any failure or interruption of our
systems could cause delays or other problems in our securities trading activities, including mortgage-backed securities trading activities, which could have a material adverse effect on our operating
results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.

Risks Related to Our Investments

Some of our portfolio investments may be recorded at fair value as determined in good faith by the Manager and, as a result, there will be uncertainty
as to the value of these investments.

Changes in the market values of our investments in securities available for sale will be directly charged or credited to stockholders' equity. As a result, a
decline in values may reduce the book value of our assets. Moreover, if the decline in value of a security is other than temporary, such decline will reduce earnings. Any such charges may result in
volatility in our reported earnings and may adversely affect the market price of our common stock. Some of our portfolio investments may be in the form of securities, including CMBS that are not
publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. We value these investments quarterly at fair value as determined in
good faith by our Manager. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ
materially from the values that would have been used if a ready market for these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair
value of these investments were materially higher than the values that we ultimately realize upon their disposal.

We may not realize gains or income from our investments.

We seek to generate both current income and capital appreciation. However, the securities we invest in may not appreciate in value and, in fact, may decline in
value, and the debt securities we invest in may default on interest and/or principal payments. Accordingly, we may not be able to realize gains or income from our investments. Any gains that we do
realize may not be sufficient to offset any other losses we experience. Any income that we realize may not be sufficient to offset our expenses.

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A prolonged economic slowdown, a lengthy or severe recession, a reduction in liquidity, or declining real estate values could harm our operations.

We believe the risk associated with our business is more severe during periods of economic slowdown or recession if these periods are accompanied by declining
real estate values. Declining real estate values will likely reduce our level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to
support the purchase or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans if the real estate economy weakens. Further, declining real
estate values significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to recover the carrying value
of the loan. A reduction in capital markets liquidity may cause difficulties for borrowers seeking to refinance existing loans at or prior to maturity, even in instances of satisfactory property cash
flow and collateral value. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as
our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions
to our stockholders.

We may be adversely affected by unfavorable economic changes in geographic areas where our properties are concentrated.

Adverse conditions in the areas where our properties or the properties underlying our investments are located (including business layoffs or downsizing, industry
slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply of, or reduced demand for, office, industrial or retail properties) may have an adverse effect
on the value of our properties. A material
decline in the demand or the ability of tenants to pay rent for office, industrial or retail space in these geographic areas may result in a material decline in our cash available for distribution.

Joint investments could be adversely affected by our lack of sole decision-making authority and reliance upon a co-venturer's financial
condition.

We co-invest with third parties through partnerships, joint ventures, co-tenancies or other entities, acquiring
non-controlling interests in, or sharing responsibility for managing the affairs of, a property, partnership, joint venture, co-tenancy or other entity. Therefore, we will not
be in a position to exercise sole decision-making authority regarding that property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may
involve risks not present were a third party not involved, including the possibility that our partners, co-tenants or co-venturers might become bankrupt or otherwise fail to
fund their share of required capital contributions. Additionally, our partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent
with our business interests or goals. These investments may also have the potential risk of impasses on decisions such as a sale, because neither we nor the partner, co-tenant or
co-venturer would have full control over the partnership or joint venture. Consequently, actions by such partner, co-tenant or co-venturer might result in
subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in specific circumstances be liable for the actions of our third-party partners,
co-tenants or co-venturers.

Some
of our loans are participation interests in loans, or co-lender arrangements, in which we share the rights, obligations and benefits of the loan with other lenders. We
may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the
institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation
interest represents a minority interest. We may be adversely affected by this lack of complete control.

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We
may in the future enter into joint venture agreements that contain terms in favor of our partners that may have an adverse effect on the value of our investments in the joint
ventures. For example, we may be entitled under a particular joint venture agreement to an economic share in the profits of the joint venture that is smaller than our ownership percentage in the joint
venture, our partner may be entitled to a specified portion of the profits of the joint venture before we are entitled to any portion of such profits and our partner may have rights to buy our
interest in the joint venture, to force us to buy the partner's interest in the joint venture or to compel the sale of the property owned by such joint
venture. These rights may permit our partner in a particular joint venture to obtain a greater benefit from the value or profits of the joint venture than us, which may have an adverse effect on the
value of our investment in the joint venture and on our financial condition and results of operations.

Liability relating to environmental matters may impact the value of the properties that we may acquire or underlying our investments.

Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances
released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or, was responsible for, the release of such hazardous substances.

There
may be environmental problems associated with our properties which we were unaware of at the time of acquisition. The presence of hazardous substances may adversely affect an
owner's ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property underlying one of our debt investments becomes liable for removal costs, the
ability of the owner to make debt payments to us may be reduced. This, in turn, may adversely affect the value of the relevant mortgage asset held by us and our ability to make distributions to
stockholders.

If
the presence of hazardous substances on our properties may adversely affect our ability to sell an affected property and we may incur substantial remediation costs, thus harming our
financial condition. In addition, although our leases, if any, will generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental
liabilities arising from a tenant's activities on the property, we nonetheless would be subject to strict liability by virtue of our ownership interest for environmental liabilities created by such
tenants, and we cannot ensure the stockholders that any tenants we might have would satisfy their indemnification obligations under the applicable sales agreement or lease. The discovery of material
environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our
stockholders.

Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities and involve risks and costs.

The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may
increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased.

In
addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the
enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the
counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a
party with whom we

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enter
into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to
reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be
able to enter into an offsetting contract in order to cover our risk. We cannot be certain that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required
to maintain a position until exercise or expiration, which could result in losses.

Prepayments can adversely affect the yields on our investments.

The yield of our portfolio assets may be affected by the rate of prepayments differing from our projections. Prepayments on debt instruments, where permitted
under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot
be predicted with certainty. In periods of declining interest rates, prepayments on mortgage at similar yields, and loans generally increase. If we are unable to invest the proceeds of such
prepayments received, the yield on our portfolio will decline. In addition, we may acquire assets at a discount or premium and if the portfolio asset does not repay when expected, our anticipated
yield may be impacted. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain investments.

The loans we invest in and the commercial mortgage loans underlying the CMBS we invest in are subject to risks of delinquency foreclosure, and loss.

Commercial mortgage loans are secured by commercial or residential property and are subject to risks of delinquency and foreclosure. CMBS evidence interests in or
are secured by a single commercial mortgage loan or a pool of commercial mortgage loans. These risks of loss are greater than similar risks associated with loans made on the security of single-family
residential property. The ability of a borrower to pay principal and interest on a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the
property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced,
the borrower's ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by a number of conditions beyond our control, including:



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Any
of these factors could have an adverse affect on the ability of the borrower to make payments of principal and interest in a timely fashion, or at all, on the mortgage loans in which
we invest and could adversely affect the cash flows we intend to receive from these investments.

In
the event of any default under a mortgage loan held directly by us, we will bear the risk of loss of principal to the extent of any deficiency between the value of the collateral and
the principal and accrued interest on the mortgage loan, which could have a material adverse effect on our cash flow from operations and our ability to make distributions to our stockholders. In the
event of the bankruptcy of a mortgage loan borrower, the mortgage loan to the borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of
bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or
debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a
substantial negative effect on our anticipated return on the foreclosed mortgage loan.

The subordinate interests in whole loans in which we invest may be subject to additional risks relating to the privately negotiated structure and terms
of the transaction, which may result in losses to us.

A subordinate interest in a whole loan is a mortgage loan typically (i) secured by a whole loan on a single large commercial property or group of related
properties and (ii) subordinated to an senior interest secured by the same whole loan on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining
for subordinate interest owners after payment to the senior
interest owners. Subordinate interests reflect similar credit risks to comparably rated CMBS. However, since each transaction is privately negotiated, subordinate interests can vary in their
structural characteristics and risks. For example, the rights of holders of subordinate interests to control the process following a borrower default may be limited in certain investments. We cannot
predict the terms of each subordinate investment. Further, subordinate interests typically are secured by a single property, and so reflect the increased risks associated with a single property
compared to a pool of properties. Subordinate interests also are less liquid than CMBS, thus we may be unable to dispose of underperforming or non-performing investments. The higher risks
associated with our subordinate position in these investments could subject us to increased risk of losses.

Investment in non-conforming and non-investment grade loans may involve increased risk of loss.

We acquire or originate and may continue to acquire or originate in the future certain loans that do not conform to conventional loan criteria applied by
traditional lenders and are not rated or are rated as non-investment grade (for example, for investments rated by Moody's Investors Service, ratings lower than Baa3, and for
Standard & Poor's, BBB- or below). The non-investment grade ratings for these loans typically result from the overall leverage of the loans, the lack of a strong
operating history for the properties underlying the loans, the borrowers' credit history, the properties' underlying cash flow or other factors. As a result, these loans have a higher risk of default
and loss than conventional loans. Any loss we incur may reduce distributions to our stockholders. There are no limits on the percentage of unrated or non-investment grade assets we may
hold in our portfolio.

Investments in mezzanine loans involve greater risks of loss than senior loans secured by income producing properties.

Investments in mezzanine loans are secured by a pledge of the ownership interests in the entity that directly or indirectly owns the property. These types of
investments involve a higher degree of risk than a senior mortgage loan because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the
entity providing the pledge of its ownership interests as security, we may not have full recourse, to the assets of the property owning entity, or the assets of the entity may not be sufficient to
satisfy our mezzanine loan. If a borrower defaults on our

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mezzanine
loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. As a result, we may not recover
some or all of our investment, which could result in losses. In addition, mezzanine loans may have higher loan to value ratios than conventional mortgage loans, resulting in less equity in the
property and increasing the risk of loss of principal.

We
evaluate the collectibility of both interest and principal of each of our loans, if circumstances warrant, to determine whether they are impaired. A loan is impaired when, based on
current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the amount of the loss accrual is
calculated by comparing the carrying amount of the investment to the value determined by discounting the expected future cash flows at the loan's effective interest rate or, as a practical expedient,
to the value of the collateral if the loan is collateral dependent. We can not be certain that our estimates of collectible amounts will not change over time or that they will be representative of the
amounts we actually collect, including amounts we would collect if we chose to sell these investments before their maturity. If we collect less than our estimates, we will record charges which could
be material.

Bridge loans involve a greater risk of loss than traditional mortgage loans.

We provide bridge loans secured by first lien mortgages on a property to borrowers who are typically seeking short-term capital to be used in an
acquisition or renovation of real estate. The borrower has usually identified an undervalued asset that has been under-managed or is located in a recovering market. If the market in which the asset is
located fails to recover according to the borrower's projections, or if the borrower fails to improve the quality of the asset's management or the value of the asset, the borrower may not receive a
sufficient return on the asset to satisfy the bridge loan, and we may not recover some or all of our investment.

In
addition, owners usually borrow funds under a conventional mortgage loan to repay a bridge loan. We may therefore be dependent on a borrower's ability to obtain permanent financing to
repay our bridge loan, which could depend on market conditions and other factors. Bridge loans are also subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses
that are not covered by standard hazard insurance. In the event of any default under bridge loans held by us, we bear the risk of loss of principal and non-payment of interest and fees to
the extent of any deficiency between the value of the mortgage collateral and the principal amount of the bridge loan. To the extent we suffer such losses with respect to our investments in bridge
loans, the value of our company and the price of our common stock may be adversely affected.

Preferred equity investments involve a greater risk of loss than traditional debt financing.

Preferred equity investments are subordinate to debt financing and are not secured. Should the issuer default on our investment, we would only be able to proceed
against the entity that issued the preferred equity in accordance with the terms of the preferred security, and not any property owned by the entity. Furthermore, in the event of bankruptcy or
foreclosure, we would only be able to recoup our investment after any lenders to the entity are paid. As a result, we may not recover some or all of our investment, which could result in losses.

Our investments in subordinate loans and subordinated CMBS are subject to losses.

We acquire subordinated loans and may invest in subordinated CMBS. In the event a borrower defaults on a loan and lacks sufficient assets to satisfy our loan, we
may suffer a loss of principal or interest. In the event a borrower declares bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be
sufficient to satisfy the loan. In addition, certain of our loans may be subordinate to other debt of the borrower. If a borrower defaults on our loan or on debt senior to our loan, or in the event of
a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of

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intercreditor
arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through "standstill periods") and control decisions made in
bankruptcy proceedings relating to borrowers.

In
general, losses on a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, and
then by the "first loss" subordinated security holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in
which we invest, we will not be able to recover all of our investment in the securities we purchase. Likewise, we may not be able to recover some or all of our investment in certain subordinated loans
in which we obtain interests. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is
available to satisfy interest and principal payments due on the related CMBS, the securities in which we invest may effectively become the "first loss" position behind the more senior securities,
which may result in significant losses to us.

An
economic downturn could increase the risk of loss on our investments in subordinated CMBS. The prices of lower credit-quality securities, such as the subordinated CMBS in which we may
invest, are generally less sensitive to interest rate changes than more highly rated investments, but are more sensitive to adverse economic downturns or individual property developments. An economic
downturn or a projection of an economic downturn could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying CMBS to make principal
and interest payments may be impaired. In such event, existing credit support to a securitized structure may be insufficient to protect us against loss of our principal on these securities.

We may make investments in assets with lower credit quality, which will increase our risk of losses.

Substantially all of our securities investments have explicit ratings assigned by at least one of the three leading nationally-recognized statistical rating
agencies. However, we may invest in unrated securities,
enter into net leases with unrated tenants or participate in unrated or distressed mortgage loans. An economic downturn, for example, could cause a decline in the price of lower credit quality
investments and securities because the ability of the obligors of net leases and mortgages, including mortgages underlying CMBS, to make rent or principal and interest payments may be impaired. If
this were to occur, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these investments and securities. We have not established
and do not currently plan to establish any investment criteria to limit our exposure to these risks for future investments.

Our investments in debt securities are subject to specific risks relating to the particular issuer of the securities and to the general risks of
investing in subordinated real estate securities.

Our investments in debt securities involve special risks. REITs generally are required to invest substantially in real estate or real estate-related assets and
are subject to the inherent risks associated with real estate-related investments discussed in this filing. Our investments in debt are subject to the risks described above with respect to mortgage
loans and CMBS and similar risks, including:



Debt
securities may be unsecured and may also be subordinated to other obligations of the issuer. We may also invest in debt securities that are rated below investment grade. As a
result, investments in debt securities are also subject to risks of:



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These
risks may adversely affect the value of outstanding debt securities and the ability of the issuers thereof to repay principal and interest.

Our real estate investments are subject to risks particular to real property.

We own both assets secured by real estate and real estate directly. Real estate investments are subject to risks particular to real property.



If
any of these or similar events occur, it may reduce our return from an affected property or investment and reduce or eliminate our ability to make distributions to stockholders.

Our real estate investments may be illiquid, which could restrict our ability to respond rapidly to changes in economic conditions.

The real estate and real estate-related assets in which we invest are generally illiquid. In addition, the instruments that we purchase in connection with
privately negotiated transactions are not registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction
that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. A majority of the CMBS and debt instruments that we purchase are
purchased in private, unregistered transactions. As a result, the majority of our investments in securities are subject to restrictions on resale or otherwise have no established trading market. As a
result, our ability to sell under-performing assets in our portfolio or respond to changes in economic and other conditions may be relatively limited.

CTL investments may generate losses.

The value of our investments and the income from our CTL investments may be significantly adversely affected by a number of factors, including:



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We may not be able to relet or renew leases at the properties held by us on terms favorable to us.

We are subject to risks that upon expiration or earlier termination of the leases for space located at our properties the space may not be relet or, if relet, the
terms of the renewal or reletting (including the costs of required renovations or concessions to tenants) may be less favorable that current lease terms. Any of these situations may result in extended
periods where there is a significant decline in revenues or no revenues generated by a property. If we are unable to relet or renew leases for all or substantially all of the spaces at these
properties, if the rental rates upon such renewal or reletting are significantly lower than expected, or if our reserves for these purposes prove inadequate, we will experience a reduction in net
income and may be required to reduce or eliminate distributions to our stockholders.

Lease defaults or terminations or landlord-tenant disputes may adversely reduce our income from our net lease property portfolio.

Lease defaults or terminations by one or more of our significant tenants may reduce our revenues unless a default in cured or a suitable replacement tenant is
found promptly. In addition, disputes may arise between the landlord and tenant that result in the tenant withholding rent payments, possibly for an extended period. These disputes may lead to
litigation or other legal procedures to secure payment of the rent withheld or to evict the tenant. Any of these situations may result in extended periods during which there is a significant decline
in revenues or no revenues generated by the property. If this were to occur, it could adversely affect our results of operations.

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We may enter into derivative contracts that could expose us to contingent liabilities in the future.

Subject to maintaining our qualification as a REIT, part of our investment strategy involves entering into derivative contracts that could require us to fund cash
payments in the future under certain circumstances, e.g., the early termination of the derivative agreement caused by an event of default or other early termination event, or the decision by a
counterparty to request margin securities it is contractually owed under the terms of the derivative contract. The amount due would be equal to the unrealized loss of the open swap positions with the
respective counterparty and could also include other fees and charges. These economic losses will be reflected in our financial results of operations, and our ability to fund these obligations will
depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.

Our due diligence may not reveal all of a borrower's liabilities and may not reveal other weaknesses in its business.

Before investing in a company or making a loan to a borrower, we assess the strength and skills of such entity's management and other factors that we believe are
material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, we rely on the resources available to us and, in some cases, an investigation
by third parties. This process is particularly subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. There can be no
assurance that our due diligence processes will uncover all relevant facts or that any investment will be successful.

Risks Related to Our Organization and Structure

The concentration of our ownership may adversely affect the ability of investors to influence our policies.

SL Green owns approximately 22% of the outstanding shares of our common stock. In addition, SL Green has the right to purchase up to 25% of the shares in any
future offering of common stock. Accordingly, SL Green has significant influence over us. The ownership level of SL Green may discourage or prevent others from trying to acquire control of us and
increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
This concentration of ownership may result in decisions affecting us that may not serve the best interest of all stockholders.

Maryland takeover statutes may prevent a change of control of our company, which could depress our stock price.

Under Maryland law, certain "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are
prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange,
or asset transfers or issuance or reclassification of equity securities. An interested stockholder is defined as:



A
person is not an interested stockholder under the statute if the board of directors approves in advance the transaction by which he otherwise would have become an interested
stockholder.

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After
the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of
directors of the corporation and approved by the affirmative vote of at least:



The
business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer, including potential acquisitions that
might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

We
have opted out of these provisions of the Maryland General Corporation Law, or the MGCL, with respect to its business combination provisions and its control share provisions by
resolution of our board of directors and a provision in our bylaws, respectively. However, in the future our board of directors may reverse its decision by resolution and elect to opt in to the
MGCL's business combination provisions, or amend our bylaws and elect to opt in to the MGCL's control share provisions.

Additionally,
Title 8, Subtitle 3 of the MGCL permits our board of directors, without stockholder approval and regardless of what is provided in our charter or bylaws, to implement
takeover defenses, some of which we do not have. These provisions may have the effect of inhibiting a third party from making us an acquisition proposal or of delaying, deferring or preventing a
change in our control under circumstances that otherwise could provide the stockholders with an opportunity to realize a premium over the then-current market price.

Our authorized but unissued preferred stock may prevent a change in our control which could be in the stockholders' best interests.

Our charter authorizes us to issue additional authorized but unissued shares of our common stock or preferred stock. Any such issuance could dilute our existing
stockholders' interests. In addition, our board of directors may classify or reclassify any unissued shares of preferred stock and may set the preferences, rights and other terms of the classified or
reclassified shares. As a result, our board of directors may establish a series of preferred stock that could delay or prevent a transaction or a change in control that might be in the best interest
of our stockholders.

Our staggered board of directors and other provisions of our charter and bylaws may prevent a change in our control.

Our board of directors is divided into three classes of directors. The current terms of the directors expire in 2008, 2009 and 2010. Directors of each class are
chosen for three-year terms upon the expiration of their current terms, and each year one class of directors is elected by the stockholders. The staggered terms of our directors may reduce
the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our stockholders. In addition, our charter and
bylaws also contain other provisions that may delay or prevent a transaction or a change in control that might be in the best interest of our stockholders.

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Changes in market conditions could adversely affect the market price of our common stock.

As with other publicly traded equity securities, the value of our common stock depends on various market conditions which may change from time to time. Among the
market conditions that may affect the value of our common stock are the following:



The
market value of our common stock is based primarily upon the market's perception of our growth potential and our current and potential future earnings and cash distributions.
Consequently, our common stock may trade at prices that are higher or lower than our net asset value per share of common stock. If our future earnings or cash dividends are less than expected, it is
likely that the market price of our common stock will diminish.

An increase in market interest rates may have an adverse effect on the market price of our common stock.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share
price relative to market interest rates. If the market price of our common stock is based primarily on the earnings and return that we derive from our investments and income with respect to our
investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions will likely affect
the market price of our common stock. For instance, if market rates rise without an increase in our distribution rate, the market price of our common stock could decrease as potential investors may
require a higher distribution yield on our common stock or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense
on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay distributions.

Risks Related to Our Taxation as a REIT

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for stockholders.

We intend to continue to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. Our continued qualification as a REIT depends on our
satisfaction of certain asset, income, organizational, distribution and stockholder ownership requirements on a continuing basis. Our ability
to satisfy some of the asset tests depends upon the fair market values of our assets, some of which are not able to be precisely determined and for which we will not obtain independent appraisals. If
we were to fail to qualify as a REIT in any taxable year, and certain statutory relief provisions were not available, we would be subject to U.S. federal income tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax
liability could be substantial and would reduce the amount of cash available for distribution. Unless entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified
from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.

REIT distribution requirements could adversely affect our liquidity.

In order to qualify as a REIT, each year we must distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the
dividends paid deduction, and not including any net capital gain. To the extent that we satisfy this distribution requirement, but distribute

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less
than 100% of our net taxable income, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise
tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.

We
intend to continue to make distributions to our stockholders to comply with the REIT distribution requirements and avoid corporate income tax and/or excise tax. However, differences
in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet
the 90% distribution requirement or avoid corporate income or excise tax. We may own assets that generate mismatches between taxable income and available cash. These assets may include
(a) securities that have been financed through financing structures which require some or all of available cash flows to be used to service borrowings, (b) loans or CMBS we hold that
have been issued at a discount and require the accrual of taxable economic interest in advance of receipt in cash, and (c) distressed debt on which we may be required to accrue taxable interest
income even though the borrower is unable to make current debt service payments in cash. As a result, the requirement to distribute a substantial portion of our net taxable income could cause us to:
(a) sell assets in adverse market conditions, (b) borrow on unfavorable terms or (c) distribute amounts that would otherwise be invested in future acquisitions, capital
expenditures or repayment of debt to comply with REIT requirements.

To
maximize the return on our funds, cash generated from operations is expected to be used to temporarily pay down borrowings. When making distributions, we may borrow the required funds
by drawing on credit capacity available under our credit or repurchase facilities. If distributions exceed the amount of cash generated from operations, we may be required to borrow additional funds,
which, in turn, would reduce the amount of funds available for other purposes.

Further,
amounts distributed will not be available to fund investment activities. We expect to fund our investments by raising equity capital and through borrowings from financial
institutions and the debt capital markets. If we fail to obtain debt or equity capital in the future, it could limit our ability to grow, which could have a material adverse effect on the value of our
common stock.

Complying with REIT requirements may limit our ability to hedge effectively.

The existing REIT provisions of the Internal Revenue Code may substantially limit our ability to hedge our operations. Except to the extent provided by Treasury
regulations, any income from a hedging transaction we enter into in the normal course of our business primarily to manage risk of interest rate or price changes or currency fluctuations with respect
to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, which is clearly identified as specified in Treasury regulations before
the close of the day on which it was acquired, originated, or entered into, including gain from the sale or disposition of such a transaction, will not constitute gross income for purposes of the 95%
gross income test (and will generally constitute non-qualifying income for purposes of the 75% gross income test). To the extent that we enter into other types of hedging transactions, the
income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. In addition, we must limit our aggregate income from
non-qualified hedging transactions, from our provision of services and from other non-qualifying sources, to less than 5% of our annual gross income (determined without regard
to gross income from qualified hedging transactions). As a result, we may have to limit our use of certain hedging techniques or implement those hedges through TRSs. This could result in greater risks
associated with changes in interest rates than we would otherwise want to incur or could increase the cost of our hedging activities. If we fail to satisfy the 75% or 95% limitations, we could lose
our REIT qualification for U.S. federal income tax purposes, unless our failure was due to reasonable cause and not due to willful neglect, and we meet certain other technical requirements. Even if
our failure was due to reasonable cause, we might incur a penalty tax.

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The stock ownership limit imposed by the Internal Revenue Code for REITs and our charter may inhibit market activity in our stock and may restrict our
business combination opportunities.

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year. Our charter, with
certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own
more than 9.8% of the aggregate value of the outstanding
shares of our stock. Our board of directors may not grant such an exemption to any proposed transferee whose ownership of in excess of 9.8% of the value of our outstanding shares would result in the
termination of our status as a REIT. Our board of directors has waived this provision in connection with SL Green's purchase of our shares. We have also granted waivers to two other purchasers in
connection with their purchase of our shares in a previous private placement. These ownership limits could delay or prevent a transaction or a change in our control that might be in the best interest
of our stockholders.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that
would be treated as sales for U.S. federal income tax purposes.

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

It
may be possible to reduce the impact of the prohibited transaction tax by engaging in securitization transactions treated as sales through one or more of our TRSs, subject to certain
limitations as described below. To the extent that we engage in such activities through one or more TRSs, the income associated with such activities may be subject to full corporate income tax.

The "taxable mortgage pool" rules may limit the manner in which we effect future securitizations and may subject us to U.S. federal income tax and
increase the tax liability of our stockholders.

Certain of our current and future securitizations, such as our CDOs, could be considered to result in the creation of taxable mortgage pools for U.S. federal
income tax purposes. As a REIT, so long as we or another private subsidiary REIT own 100% of the equity interests in a taxable mortgage pool, our qualification as a REIT would not be adversely
affected by the characterization of the securitization as a taxable mortgage pool. We would generally be precluded, however, from holding equity interests in such securitizations through our operating
partnership (unless held through a private subsidiary REIT), selling to outside investors equity interests in such securitizations or from selling any debt securities issued in connection with such
securitizations that might be considered to be equity interests for tax purposes. These limitations will preclude us from using certain techniques to maximize our returns from securitization
transactions.

Furthermore,
we are taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool that is allocable to the percentage of our shares
held by
"disqualified organizations," which are generally certain cooperatives, governmental entities and tax-exempt organizations that are exempt from unrelated business taxable income. We expect
that disqualified organizations will own our shares from time to time.

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In
addition, if we realize excess inclusion income and allocate it to stockholders, this income cannot be offset by net operating losses of our stockholders. If the stockholder is a
tax-exempt entity and not a disqualified organization, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Internal Revenue Code.
If the stockholder is a foreign person, it would be subject to U.S. federal income tax withholding on this. Nominees or other broker/dealers who hold our stock on behalf of disqualified organizations
are subject to tax at the highest corporate income tax rate on a portion of our excess inclusion income allocable to the stock held on behalf of disqualified organizations. If the stockholder is a
REIT, a regulated investment company, or RIC, common trust fund, or other pass-through entity, its allocable share of our excess inclusion income could be considered excess inclusion
income of such entity and such entity will be subject to tax at the highest corporate tax rate on any excess inclusion income allocated to their owners that are disqualified organizations.
Accordingly, such investors should be aware that a portion of our income may be considered excess inclusion income. Finally, if we fail to qualify as a REIT, our taxable mortgage pool securitizations
will be treated as separate taxable corporations for U.S. federal income tax purposes.

We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay distributions to our stockholders.

As a REIT, we are generally required to distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and not
including net capital gains) each year to our stockholders. To qualify for the tax benefits accorded to REITs, we have and intend to continue to pay quarterly distributions and to make distributions
to our stockholders in amounts such that we distribute all or substantially all our net taxable income each year, subject to certain adjustments. However, our ability to make distributions may be
adversely affected by the risk factors described in this Annual Report on Form 10-K. In the event of a downturn in our operating results and financial performance or unanticipated
declines in the value of our asset portfolio, we may be unable to declare or pay quarterly distributions or make distributions to our stockholders. The timing and amount of distributions are in the
sole discretion of our board of directors, which considers, among other factors, our earnings, financial condition, debt service obligations and applicable debt covenants, REIT qualification
requirements and other tax considerations and capital expenditure requirements as our board may deem relevant from time to time.

Although our use of TRSs may be able to partially mitigate the impact of meeting the requirements necessary to maintain our qualification as a REIT, our
ownership of and relationship with our TRSs will be limited and a failure to comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS generally may hold assets and earn income that would not be qualifying assets or income if held
or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting
power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT's assets may consist of stock or securities of one or more TRSs. In addition, the
TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100%
excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm's-length basis.

Our
TRSs, including GKK Trading Corp. and GIT Trading Corp., will pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income will be
available for distribution to us but will not be required to be distributed to us. We anticipate that the aggregate value of TRS securities owned by us will be less than 20% of the value of our total
assets (including such TRS securities). Furthermore, we will monitor the value of our respective investments in our

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TRSs
for the purpose of ensuring compliance with the rule that no more than 20% of the value of a REIT's assets may consist of TRS securities (which is applied at the end of each calendar quarter). In
addition, we will scrutinize all of our transactions with our TRSs for the purpose of ensuring that they are entered into on arm's-length terms in order to avoid incurring the 100% excise tax
described above. The value of the securities that we hold in our TRSs may not be subject to precise valuation. Accordingly, there can be no complete assurance that we will be able to comply with the
20% limitation discussed above or avoid application of the 100% excise tax discussed above.

Risks Related to Our Agreement and Plan of Merger with American Financial

The market price of our common stock and our earnings per share may decline as a result of the merger.

The market price of our common stock may decline as a result of the merger if we do not achieve the perceived benefits of the merger as rapidly or to the extent
anticipated by financial or industry analysts
or stockholders, or if the effect of the merger on our financial results is not consistent with the expectations of financial or industry analysts or stockholders. In addition, either the failure to
achieve expected benefits or unanticipated costs relating to the mergers could reduce our future earnings per share.

There may be unexpected delays in the consummation of the merger, which could impact our ability to timely achieve cost savings associated with the
merger.

The merger is expected to close on or about March 31, 2008. However, certain events may delay the consummation of the merger including satisfying the
closing conditions to which the mergers are subject, and confirming the closings, acquisition financings, and certain property sales. There can be no assurance that these transactions will close
timely.

If the merger does not occur, we may incur payment obligations to American Financial and our stock price may decline

If the merger agreement is terminated under specified circumstances, we would be required to pay American Financial, an amount equal to $14.0 million. The
merger is subject to customary conditions to closing. If any condition to the merger is not satisfied or, if permissible, waived, the merger will not be completed. In addition, we or American
Financial may terminate the merger agreement in certain specified circumstances. If we do not complete the merger, the market price of our common shares may decline to the extent that the current
market prices of those shares reflect a market assumption that the merger will be completed. Gramercy has diverted significant management resources in an effort to complete the merger and is subject
to restrictions contained in the merger agreement on the conduct of its business. If the merger is not completed, we will have incurred significant costs, including the diversion of management
resources, for which it will have received little or no benefit.

If we are unable to successfully integrate the operations of American Financial, our business and earnings may be negatively affected.

The merger with American Financial will involve the integration of companies that have previously operated independently. Successful integration of the operations
of American Financial will depend primarily on our ability to consolidate operations, system procedures, and properties, and to eliminate redundancies and costs, and on our external manager's ability
to integrate personnel. The merger will also pose other risks commonly associated with similar transactions, including unanticipated liabilities, unexpected costs and the diversion of management's
attention to the integration of the operations of American Financial. We cannot ensure that we will be able to integrate American Financial's operations without encountering difficulties, including,
but not limited to, the loss of key employees, the disruption of its respective ongoing businesses or possible inconsistencies in standards, controls,

48

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procedures
and policies. Estimated cost savings are projected to come from various areas that we have identified through the due diligence and integration planning process. If we have difficulties
with any of these integrations, we might not achieve the economic benefits we expect to result from the merger, and this may hurt our business and earnings. In addition, we may experience greater than
expected costs or difficulties relating to the integration of the business of American Financial and/or may not realize expected cost savings from the merger.

The market price of our common stock after the merger may be affected by factors different from those affecting our common stock currently.

Our business and American Financial's business are different, and accordingly, the results of operations and the market price of our common stock may be affected
by factors different from those currently affecting the results of operations and the market price of our common stock.

A significant portion of American Financial's properties are leased to financial institutions, making us more economically vulnerable in the event of a
downturn in the banking industry after the completion of the merger.

Upon the closing of the merger, we expect that a significant portion of our revenue will be derived from net leases to financial institutions. Individual banks,
as well as the banking industry in general, may be adversely affected by negative economic and market conditions throughout the United States or in the local economies in which regional or community
banks operate, including negative conditions caused by the recent disruptions in the financial markets. In addition, changes in trade, monetary and fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal Reserve System, may have an adverse impact on banks' loan portfolios and allowances for loan losses.
As a result, we may experience higher rates of lease default or terminations in the event of a downturn in the banking industry than we would if our tenant base was more diversified.

The portfolio we will acquire in connection with the merger of American Financial includes certain tenants that represent a significant portion of the
revenues generated by such portfolio and failure of these tenants to perform their obligations or renew their leases upon expiration may adversely affect our cash flow and ability to pay distributions
to our stockholders.

As of December 31, 2007, Bank of America, N.A. and Wachovia Bank, N.A. represented approximately 36% and 15%, respectively, of the rental income of
American Financial's portfolio and occupied approximately 43% and 19%, respectively, of American Financial's total rentable square feet. We will acquire the leases with Bank of America, N.A. and
Wachovia Bank, N.A. upon the closing of the merger. After the completion of the merger, we expect that Bank of America, N.A. and Wachovia Bank, N.A. will represent a significant portion of our
portfolio's rental income and total rentable square feet. The default, financial distress or insolvency of Bank of America N.A. or Wachovia Bank, N.A., or the failure of any of these parties to renew
their leases with us upon expiration, could cause interruptions in the receipt of lease revenue from these tenants and/or result in vacancies, which would reduce our revenue and increase operating
costs until the affected properties are leased, and could decrease the ultimate value of the affected properties upon sale. We may be unable to lease the vacant property at a comparable lease rate or
at all, which could have a material adverse impact on our operating results and financial condition as well as our ability to make distributions to our stockholders.

Rising operating expenses relating to the properties we will acquire in connection with the merger of American Financial could reduce our cash flow and
funds available for future distributions.

The properties we will acquire in connection with the merger of American Financial are subject to operating risks common to real estate in general, any or all of
which may negatively affect us. If the properties do not generate revenue sufficient to meet operating expenses, including debt service, tenant improvements, leasing commissions and other capital
expenditures, we may have to borrow additional

49

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amounts
to cover these expenses. This could harm our cash flow and ability to make distributions to our stockholders.

The use of our available liquidity to finance our acquisition of American Financial could affect our ability to make investments consistent with our
investment objective.

We will utilize a significant amount of our available liquidity to finance our acquisition of American Financial. In addition, we cannot be certain that
sufficient funding or capital will be available to us after completion of the merger on terms that are acceptable to us. If we cannot obtain sufficient funding on acceptable terms after completion of
the merger, we may not be able to finance our existing portfolio or new investments in a manner that will generate attractive, risk-adjusted returns. Our failure to accomplish this would
materially and adversely affect us.

We will use a significant amount of short-term debt to finance our acquisition of American Financial, which may subject us to an increased
risk of loss.

We will use a significant amount of short-term debt to finance our acquisition of American Financial. Our ability to repay such debt at maturity may
depend on our ability to refinance all or a portion of such debt. Our ability to refinance such debt will be affected by several factors, including the level of available interest rates at the time,
the value of the related collateral and our equity in such collateral, our financial condition, the tax laws and general economic conditions at the time. A high interest rate environment may make it
more difficult for us to accomplish a refinancing and may lead to default and foreclosure on certain of our assets.

Cautionary Note Regarding Forward-Looking Information

This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. You can identify forward-looking statements by the use of forward-looking expressions such as "may," "will,"
"should," "expect," "believe," "anticipate," "estimate," "intend," "plan," "project," "continue," or any negative or other variations on such expressions. Forward-looking statements include
information concerning possible or assumed future results of our operations, including any forecasts, projections, plans and objectives for future operations. Although we believe that our plans,
intentions and expectations as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions or expectations will be achieved. We
have listed below some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from the forward-looking statements
we make in this report. These risks, uncertainties and contingencies include, but are not limited to, the following:



50

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

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

ITEM 1B.    UNRESOLVED STAFF COMMENTS

As of December 31, 2007, we did not have any unresolved comments with the Staff of the SEC.

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ITEM 2.    PROPERTIES

Our corporate offices are located in midtown Manhattan at 420 Lexington Avenue, New York, New York 10170. We can be contacted at
(212) 297-1000. We maintain a website atwww.gramercycapitalcorp.com.

ITEM 3.    LEGAL PROCEEDINGS

As of December 31, 2007, we were not involved in any material litigation nor, to management's knowledge, is any material litigation threatened against us
or our Manager.

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

On February 13, 2008, we held a special meeting of our stockholders for the purpose of approving the issuance of shares of our common stock in the merger
with American Financial Realty Trust, or the Proposal. The total number of shares of common stock entitled to vote at the meeting was 34,842,244 shares, of which 27,768,617 shares, or
79.7%, were present in person or by proxy. 27,633,652 shares, or approximately 79.3%, voted for the Proposal, 102,525 shares, or approximately 0.3%, voted against the Proposal, and
32,440 shares, or approximately 0.1%, abstained from voting.

52

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock began trading on the New York Stock Exchange, or the NYSE, on August 2, 2004 under the symbol "GKK." On March 14, 2008, the
reported closing sale price per share of common stock on the NYSE was $17.16 and there were approximately 47 holders of record of our common stock. The table below sets forth the quarterly high and
low closing sales prices of our common stock on the NYSE since our initial public offering and the distributions paid by us with respect to the periods indicated.

2007

2006Quarter Ended

High

Low

Dividends

High

Low

DividendsMarch 31

$
38.30

$
28.61

$
0.56

$
31.15

$
24.70

$
0.50June 30

$
34.86

$
27.10

$
0.63

$
27.10

$
24.89

$
0.51September 30

$
30.00

$
20.03

$
0.63

$
27.40

$
23.61

$
0.51December 31

$
28.51

$
20.03

$
2.63

$
26.80

$
23.18

$
0.56


If
dividends are declared in a quarter, those dividends will be paid during the subsequent quarter. We expect to continue our policy of generally distributing 100% of our taxable income
through regular cash dividends on a quarterly basis, although there is no assurance as to future dividends because they depend on future earnings, capital requirements and financial condition. See
Item 7 "Management's Discussion and Analysis of Financial Condition and Results of OperationsDividends" for additional information regarding our dividends.

For
the year ended December 31, 2007, we declared dividends of $2.45 per share, of which $2.00 represented distributions of taxable earnings and profits and $2.45 represented a
capital gain distribution. All distributions for the year ended December 31, 2006 represented distributions of taxable earnings. We declared a quarterly dividend of $0.63 per share and a
special one-time cash dividend of $2.00, both payable on January 15, 2008, for stockholders of record of our common stock on December 31, 2007. Pursuant to our merger
agreement with American Financial, American Financial's shareholders will be entitled to additional merger consideration of $0.2419 per common share, which represents their pro-rata share
of the special dividend.

The
following table summarizes information, as of December 31, 2007, relating to our equity compensation plans pursuant to which shares of our common stock or other equity
securities may be granted from time to time.

|Plan category                                              |  | (a)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights |  | (b)
Weighted average
exercise price of
outstanding options,
warrants and rights |       | (c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders(1)  |  | 1,428,169                                                                                       |  | $                                                                               | 22.82 |                                                                                                                                                
|Equity compensation plans not approved by security holders |  | N/A                                                                                             |  |                                                                                 | N/A   |                                                                                                                                                
|Total                                                      |  | 1,428,169                                                                                       |  | $                                                                               | 22.82 |                                                                                                                                                

---

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Sale of Unregistered Securities

In December, 2004, we sold 5,500,000 shares of common stock, at a price of $17.27 per share, through a private placement exempt from registration pursuant to
Section 4(2) of the Securities Act. We subsequently registered the resale of these shares under the Securities Act in August 2005. A total of 4,225,000 shares were sold to various institutional
investors and an additional 1,275,000 were sold to SL Green Operating Partnership, L.P., an affiliate of SL Green Realty Corp., pursuant to its contractual right to choose to maintain up to a
25% ownership interest in the outstanding shares of our common stock. On December 31, 2004, 2,000,000 shares sold in the offering were issued. The remaining 3,500,000 shares were issued on
January 3, 2005. The net proceeds from the offering (approximately $93.7 million) were used to fund additional investments, repay borrowings and for general corporate purposes. We did
not use an underwriter; however, our Manager arranged the transaction and received a fee of $1.0 million.

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

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ITEM 6.    SELECTED FINANCIAL DATA

The following tables set forth our selected financial data and should be read in conjunction with our Financial Statements and notes thereto included in
Item 8, "Financial Statements and Supplementary Data" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this
Form 10-K.

Operating Data

|(In thousands, except per share data)                                                                             |            | For the
Year ended
December 31,
2007 |         | For the
Year ended
December 31,
2006 |   | For the
Year ended
December 31,
2005 |        | For the Period
April 12, 2004
(formation) through
December 31,
2004 |       
|----------------------------------------------------------------------------------------------------------------- | ---------- | ------------------------------------ | ------- | ------------------------------------ | - | ------------------------------------ | ------ | ------------------------------------------------------------------- | ------
|Total revenues                                                                                                    |            | $                                    | 327,285 |                                      | $ | 198,215                              |        | $                                                                   | 88,085
|Interest expense                                                                                                  |            |                                      | 177,611 |                                      |   | 98,299                               |        |                                                                     | 33,771
|Management fees                                                                                                   |            |                                      | 22,671  |                                      |   | 16,668                               |        |                                                                     | 9,600 
|Incentive fee                                                                                                     |            |                                      | 32,235  |                                      |   | 7,609                                |        |                                                                     | 2,276 
|Depreciation and amortization                                                                                     |            |                                      | 4,623   |                                      |   | 1,582                                |        |                                                                     | 672   
|Marketing, general and administrative                                                                             |            |                                      | 13,557  |                                      |   | 11,957                               |        |                                                                     | 6,976 
|Provision for possible loan losses                                                                                |            |                                      | 9,398   |                                      |   | 1,430                                |        |                                                                     | 1,030 
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       
|Total expenses                                                                                                    |            |                                      | 260,095 |                                      |   | 137,545                              |        |                                                                     | 54,325
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       
|Income before equity in net income (loss) of unconsolidated joint ventures and provision for taxes                |            |                                      | 67,190  |                                      |   | 60,670                               |        |                                                                     | 33,760
|Equity in net income (loss) of unconsolidated joint ventures                                                      |            |                                      | 3,513   |                                      |   | (2,960                               | )      |                                                                     | (1,489
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       
|Income before provision for taxes, gain on sale of unconsolidated joint venture interests and GKK formation costs |            |                                      | 70,703  |                                      |   | 57,710                               |        |                                                                     | 32,271
|Gain from sale of unconsolidated joint venture interest                                                           |            |                                      | 92,235  |                                      |   |                                     |        |                                                                     |      
|Provision for taxes                                                                                               |            |                                      | (1,341  | )                                    |   | (1,808                               | )      |                                                                     | (900  
|GKK formation costs                                                                                               |            |                                      |        |                                      |   |                                     |        |                                                                     |      
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       
|                                                                                                                  | Net income |                                      |         | 161,597                              |   |                                      | 55,902 |                                                                     |       
|Preferred stock dividends                                                                                         |            |                                      | (6,567  | )                                    |   |                                     |        |                                                                     |      
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       
|Net income available to common stockholders                                                                       |            | $                                    | 155,030 |                                      | $ | 55,902                               |        | $                                                                   | 31,371
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       
|Net income per common shareBasic                                                                                 |            | $                                    | 5.54    |                                      | $ | 2.26                                 |        | $                                                                   | 1.57  
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       
|Net income per common shareDiluted                                                                               |            | $                                    | 5.28    |                                      | $ | 2.15                                 |        | $                                                                   | 1.51  
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       
|Cash dividends declared per common share                                                                          |            | $                                    | 4.45    |                                      | $ | 2.08                                 |        | $                                                                   | 1.495 
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       
|Basic weighted average common shares outstanding                                                                  |            |                                      | 27,968  |                                      |   | 24,722                               |        |                                                                     | 20,027
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       
|Diluted weighted average common shares and common share equivalents outstanding                                   |            |                                      | 29,379  |                                      |   | 26,009                               |        |                                                                     | 20,781
|                                                                                                                  |            |                                      |         |                                      |   |                                      |        |                                                                     |       

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Balance Sheet Data

|                                                                                                         |  | Year Ended December 31,
|-------------------------------------------------------------------------------------------------------- |  | -----------------------
|
|Loans and other lending investments, net                                                                 |  | $                      
|Commercial mortgage backed securities                                                                    |  |                        
|Loans held for sale, net                                                                                 |  |                        
|Commercial real estate, net                                                                              |  |                        
|Investment in unconsolidated joint ventures                                                              |  |                        
|Total assets                                                                                             |  |                        
|Collateralized debt obligations                                                                          |  |                        
|Repurchase agreements                                                                                    |  |                        
|Credit facilities                                                                                        |  |                        
|Mortgage note payable                                                                                    |  |                        
|Junior subordinated deferrable interest debentures held by trusts that issued trust preferred securities |  |                        
|Total liabilities                                                                                        |  |                        
|Stockholders' equity                                                                                     |  |                        

Other Data

|(In thousands)                              |  | For the
year ended
December 31,
2007 |            | For the
year ended
December 31,
2006 |   | For the
Year ended
December 31,
2005 |   | For the Period
April 12, 2004
(formation) through
December 31,
2004 |         
|------------------------------------------- |  | ------------------------------------ | ---------- | ------------------------------------ | - | ------------------------------------ | - | ------------------------------------------------------------------- | --------
|Funds from operations(1)                    |  | $                                    | 89,056     |                                      | $ | 64,027                               |   | $                                                                   | 36,490  
|Cash flows provided by operating activities |  | $                                    | 59,574     |                                      | $ | 154,707                              |   | $                                                                   | 2,160   
|Cash flows used in investing activities     |  | $                                    | (1,229,382 | )                                    | $ | (1,149,526                           | ) | $                                                                   | (868,101
|Cash flows provided by financing activities |  | $                                    | 1,443,620  |                                      | $ | 943,557                              |   | $                                                                   | 897,423 

---

A
reconciliation of FFO to net income computed in accordance with GAAP is provided under the heading of "Management's Discussion and Analysis of Financial Condition and Results of
OperationsFunds From Operations."

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND                     RESULTS OF OPERATIONS (Amounts in
Thousands, except for share and per share                     amounts)

Overview

Gramercy Capital Corp. (the "Company" or "Gramercy") is a commercial real estate specialty finance company that focuses on the direct origination and acquisition
of whole loans, subordinate interests in whole loans, mezzanine loans, bridge loans, distressed debt, preferred equity, and net lease investments involving commercial properties throughout the United
States. We have also established a real estate securities business that focuses on the acquisition trading and financing of commercial mortgage backed securities, or CMBS, and other real estate
related securities. When evaluating transactions, we assess our risk-adjusted return and target transactions with yields that seek to provide excess returns for the risks being taken. We
have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code and generally will not be subject to federal income taxes to the extent we distribute our income to
our stockholders. We have in the past established, and may in the future establish, taxable REIT subsidiaries, or TRSs, to effect various taxable transactions. Those TRSs would incur federal, state
and local taxes on the taxable income from their activities. Unless the context requires otherwise, all references to "we," "our" and "us" mean Gramercy Capital Corp.

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

Since
our inception, we have completed transactions in a variety of markets and secured by a variety of property types. Until recently, the market for commercial real estate debt
exhibited high relative returns and significant inflows of capital. Commercial real estate debt has continued to demonstrate low rates of default in comparison with historical levels. However, this
may change as the credit markets become increasingly illiquid, or as the economy slows. Consequently, the market for debt instruments had for several years until recently evidenced declining yields
and more flexible credit standards and loan structures. In particular, "conduit" originators who packaged whole loans for resale to investors drove debt yields lower while maintaining substantial
liquidity because of the then-strong demand for the resulting securities. Because of reduced profits in the most liquid sectors of the mortgage finance business, several large institutions
began originating large bridge loans for the purpose of generating interest income, rather than the typical focus on trading profits. In response to those developments, we have focused on areas where
we have comparative advantages rather than competing for product merely on the basis of yield or structure. This has particularly included whole loan origination in markets and transactions where 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 in secondary market transactions in tranched debt, we often avoid first loss risk in larger transactions due to the high
recent valuations of the underlying real estate relative to historic valuation levels. Because of the significant increase in the value of institutional quality assets relative to historic norms, we
focus on positions in which a property sale or conventional refinancing at loan maturity would provide for a complete return of our investment.

We
have carefully managed our exposure to interest rate changes that could affect our liquidity. We generally match our assets and liabilities in terms of base interest rate (generally
one-month

57

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LIBOR)
and, to the extent possible, expected duration. We have raised liabilities and equity in several different capital markets to improve the diversity of our funding sources, maintain liquidity,
and achieve our match-funding objectives. We have been active in the equity and debt markets since 2004 to take advantage of cost effective sources of capital, maintain liquidity and attractively
finance our business. We raised $95,000 of additional equity in December, 2004, and January, 2005, to reduce our outstanding indebtedness and maintain sufficient liquidity for our investment
portfolio. In September, 2005, we sold 3,833,333 shares of common stock resulting in net proceeds of approximately $97,830, in May, 2006, we sold 3,000,000 shares of common stock resulting in net
proceeds of approximately $80,000, and in September, 2007, we sold 4,825,000 shares of common stock for net proceeds of approximately $124,451. In April, 2007, we sold 4,600,000 shares of our 8.125%
Series A cumulative redeemable preferred stock, resulting in net proceeds of approximately $111,205. In November, 2007, we sold, through a private placement pursuant to Section 4(2) of
the Securities Act, 3,809,524 shares of common stock at a price of $26.25 per share to an affiliate of Morgan Stanley Real Estate Special Situations Fund III, a global diversified fund managed by
Morgan Stanley Real Estate, raising proceeds of approximately $100,000. The proceeds of these offerings were used to fund loan acquisitions and originations, repay outstanding principal amounts under
our repurchase facilities or unsecured revolving credit facilities, and for general corporate purposes. We have 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-owned subsidiaries of our Operating Partnership with 30 year terms. The securities issued in May, 2005, bear interest at a fixed rate
of 7.57% for the first ten years ending, the securities issued in August, 2005, bear interest at a fixed rate of 7.75% for the first ten years and the securities issued in January 2006 bear interest
at a fixed rate of 7.65% for the first ten years. After the first ten years, the 2005 issuances bear interest at three-month LIBOR plus 300 basis points while the 2006 issuance bears interest at
three-month LIBOR plus 270 basis points. The proceeds from the issuances of the trust preferred securities were used to fund existing and future investment opportunities. In July, 2005, we closed our
first $1,000,000 CDO which extended the term of our liabilities and reduced our overall cost of funds with respect to debt investments financed by the CDO and previously financed by our repurchase
agreements, to approximately 49 basis points over LIBOR, excluding transaction costs. Our second $1,000,000 CDO was closed in August, 2006, at a weighted average interest spread of approximately 37
basis points over LIBOR, excluding transaction costs. In August, 2007, we issued an additional $1,100,000 CDO with a combined weighted average rate of three-month LIBOR plus 0.46%. The proceeds of the
CDOs were used to repay our repurchase facilities and to fund additional investment activities. In addition, we have an unsecured credit facility which was increased in June 2007 to $175,000 from
$100,000 and its term was extended to June 2010. The facility is available for funding investments and general corporate purposes.

On
November 2, 2007, we entered into a definitive merger agreement to acquire American Financial Realty Trust (NYSE: AFR), or American Financial, for approximately
$3.5 billion, including the assumption of certain of American Financial's outstanding indebtedness. American Financial is a self-administered, self-managed real estate
investment trust that acquires properties from, and leases properties to, regulated financial institutions, and through its operating partnership and various affiliates, owns and manages its assets
primarily under long-term triple net and bond net leases with banks. The merger agreement provides that we will acquire all of American Financial's common stock for per share consideration
of $5.50 in cash and 0.12096 shares of our common stock. At closing of the merger, American Financial's shareholders will also be entitled to receive (i) the regular quarterly dividend declared
and paid by us in respect of the first quarter of 2008, if any, and (ii) a portion of any special dividend declared by us before closing of the merger. The merger agreement also provides that
if the net proceeds received on the sales of specified properties prior to closing exceed agreed levels, an additional cash payment of half of such excess amount, if any (but no more than $0.25 per
share), will be made at closing to American Financial's shareholders. The sales process is subject to various uncertainties, and no assumption should be made of any such payment. Upon closing of the
merger,

58

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American
Financial's shareholders are expected to own approximately 31% of Gramercy's outstanding shares.

We
expect to assume approximately $1.20 billion of American Financial's outstanding debt. We have also obtained a commitment letter from Goldman Sachs Mortgage Company, Citigroup
Global Markets Realty Corp. and SL Green to provide debt financing for the cash component of the consideration in an amount of up to $850.0 million, subject to certain customary
conditions. This commitment will terminate in the event that we do not complete our merger with American Financial on or prior to April 1, 2008. Further, in connection with the closing of the
merger, we also expect to consummate various financings and close on the sale of various individual American Financial assets currently under contract. However there can be no assurance that any or
all of these financing transactions will close.

Our
merger with American Financial will combine the existing operating platforms of American Financial with our own to create an integrated commercial real estate finance and operating
company, and will transform us from primarily a specialty finance company into a $7.6 billion diversified real estate enterprise with complementary business lines consisting of commercial real
estate finance and net lease property investments. Upon the closing of the merger, we expect to own approximately 27 million square feet of commercial real estate in 37 states to add to our
current investment portfolio. The acquisition is expected to be completed on or about March 31, 2008, but is subject to customary closing conditions. The stockholders of both Gramercy and
American Financial approved the merger on February 13, 2008.

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

As
of December 31, 2007, we held loans, other lending investments and CMBS of $3,428,728, net of fees, discounts, and unfunded commitments with an average spread to LIBOR of 397
basis points for our floating rate investments, and an average yield of 7.02% for our fixed rate investments. As of December 31, 2007, we also held interests in three credit tenant net lease
investments, or CTL investments, two interests in fee positions on properties subject to long-term ground leases and a 100% fee interest in a property subject to a long-term
ground lease.

59

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The
aggregate carrying values, allocated by product type and weighted average coupons of our loans, other lending investments and CMBS as of December 31, 2007 and
December 31, 2006 were as follows:

|                                                    |                            | Carrying Value(1) |           | Allocation by
Investment Type |   | Fixed Rate:
Average Yield |           | Floating Rate:
Average Spread
over LIBOR(2)
|--------------------------------------------------- | -------------------------- | ----------------- | --------- | ----------------------------- | - | ------------------------- | --------- | -------------------------------------------
|
|Whole loans, floating rate                          |                            | $                 | 1,594,338 |                               | $ | 1,372,316                 |           | 60                                         
|Whole loans, fixed rate                             |                            |                   | 204,192   |                               |   | 42,376                    |           | 8                                          
|Subordinate interests in whole loans, floating rate |                            |                   | 146,901   |                               |   | 236,308                   |           | 6                                          
|Subordinate interests in whole loans, fixed rate    |                            |                   | 61,890    |                               |   | 48,769                    |           | 2                                          
|Mezzanine loans, floating rate                      |                            |                   | 413,813   |                               |   | 226,675                   |           | 16                                         
|Mezzanine loans, fixed rate                         |                            |                   | 203,753   |                               |   | 216,216                   |           | 8                                          
|Preferred equity, fixed rate                        |                            |                   | 11,858    |                               |   | 44,224                    |           |                                           
|                                                    |                            |                   |           |                               |   |                           |           |                                            
|                                                    | Subtotal/ Weighted average |                   | $         | 2,636,745                     |   | $                         | 2,186,884 |                                            
|                                                    |                            |                   |           |                               |   |                           |           |                                            
|Real Estate Securities, floating rate               |                            |                   | 23,817    |                               |   |                          |           | 3                                          
|Real Estate Securities, fixed rate                  |                            |                   | 768,166   |                               |   |                          |           | 97                                         
|                                                    |                            |                   |           |                               |   |                           |           |                                            
|                                                    | Subtotal/ Weighted average |                   |           | 791,983                       |   |                           |          |                                            
|                                                    |                            |                   |           |                               |   |                           |           |                                            
|Total                                               |                            | $                 | 3,428,728 |                               | $ | 2,186,884                 |           | 100                                        
|                                                    |                            |                   |           |                               |   |                           |           |                                            

---

The
following discussion related to our consolidated financial statements should be read in conjunction with the financial statements appearing in Item 8 of this Annual Report on
Form 10-K.

Critical Accounting Policies

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

Variable Interest Entities

Our ownership of the subordinated classes of CMBS from a single issuer may provide us with the right to control the foreclosure/workout process on the underlying
loans. There are certain exceptions to the scope of FIN 46R, one of which provides that an investor that holds a variable interest in a

60

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

We
have analyzed the pooling and servicing agreements governing each of our controlling class CMBS investments and we believe that the terms of those agreements conform to industry
standards and are consistent with the QSPE criteria. However, there is uncertainty with respect to QSPE treatment due to ongoing review by accounting standard setters, potential actions by various
parties involved with the QSPE (discussed in the paragraph above), as well as varying and evolving interpretations of the QSPE criteria under SFAS 140. Additionally, the standard setters
continue to review the FIN 46R provisions related to the computations used to determine the primary beneficiary of a VIE.

At
December 31, 2007, we owned securities of three controlling class CMBS trusts with a carrying value of $38,007. The total par amounts of CMBS issued by the three CMBS trusts
was $921,654. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not be the primary beneficiary of any of the underlying special-purpose
entities. At December 31, 2007, our maximum exposure to loss as a result of our investment in these QSPEs totaled $38,007, which equals the book value of these investments as of
December 31, 2007.

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

Loans and 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 unfunded commitments unless such loan or investment is deemed to be impaired. Loans held for sale are carried at the lower of cost or market value
using available market information obtained through consultation with dealers or other originators of such investments. We may originate or acquire preferred equity interests that allow us to
participate in a percentage of the underlying property's cash flows from operations and proceeds from a sale or refinancing. Should we make such a preferred equity investment, we must determine
whether that investment should be accounted for as a loan, joint venture or as an interest in real estate.

Commercial Mortgage Backed Securities

We designate our CMBS investments pursuant to FASB Statement of Financial Accounting Standards No. 115, or SFAS 115, on the date of acquisition of
the investment. Held to maturity investments are stated at cost plus the amortization of any premiums or discounts and any premiums or discounts are amortized through the consolidated statements of
income using the level yield method. CMBS securities that we do not hold for the purpose of selling them in the near-term but may dispose

61

---



of
prior to maturity, are designated as available-for-sale and are carried at estimated fair value with the net unrealized gains or losses recorded as a component of
accumulated other comprehensive income (loss) in stockholders equity. Unrealized losses on securities that in the judgment of management are other than temporary are charged against earnings as a loss
on the income statement. In November, 2007, subsequent to financing our CMBS investments in our CDOs, we redesignated all of our available for sale CMBS investments, with a book value of approximately
$43.6 million, to held to maturity. As of December 31, 2007, the unrealized loss on the redesignated CMBS investments included in other comprehensive income was $5,575.

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

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

In
accordance with SFAS 115, when the estimated fair value of the security classified as available-for-sale has been below amortized cost for a significant
period of time and we conclude that we no longer have the ability or intent to hold the security for the period of time over which we expect the values to recover to amortized cost, the investment is
written down to its fair value, and this loss is realized and charged against earnings. The determination of other than temporary impairment is a subjective process, and different judgments and
assumptions could affect the timing of loss realization. At December 31, 2007, we had no CMBS classified as available-for-sale.

We
evaluate our CMBS investments to determine if there has been an other than temporary impairment. Certain of our CMBS investments have an unrealized loss as the carrying value is in
excess of the market value. These unrealized losses are primarily the result of market factors other than credit impairment which is generally indicated by significant change in estimated cash flows
from the cash flows previously estimated due to actual prepayments and credit loss experience. All of our CMBS investments have been in a continuous loss position for less than 12 months. We
believe the carrying value of the securities are fully recoverable over their expected holding period. We possess both the intent and the ability to hold the securities until we have recovered the
amortized costs. Accordingly, we do not believe any of the securities are other than temporarily impaired. The unrealized loss on our CMBS continued subsequent to year end.

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CTL Investments

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

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

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 or its estimated fair value, less its cost to sell. Once an asset is held for sale, depreciation expense and straight-line rent adjustments are no longer
recorded and historic results are reclassified as Discontinued Operations.

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

Investments in Unconsolidated Joint Ventures

We account for our investments in unconsolidated joint ventures under the equity method of accounting since we exercise significant influence, but do not
unilaterally control, the entities and are not considered to be the primary beneficiary under FIN 46. In the joint ventures, the rights of the other investor are protective and participating.
Unless we are determined to be the primary beneficiary, these rights preclude us from consolidating the investments. The investments are recorded initially at cost as an investment in unconsolidated
joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the investments on our balance
sheet and the underlying equity in net assets is amortized as an adjustment to equity in net income (loss) of unconsolidated joint ventures over the lesser of the joint venture term
or 40 years. None of the joint venture debt is recourse to us. As of December 31, 2007 and 2006, we had investments of $49,440 and $57,567 in unconsolidated joint ventures, respectively.

63

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Revenue Recognition

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

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

We
designate loans as non-performing at such time as: (1) the loan becomes 90 days delinquent; or (2) the loan has a maturity default. All
non-performing loans are placed on non-accrual status and income is recognized only upon actual cash receipt. At December 31, 2007, we had one non-performing
loan with a carrying value of $29,058. We believe there is adequate collateral and reserves to support the carrying value of the loan. There were no non-performing loans at
December 31, 2006. We classify loans as sub-performing if they are not performing in accordance with their terms, in all material respects, but they do not qualify as
non-performing loans. The specific facts and circumstances of these loans may cause them to ripen into non-performing loans should certain events occur. At December 31,
2007, one first mortgage loan with a carrying value of $10,403, and one 40% participation interest in a first mortgage loan with a carrying value of $22,000, were classified as
sub-performing. There were no sub-performing loans at December 31, 2006.

In
some instances we may sell all or a portion of our investments to a third party. To the extent the fair value received for an investment exceeds the amortized cost of that investment
and FASB Statement No. 140, or SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," criteria is met, under which control of the
asset that is sold is surrendered making it a
"true sale," a gain on the sale will be recorded through earnings as other income. To the extent an investment that is sold has a discount or fees, which were deferred at the time the investment was
made and were being recognized over the term of the investment, the unamortized portion of the discount or fees are recognized at the time of sale and recorded as a gain on the sale of the investment
through other income. For the years ended December 31, 2007, 2006 and 2005, we recognized $3,985, $5,349 and $10,474 in net gains from the sale of debt investments or commitments, respectively.

Rental
revenue is recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying
leases is included in other assets on the accompanying balance sheets. We may establish, on a current basis, an allowance against this account for future potential tenant credit losses, which may
occur. The balance reflected on the balance sheet will be net of such allowance.

In
addition to base rent, the tenants in our CTL investments also pay all operating costs of owned property including real estate taxes.

Reserve for Possible Loan Losses

Specific valuation allowances are established for possible credit losses on loans in instances where it is deemed possible that we will be unable to collect all
amounts of principal and interest due according to the contractual terms of the loan. We consider the estimated value of the collateral

64

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securing
the loan, and compare it to the carrying value of the loan. The estimated value of the collateral is determined by selecting the most appropriate valuation methodology, or methodologies,
among several generally available and accepted in the commercial real estate industry. The determination of the most appropriate valuation methodology is based on the key characteristics of the
collateral type, collateral location, quality of the sponsor, and other factors. These methodologies include the evaluation of operating cash flow from the property during the projected holding
period, and the estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, all of
which are discounted at market discount rates. Because the determination of estimated value is based upon projections of future economic events, which are inherently subjective, amounts ultimately
realized from loans and investments may differ materially from the carrying value at the balance sheet date.

If
upon completion of the valuation, the estimated value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created with a
corresponding charge to the provision for possible loan losses. The allowance for each loan is maintained at a level we believe is adequate to absorb possible losses. Impairment losses are recognized
as a direct write-down of the loan investment with a corresponding charge-off to the allowance. During the year ended December 31, 2007, we incurred a
charge-off totaling
$3,200 related to a defaulted loan which had a carrying value of $19,155 at December 31, 2007, and is recorded in other assets. There were no charge-offs for the year ended
December 31, 2006. We maintained a reserve for possible loan losses of $8,658 against investments with a carrying value of $264,612 as of December 31, 2007, and a reserve for possible
loan losses of $2,460 against investments with a carrying value of $131,427 as of December 31, 2006. There were no charge-offs for the year ended December 31, 2006.

Stock Based Compensation Plans

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

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

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

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

2007

2006Dividend yield

7.9
%
8.0
%Expected life of option

5.9 years

6.7 yearsRisk-free interest rate

4.32
%
4.14
%Expected stock price volatility

28.0
%
21.0
%


65

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Incentive Distribution (Class B Limited Partner Interest)

The Class B limited partner interests are entitled to receive an incentive return equal to 25% of the amount by which funds from operations, or FFO, plus
certain accounting gains (as defined in the partnership agreement of our Operating Partnership which was amended and restated in April 2006) exceed the product of our weighted average stockholders
equity (as defined in the amended and restated partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by 4 to adjust for quarterly calculations). We will record any
distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payment of such amounts has become probable and reasonably
estimable in accordance with the partnership agreement. These cash distributions will reduce the amount of cash available for distribution to our common unitholders in our Operating Partnership and to
common stockholders. We incurred approximately $32,235, $7,609 and $2,276 with respect to such Class B limited partner interests for the years ended December 31, 2007, 2006 and 2005,
respectively.

Derivative Instruments

In the normal course of business, we use a variety of commonly used derivative instruments that are considered conventional or "plain vanilla" derivatives,
including interest rate swaps, caps, collars and floors, to manage, or hedge, interest rate risk. We require that hedging derivative instruments be effective in reducing the interest rate risk
exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Some derivative instruments are associated with an anticipated transaction. In those
cases, hedge effectiveness criteria also require that it be probable that the underlying transaction occurs. Instruments that meet these hedging criteria are formally designated as hedges at the
inception of the derivative contract. We expressly prohibit the use of unconventional derivative instruments and using derivative instruments for trading or speculative purposes. Further, we have a
policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.

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

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

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

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

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

Income Taxes

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

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

Results of Operations (Amounts in thousands)

Comparison of the year ended December 31, 2007 to the year ended December 31, 2006



2007

2006

$ ChangeInvestment income

$
297,712

$
176,421

$
121,291Rental revenue, net


10,242


2,402


7,840Gain on sales and other income


19,331


19,392


(61
)Total revenues

$
327,285

$
198,215


129,070Equity in net income (loss) of unconsolidated joint ventures

$
3,513

$
(2,960
)
$
6,473


Investment
income is generated on our whole and bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS investments. For the year ended
December 31, 2007, $66,831 was earned on fixed rate investments while the remaining $230,881 was earned on floating rate investments. The increase over the prior year is due primarily to a
significantly larger investment balance in 2007 versus 2006.

Rental
revenue of $10,242 in 2007 was earned on 292 Madison Avenue and our TIC interest in 55 Corporate Drive, which has been held as a proportionately consolidated property since
its acquisition in June 2006. Following its acquisition, 55 Corporate Drive was being redeveloped. The property was accounted for as an operating property beginning in the three months ended

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December 31,
2006. Rental revenue in 2007 includes the effect of adjustments for straight-line rent for 55 Corporate Drive and 292 Madison Avenue.

Gains
on sales and other income of $19,331 for the year ended December 31, 2007 is primarily attributable to $3,985 in net gains from the sale of loans and securities and a gain
of $3,806 on the extinguishment of debt on two of our CDO bonds. The remaining balance is primarily composed of interest on restricted cash balances in our three CDOs (only two of which were in place
during the same period of 2006) and other cash balances held by us. For the year ended December 31, 2006, other income of $19,392 was comprised primarily of $7,361 in gains recorded on the sale
of loans and securities, and the gain on the sale of 75% of the security interests in the entity that owns 200 Franklin
Square Drive of $4,530. The remaining balance is attributable to interest earned in restricted cash balances.

The
income on investments in unconsolidated joint ventures of $3,513 for the year ended December 31, 2007 represents our proportionate share of income generated by our joint
venture interests including $4,802 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $8,315. The loss on investments in unconsolidated
joint ventures of $2,960 for the year ended December 31, 2006 was generated primarily on our investment in One Madison Avenue in New York, New York. Our use of FFO as an important financial
measure is discussed in more detail below. In August 2007 we sold our entire investment in the joint venture to SL Green for approximately $147.6 million and realized a gain of $92,235.



2007

2006

$ ChangeInterest expense

177,611

$
98,299

$
79,312Management fees

22,671


16,668


6,003Incentive fee

32,235


7,609


24,626Depreciation and amortization

4,623


1,582


3,041Marketing, general and administrative

13,557


11,957


1,600Provision for loan loss

9,398


1,430


7,968Provision for taxes

1,341


1,808


(467
)Total expenses

261,436

$
139,353

$
122,083


Interest
expense was $177,611 for the year ended December 31, 2007 compared to $98,299 for year ended December 31, 2006. Interest expense for the year ended
December 31, 2007 consisted primarily of $123,669 of interest on the investment grade tranches of our three CDOs, (only two of which were in place during the same period in 2006), $22,909 of
interest on borrowings on our master repurchase facilities with Wachovia and Goldman, $11,485 of expense on our three $50,000 issuances of trust preferred securities, $5,471 of interest on our
unsecured revolving credit facility, $7,179 of interest on our mortgage debt, and the amortization of deferred financing costs related to our CDOs, repurchase facilities and unsecured revolving credit
facility. The $98,299 of interest expense for the year ended December 31, 2006 consisted primarily of $64,445 of interest on the investment grade tranches of our two CDOs, $16,138 of interest
on borrowings on our master repurchase facilities with Wachovia and Goldman, $11,086 of expense on our three $50,000 issuances of trust preferred securities.

Management
fees increased to $22,671 for the year ended December 31, 2007 compared to $16,668 for the same period in 2006 due primarily to an increase in our stockholder's equity
as a result of the issuance of our preferred and common stock, on which base management fees are calculated. The remaining increase is attributed to $4,629 paid or payable to our Manager on
investments in our three CDOs (only one of which was in place during the entire same period in 2006) in accordance with the CDO collateral management agreements in lieu of the 0.15% fee otherwise
payable to SL Green

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Operating
Partnership, L.P. on those investments under the asset servicing agreement, higher fees paid or payable to SL Green Operating Partnership, L.P. under our outsource agreement
and asset servicing agreement due to the increase in our investment balances, and the scheduled 3% annual increase in the fee payable under our outsource agreement.

We
recorded an incentive fee expense of $32,235 during the year ended December 31, 2007 in accordance with requirements of the partnership agreement of our Operating Partnership
which entitles owners of Class B limited partner interests in our Operating Partnership to an incentive return equal to 25% of the amount by which FFO plus certain accounting gains (as defined
in the partnership
agreement of our Operating Partnership) exceed the product of our weighted average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5%
(divided by four to adjust for quarterly calculations). Approximately $18,994 of incentive fees for the year ended December 31, 2007 was related to the sale of our joint venture interest in One
Madison Avenue to SL Green.

The
increase in marketing, general and administrative expenses to $13,557 for the year ended December 31, 2007 versus the same period in 2006 was due primarily to higher equity
and equity-related compensation, which is, in most cases, directly linked to the performance of our company, and an increase in professional fees, insurance and general overhead costs.

Comparison of the year ended December 31, 2006 to the year ended December 31, 2005



2006

2005

$ ChangeInvestment income

$
176,421

$
73,302

$
103,119Rental revenue, net


2,402


1,219


1,183Gain on sales and other income


19,392


13,564


5,828Total revenues

$
198,215

$
88,085

$
110,130Equity in net loss of unconsolidated joint ventures

$
(2,960
)
$
(1,489
)
$
(1,471
)


Investment
income is generated on our whole and bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS investments. For the year ended
December 31, 2006, $24,236 was earned on fixed rate investments while the remaining $152,185 was earned on floating rate investments. The increase over the prior year is due primarily to a
significantly larger investment balance in 2006 versus 2005.

Rental
revenue of $2,402 in 2006 was earned on 200 Franklin Square Drive, which was held as a consolidated operating property for the three months ended March 31, 2006, and
on our TIC interest in 55 Corporate Drive, which has been held as a proportionately consolidated property since its acquisition in June 2006. Following its acquisition, 55 Corporate
Drive was being redeveloped. The property was accounted for as an operating property beginning in the three months ended December 31, 2006. Rental revenue in 2006 includes the effect of
adjustments for straight-line rent and FASB 141 adjustments for below-market leases for 55 Corporate Drive. Rental revenue of $1,219 in 2005 was earned on only
200 Franklin Square Drive.

Other
income of $19,392 for the year ended December 31, 2006 is comprised primarily of gains recorded on the sale of loans and securities of $7,361, and the gain on the sale of
75% of the security interests in the entity that owns 200 Franklin Square Drive of $4,530. The remaining increase over the prior year is primarily attributable to interest on restricted cash balances
in our two CDOs (only one of which was in place in the same period of 2005) and other cash balances held by us. For the year ended December 31, 2005, other income of $13,564 was comprised
primarily of income recorded on the sale of loans of $7,997.

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The
loss on investments in unconsolidated joint ventures of $2,960 for the year ended December 31, 2006 represents our proportionate share of the losses generated by our joint
venture interests including $7,753 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $4,793. The loss on investments in unconsolidated
joint venture of $1,489 for the year ended December 31, 2005 was generated primarily on our investment in One Madison Avenue
in New York, New York. Our use of FFO as an important financial measure is discussed in more detail below.



2006

2005

$ ChangeInterest expense

$
98,299

$
33,771

$
64,528Management fees


16,668


9,600


7,068Incentive fee


7,609


2,276


5,333Depreciation and amortization


1,582


672


910Marketing, general and administrative


11,957


6,976


4,981Provision for loan loss


1,430


1,030


400Provision for taxes


1,808


900


908Total expenses

$
139,353

$
55,225

$
84,128


Interest
expense was $98,299 for the year ended December 31, 2006 compared to $33,771 for the year ended December 31, 2005. Interest expense for the year ended
December 31, 2006 consisted primarily of $64,445 of interest on the investment grade tranches of our two CDOs (only one of which was in place during the same period in 2005), $16,138 of
interest on borrowings on our master repurchase facilities with Wachovia and Goldman, $11,086 of expense on our three $50,000 issuances of trust preferred securities, and the amortization of deferred
financing costs related to our CDOs, repurchase facilities and unsecured revolving credit facility. The $33,771 of interest expense during the same period in 2005 was comprised primarily of $17,429 of
interest on the investment grade tranches of our first CDO, $11,756 of interest on borrowings on our master repurchase facilities with Wachovia and Goldman and $3,838 of interest expense incurred
against only two $50,000 issuances of trust preferred securities.

Management
fees increased $7,068 for the year ended December 31, 2006 to $16,668 versus $9,600 for the same period in 2005 due primarily to an increase in our stockholder's equity
as a result of additional issuances of common equity and the issuance of $150,000 of trust preferred securities, on which base management fees are calculated. The remaining increase is comprised of
$2,868 paid or payable to our Manager on investments in our two CDOs (only one of which was in place during the same period in 2005) in accordance with the CDO collateral management agreements in lieu
of the 0.15% fee otherwise payable to SL Green Operating Partnership, L.P. on those investments under the asset servicing agreement, higher fees paid or payable to SL Green
Operating Partnership, L.P. under our outsource and servicing agreements due to the increase in our investment balances, and the scheduled 3% annual increase in the fee payable under our
outsource agreement.

We
recorded an incentive fee expense of $7,609 during the year ended December 31, 2006 in accordance with requirements of the partnership agreement of our Operating Partnership
which entitles owners of Class B limited partner interests in our Operating Partnership to an incentive return equal to 25% of the amount by which FFO plus certain accounting gains (as defined
in the amended and restated partnership agreement of our Operating Partnership) exceed the product of our weighted average stockholders equity (as defined in the amended and restated partnership
agreement of our Operating Partnership) multiplied by 9.5% (divided by 4 to adjust for quarterly calculations). This threshold was reached only during the last six months of 2005 resulting in a lower
total expense for 2005.

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The increase in marketing, general and administrative expenses to $11,957 for the year ended December 31, 2006 versus the same period in 2005 was due primarily to higher equity
and equity related compensation, including an accrual of $1,625 in December 2006, which is directly linked to the performance of our company, professional fees, insurance and general overhead costs,
and a nonrecurring charge of $525 for third-party professional expenses in connection with a possible business combination involving the acquisition of a publicly-traded commercial real estate finance
company with business lines considered by management to be highly complementary to ours. The decision to expense these costs was made once management concluded the proposed transaction was unlikely to
occur on terms advantageous to us.

Liquidity and Capital Resources

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

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

Our
ability to meet our long-term liquidity and capital resource requirements will be subject to obtaining additional debt financing and equity capital. Our inability to
renew, replace or expand our sources of financing on substantially similar terms, may have an adverse effect on our business and results of operations. In addition, an event of default can be
triggered under our repurchase facilities and our unsecured revolving credit facility if, among other things, the management agreement with the Manager is terminated. Depending on market conditions,
our debt financing will generally be in the range of 70% to 80% of the carrying value of our total assets. Any indebtedness we incur will likely be subject to continuing covenants and we will likely
be required to make continuing representations and warranties in connection with such debt. Our debt financing terms may require us to keep uninvested cash on hand, or to maintain a certain portion of
our assets free of liens, each of which could serve to limit our borrowing ability. Moreover, our debt may be secured by our assets. If we default in the payment of interest or principal on any such
debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to
immediately repay all outstanding principal. If we are unable to

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make
such payment, our lender could foreclose on our assets that are pledged as collateral to such lender. The lender could also sue us or force us into bankruptcy. Any such event would have a
material adverse effect on our liquidity and the value of our common stock. In addition, posting additional collateral to support our credit and repurchase facilities will reduce our liquidity and
limit our ability to leverage our assets. At December 31, 2007, we had approximately $293 million of cash and cash equivalents available. We also had approximately $175 million
available under our unsecured revolving credit facility. In addition, we have $2.7 billion of long-term financing in place through our commercial real estate CDOs which currently
fund a significant portion of our existing portfolio of assets, and provide liquidity for reinvestment to the extent of principal repayments and subject to the CDO reinvestment conditions.

To
maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income. These distribution requirements limit our ability to
retain earnings and thereby replenish or increase capital for operations. However, we believe that our significant capital resources and access to financing, as noted above, will provide us with
financial flexibility at levels sufficient to meet current and anticipated capital requirements, including funding new lending and investment opportunities.

Cash Flows (Amounts in thousands)



Net cash provided by operating activities decreased $95,133 to $59,574 for the year ended December 31, 2007 compared to cash provided of $154,707 for the
year ended December 31, 2006. The decrease in net cash provided by operating activities is primarily attributable to the net difference between new investments in loans classified as held for
sale and the proceeds from sale of loans, which were greater in 2006 as compared to 2007. Operating cash flow was generated primarily by interest income on our whole and bridge loans, subordinate
interests in whole loans, mezzanine loans and preferred equity interests and gains on loan sales. In addition, $177,414 of proceeds from the sales of loans was offset primarily by a $151,638 use of
cash related to the origination of loans held for sale during the year ended December 31, 2007, whereas we realized proceeds of $175,050 from the sales of loans while originating $104,931 of
loans that were held for sale during the year ended December 31, 2006.

Net
cash used in investing activities increased $79,856 to $1,229,382 for the year ended December 31, 2007 compared to $1,149,526 used during the year ended December 31,
2006. The primary reason for the additional use of cash is related to increased debt investment originations of $1,914,626 and $796,306 of CMBS investments, offset by higher principal collections on
our debt investments of $1,201,423.

Net
cash provided by financing activities increased $500,063 to $1,443,620 for the year ended December 31, 2007 compared to $943,557 provided during the same period in 2006. This
increase was due primarily to the issuance of $1,043,572 of CDOs during the year ended December 31, 2007 versus only $903,750 during the same period in 2006, $111,205 in proceeds from the
issuance of preferred stock, and an increase of $196,314 in restricted cash during the year ended December 31, 2007 versus a decrease of $304,567 during the same period in 2006.



Net cash provided by operating activities increased $152,547 to $154,707 for the year ended December 31, 2006 compared to cash provided of $2,160 for the
year ended December 31, 2005. Operating cash flow was generated primarily by interest income on our whole and bridge loans, subordinate interests in whole loans, mezzanine loans and preferred
equity interests and gains on loan sales due, in part, to a larger number of investments in 2006 versus 2005. In addition, $175,050 of

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proceeds
from the sales of loans was offset primarily by a $104,931 use of cash related to the origination of loans held for sale during the year ended December 31, 2006, whereas we realized
proceeds of $140,431 from the sales of loans while originating $182,431 of loans that were held for sale during the year ended December 31, 2005.

Net
cash used in investing activities increased $281,531 to $1,149,526 for the year ended December 31, 2006 compared to $867,995 used during the year ended December 31,
2005. The primary reason for the additional use of cash is related to increased debt investment originations of $817,827, offset by higher principal collections on our debt investments of $537,050.

Net
cash provided by financing activities increased $46,240 to $943,557 for the year ended December 31, 2006 compared to $897,317 provided during the same period in 2005. This
increase was due primarily to the issuance of $903,750 of CDOs during the year ended December 31, 2006 versus only $810,500 during the same period in 2005, net proceeds from our proportionate
share of the mortgage payable of $94,525 on our TIC interest in 55 Corporate Drive and increased net proceeds from our repurchase facilities of $296,564, offset by lower proceeds from the sale
of common stock of $77,057 and an increase in the dividend paid to our common stockholders of $25,545.

Capitalization

Our authorized capital stock consists of 125,000,000 shares, $0.001 par value, of which we have authorized the issuance of up to 100,000,000 shares
of common stock, $0.001 par value per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2007, 34,850,577 shares of common stock and
4,600,000 shares of preferred stock were issued and outstanding.

Preferred Stock

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

Common Stock

As of the date of our formation, April 12, 2004, we had 500,000 shares of common stock outstanding valued at approximately $200. On August 2,
2004 we completed our initial public offering of 12,500,000 shares of common stock resulting in net proceeds of approximately $172,900, which was used to fund investments and commence our
operations. As of December 31, 2007, 594,333 restricted shares had also been issued under our 2004 Equity Incentive Plan, or our Equity Incentive Plan. These shares have a vesting period of
three to four years. The vested and unvested shares are currently entitled to receive distributions declared by us on our common stock.

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

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2,000,000 shares
were settled on December 31, 2004 and the remaining 3,500,000 shares were settled on January 3, 2005.

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

In
May 2006, we sold 3,000,000 shares of our common stock, at a price of $26.75 per share, resulting in net proceeds of approximately $79,787. A total of 2,250,000 shares
were sold through a public offering and an additional 750,000 shares were sold to SL Green Operating Partnership, L.P. pursuant to its contractual right to choose to maintain up
to a 25% ownership interest in the outstanding shares of our common stock. After this offering, SL Green Operating Partnership, L.P. owned 6,418,333 shares of our common stock.
Net proceeds were used for loan acquisitions and originations, repayment of outstanding principal under our repurchase facilities and general corporate purposes.

In
May 2007 our new $500,000 shelf registration statement was declared effective by the Securities and Exchange Commission, or SEC. This registration statement provides us with the
ability to issue common and preferred stock, depository shares and warrants. We currently have $373.3 million available under the shelf.

In
September 2007, we sold 4,825,000 shares of common stock, at a public offering price of $26.25 per share, resulting in net proceeds of approximately $124.5 million. A
total of 3,618,750 shares were sold through a public offering and an additional 1,206,250 shares were sold directly to SL Green Operating Partnership, L.P. pursuant to its
contractual right to choose to maintain up to a 25% ownership interest in our outstanding shares of common stock. After this offering, SL Green Operating Partnership, L.P. owned
7,624,583 shares of our common stock. Net proceeds were used to retire borrowings under the Company's unsecured facility and to create additional funding capacity for opportunistic investments.

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

Outperformance Plan

In June 2005, the compensation committee of our board of directors approved a long-term incentive compensation program, the 2005 Outperformance Plan.
Participants in the 2005 Outperformance Plan, all of whom are co-leased employees, will share in a "performance pool" if our total return to stockholders for the period from June 1,
2005 through May 31, 2008 exceeds a cumulative total return to stockholders of 30% during the measurement period over a base share price of $20.21 per share. The size of the pool will be 10% of
the outperformance amount in excess of the 30% benchmark, subject to a maximum limit equal to the lesser of 4% of our outstanding shares and units of limited partnership interest as of the end of the
performance period, or 1,200,000 shares. If our total return to stockholders from June 1, 2005 to any subsequent date exceeds 80% and remains at that level or higher for 30 consecutive
days, then a minimum performance pool will be established. In the event the potential performance pool reaches the maximum dilution cap before May 31, 2008 and remains at that level or higher
for 30 consecutive days, the performance period will end early and the

74

---



pool
will be formed on the last day of such 30-day period. Each participant's award under the 2005 Outperformance Plan is designated as a specified percentage of the aggregate performance
pool to be allocated to such participant assuming the 30% benchmark is achieved. Individual awards under the 2005 Outperformance Plan will be made in the form of partnership units, or LTIP Units, that
may ultimately become exchangeable for shares of our common stock or cash, at our election. Under the 2005 Outperformance Plan, LTIP Units have been granted and additional LTIP Units may be granted in
the future prior to the determination of the performance pool; however, these LTIP Units will only vest upon satisfaction of performance and other thresholds, and will not be entitled to distributions
until after the performance pool, or minimum performance pool, is established. The 2005 Outperformance Plan provides that if a pool is established, each participant will also be entitled to the
distributions that would have been paid on the number of LTIP Units earned, had they been issued at the beginning of the performance period. Those distributions will 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 per unit basis equal to the dividends per share paid on our common
stock, whether or not they are vested. Any LTIP Units that are not earned upon the establishment of the performance pool will be automatically forfeited, and the LTIP Units that are earned will be
subject to time-based vesting, with 50% of the LTIP Units earned vesting in May 2009 and the balance vesting one year later based on continued employment with the Manager or
SL Green. We will record the expense of the restricted stock award in accordance with FASB Statement No. 123(R). Compensation expense of $1,533, $1,174 and $1,174 was recorded for the
years ended December 31, 2007, 2006 and 2005, respectively, related to the 2005 Outperformance Plan.

Deferred Stock Compensation Plan for Directors

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

As
of December 31, 2007 and 2006, there were approximately 29,713 and 15,301 phantom stock units outstanding, respectively, of which 19,713 and 11,301 phantom stock units are
vested as of December 31, 2007 and 2006, respectively.

Market Capitalization

At December 31, 2007, our CDOs and borrowings under our repurchase facilities, unsecured revolving credit facility and mortgage loans (excluding our share
of joint venture debt of $242 million) represented 76% of our consolidated market capitalization of $4.0 billion (based on a common stock price of $24.31 per share, the closing price of
our common stock on the New York Stock Exchange on December 31, 2007). Market capitalization includes our consolidated debt, preferred and common stock.

Indebtedness

The table below summarizes borrowings at December 31, 2007 and 2006, respectively, which currently include our Wachovia and Goldman repurchase facilities,
KeyBank unsecured revolving credit

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---



facility,
any proportionately consolidated mortgage debt or term loans, our CDOs and our subordinated debentures:

December 31,
2007

December 31,
2006Repurchase agreements

$
200,197

$
277,412Credit facilities





15,000Mortgage notes payable


153,624
(1)

94,525
(1)Collateralized debt obligations


2,735,145


1,714,250Junior subordinated debentures


150,000


150,000Total

$
3,238,966

$
2,251,187Cost of debt


LIBOR+0.81
%

LIBOR+1.04
%




Repurchase Facilities

We have two repurchase facilities with an aggregate of $900,000 of total debt capacity. In August 2004, we closed on a $250,000 repurchase facility with Wachovia.
This facility was then increased to $350,000 in January 2005 and subsequently increased to $500,000 in April, 2005. In June, 2007, we modified the
facility by further reducing the interest spreads. As a result of the modifications, the $500,000 facility bears interest at spreads of 0.65% to 2.50% over one-month LIBOR and, based on
our expected investment activities, provides for advance rates that vary from 60% to 95% based upon the collateral provided under a borrowing base calculation. In October, 2006, we extended the
facility's maturity date until October 2009. The lender has a consent right with respect to the inclusion of investments in this facility, determines periodically the market value of the investments,
and has the right to require additional collateral or require partial repayment of advances under the facility (margin calls) if the estimated market value of the included investments declines. We had
no accrued interest and borrowings of $165,286 at a weighted average spread to LIBOR of 1.33% as of December 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.

In
January, 2005, we closed an additional repurchase facility with Goldman. In October 2006, we increased this facility from $200,000 to $400,000 and extended its maturity date until
September 2009. In June, 2007, we modified the facility by further reducing the interest spreads. As a result of the modifications, the facility bears interest at spreads of 1.00% to 1.50% over
one-month LIBOR and, based on our expected investment activities, provides for advance rates that vary from 70% to 90% based upon the collateral provided under a borrowing base
calculation. As with the Wachovia facility, the lender has a consent right to the inclusion of investments in this facility, determines periodically the market value of the investments, and has the
right to require additional collateral or require partial repayment of advances under the facility (margin calls) if the estimated market value of the included investments declines. We had accrued
interest of $189 and borrowings of $34,911 at a weighted average spread to LIBOR of 1.07% as of December 31, 2007, and accrued interest of $261 and borrowings of $126,009 at a weighted average
spread to LIBOR of 1.51% under this facility at December 31, 2006.

The
repurchase facilities require that we pay down borrowings under these facilities as principal payments on the loans and investments pledged to these facilities are received. Assets
pledged as collateral under these facilities may include stabilized and transitional whole loans, subordinate interests in whole loans, mezzanine loans, and rated CMBS or commercial real estate CDO
securities originated or acquired by us.

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Restrictive Covenants

The terms of our repurchase facilities (together with any related guarantees) with Wachovia and Goldman include covenants that (a) limit our maximum total
indebtedness to no more than 85% of total assets, (b) require us to maintain minimum liquidity of at least $15,000, (c) require our fixed charge coverage ratio to be at no time less than
1.25 to 1.00, (d) require our minimum interest coverage ratio to be at no time less than 1.35 to 1.00, and (e) require us to maintain minimum tangible net worth of
not less than (i) $400,000, plus (ii) 75% of the net proceeds of our subsequent equity issuances following the date of the June 2007 amendments. The covenants also restrict 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 any case pay distributions necessary to maintain our REIT status.
An event of default can be triggered on our repurchase facilities if, among other things, GKK Manager LLC is terminated as our manager. As of December 31, 2007 and 2006, we were in
compliance with all such covenants.

Unsecured Revolving Credit Facility

In May 2006, we closed on a $100,000 senior unsecured revolving credit facility with KeyBank National Association, or KeyBank, with an initial term of three years
and a one-year extension option. The initial facility was supported by a negative pledge of an identified asset base (involving substitution rights) with advance rates that vary from 30%
to 90% of the asset value provided under a borrowing base calculation. The lender had consent rights to the inclusion of assets in the borrowing base calculation. The facility bore interest at 1.90%
over one-month LIBOR to the extent our leverage ratio, defined as total liabilities to total assets, including our proportionate share of the liabilities and assets of our unconsolidated
subsidiaries, is less than 80% and 2.10% over one-month LIBOR to the extent out leverage ratio is equal to or greater than 80%. In June 2007 the facility was increased to $175,000 and
interest spreads on the facility were reduced. The facility is supported by a negative pledge of an identified asset base with advance rates that vary from 30% to 90% of the asset value provided under
a borrowing base calculation. The lender also has consent rights to the inclusion of assets in the borrowing base calculation. Following the modifications in June 2007, the facility bears interest at
1.65% over one-month LIBOR. We had no accrued interest and no borrowings as of December 31, 2007 and accrued interest of $75 and borrowings of $15,000 at a spread to LIBOR of 2.10%
against this facility as of December 31, 2006.

The
terms of the unsecured revolving credit facility include covenants that (a) limit our maximum total indebtedness to no more than 85% of total assets, (b) require our
fixed charge coverage ratio to be at no time less than 1.50, (c) require our minimum interest coverage ratio to be at no time less than 1.70, (d) require us to maintain minimum tangible
net worth of not less than $370,000 plus 75% of the net proceeds 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 making distributions in excess of a maximum of 100% of our FFO (as defined by the National Association of Real Estate Investment Trusts, or NAREIT), except that we
may in any case pay distributions necessary to maintain our REIT status. An event of default can be triggered on our unsecured revolving credit facility if, among other things, GKK Manager LLC
is terminated as our manager. As of December 31, 2007 and 2006, we were in compliance with all such covenants.

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

Mortgage Loans

We have two consolidated interest-only mortgage loans related to 55 Corporate Drive and 292 Madison Avenue. The mortgage loan that
financed the acquisition of 55 Corporate Drive in June

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2006
has an outstanding principal balance of $190,000, of which we have consolidated our ownership percentage of 49.75% or $94,525. This loan has an effective interest rate of 5.75% and a term of ten
years. Interest on this mortgage was capitalized for a portion of the year ended December 31, 2006 as the property was undergoing redevelopment. Capitalized interest was $1,841 for the year
ended December 31, 2006. The mortgage loan that financed the acquisition of 292 Madison Avenue in July 2007 has an outstanding balance of $59,099, with an effective interest rate of
6.17% and a term of ten years.

Collateralized Debt Obligations

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

On
August 24, 2006, we issued an additional approximately $1,000,000 of CDOs through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO
2006-1 Ltd., or the 2006 Issuer, and Gramercy Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. The CDO consists of $903,750 of investment grade
notes, $38,750 of non-investment grade notes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and $57,500 of preferred shares, which were issued by
the 2006 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.37%. We incurred approximately $11,273 of costs
related to Gramercy Real Estate CDO 2006-1, which are amortized on a level yield basis over the average life of the CDO.

In
August 2007 we issued $1,100,000 of CDOs through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2007-1 Ltd., or the 2007 Issuer and, together with
the 2005 Issuer and the 2006 Issuer, the Issuers and Gramercy Real Estate CDO 2007-1 LLC, or
the 2007 Co-Issuer and, together with the 2005 Co-Issuer and the 2006 Co-Issuer, the Co-Issuers. The CDO consists of $1,045,550 of investment grade notes, and, together with the 2005
Issuer and the 2006 Issuer, the Issuers, $22,000 of non-investment grade notes,. which were co-issued by the 2007 Issuer and the 2007 Co-Issuer, and $32,450 of
preferred shares, which were issued by the 2007 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.45%. We
incurred approximately $16,816 of costs related to Gramercy Real Estate CDO 2007-1, which are amortized on a level-yield basis over the average life of the CDO.

We
retained all non-investment grade securities, the preferred shares and the common shares in the Issuers and the Co-Issuers. The Issuers and the
Co-Issuers holds assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity investments, and CMBS, which serve as collateral for
the CDO. Each CDO may be replenished, pursuant to certain rating agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid during the first
five years of the CDO. Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as loans are repaid. The financial statements of the
Issuers are consolidated in our financial statements. The investment grade notes are treated as a secured financing, and are non-recourse to us. Proceeds from the sale of the investment
grade notes issued in each CDO were used to repay substantially all outstanding debt under our repurchase agreements and to fund additional investments.

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In November 2007, we repurchased $17,750 of Class C notes and $5,000 of Class E notes in the 2006 Issuer at a dollar price of approximately $0.80 and $0.84, respectively.
We recorded a net gain of $3,806 in connection with the repurchase of the Class C and Class E notes.

Junior Subordinated Debentures

On January 27, 2006, we completed a third issuance of $50,000 in unsecured trust preferred securities through a separate newly formed Delaware Statutory
Trust, or DST, Gramercy Capital Trust III, or GCTIII, that is a wholly-owned subsidiary of our Operating Partnership. The securities bear interest at a fixed rate of 7.65% for the first ten years
ending January 2016, with an effective rate of 7.43% when giving effect to the swap arrangement previously entered into in contemplation of this financing. Thereafter, the interest rate will float
based on the three-month LIBOR plus 270 basis points.

In
May and August 2005, we completed issuances of $50,000 each in unsecured trust preferred securities through two DSTs, Gramercy Capital Trust I, or GCTI, and Gramercy Capital Trust II,
or GCTII, that are also wholly-owned subsidiaries of our Operating Partnership. The securities issued in May 2005 bear interest at a fixed rate of 7.57% for the first ten years ending June 2015 and
the securities issued in August 2005 bear interest at a fixed rate of 7.75% for the first ten years ending October 2015. Thereafter the rates will float based on the three-month LIBOR plus 300 basis
points.

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

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

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

Contractual Obligations

Combined aggregate principal maturities of our CDOs, repurchase facilities, trust preferred securities, proportionately consolidated mortgage note related to our
TIC interest in 55 Corporate Drive, mortgage note relating to 292 Madison Avenue, unsecured revolving credit facility, unfunded loan commitments and our obligations under our management agreement,
outsource agreement, CDO

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collateral
management agreements and operating lease as of December 31, 2007 are as follows (amounts in thousands):

|           |       | CDOs |           | Repurchase
Facilities |   | Trust
Preferred
Securities |         | Mortgage
Note
Payable(1) |         | Unsecured
Revolving
Credit
Facility |   | Unfunded
Loan(2)
Commitments |         | Outsource and
Management
Agreements(3) |   | CDO
Collateral
Management
Agreements |   | Operating
Lease |         | Total
|---------- | ----- | ---- | --------- | --------------------- | - | -------------------------- | ------- | ------------------------ | ------- | ----------------------------------- | - | ---------------------------- | ------- | -------------------------------------- | - | ------------------------------------ | - | --------------- | ------- | -----
|2008       |       | $    |          |                       | $ |                           |         | $                        |        |                                     | $ |                             |         | $                                      |  |                                      | $ | 163,817         |         | $    
|2009       |       |      |          |                       |   | 200,197                    |         |                          |        |                                     |   |                             |         |                                        |  |                                      |   | 88,591          |         |      
|2010       |       |      |          |                       |   |                           |         |                          |        |                                     |   |                             |         |                                        |  |                                      |   | 45,311          |         |      
|2011       |       |      |          |                       |   |                           |         |                          |        |                                     |   |                             |         |                                        |  |                                      |   |                |         |      
|2012       |       |      |          |                       |   |                           |         |                          |        |                                     |   |                             |         |                                        |  |                                      |   |                |         |      
|Thereafter |       |      | 2,735,145 |                       |   |                           |         |                          | 150,000 |                                     |   | 153,624                      |         |                                        |  |                                      |   |                |         |      
|           |       |      |           |                       |   |                            |         |                          |         |                                     |   |                              |         |                                        |   |                                      |   |                 |         |      
|           | Total |      | $         | 2,735,145             |   | $                          | 200,197 |                          | $       | 150,000                             |   | $                            | 153,624 |                                        | $ |                                     |   | $               | 297,719 |      
|           |       |      |           |                       |   |                            |         |                          |         |                                     |   |                              |         |                                        |   |                                      |   |                 |         |      

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Off-Balance-Sheet Arrangements

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

Dividends

To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined before taking
into consideration the dividends paid deduction and net capital gains. We intend to continue to pay regular quarterly dividends to our stockholders. Before we pay any dividend, whether for Federal
income tax purposes or otherwise, which would only be paid out of available cash to the extent permitted under our unsecured and secured credit and repurchase facilities, and our term loans, we must
first meet both our operating requirements and scheduled debt service on our mortgages and loans payable.

Inflation

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

Related Party Transactions

In connection with our initial public offering, we entered into a management agreement with the Manager, which was subsequently amended and restated in April
2006. The management agreement provides for a term through December 2009 with automatic one-year extension options and is subject to certain termination rights. We pay our Manager an
annual management fee equal to 1.75% of our

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gross
stockholders equity (as defined in the management agreement) inclusive of our trust preferred securities. We incurred expense to the Manager under this agreement of an aggregate of $13,135,
$10,147 and $6,337 for the years ended December 31, 2007 and 2006 and 2005, respectively.

To
provide an incentive to enhance the value of our common stock, the holders of the Class B limited partner interests of our Operating Partnership are entitled to an incentive
return equal to 25% of the amount by which FFO plus certain accounting gains and losses (as defined in the partnership agreement of our Operating Partnership) exceed the product of our weighted
average stockholders equity (as defined in the partnership agreement of our Operating Partnership) multiplied by 9.5% (divided by four to adjust for quarterly calculations). We will record any
distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payments of such amounts have become probable and reasonably
estimable in accordance with the partnership agreement. We incurred $32,235, $7,609 and $2,276 with respect to such Class B limited partner interests for the years ended December 31,
2007, 2006 and 2005.

We
are obligated to reimburse our Manager for its costs incurred under an asset servicing agreement between our Manager and an affiliate of SL Green Operating
Partnership, L.P. and a separate outsource agreement between our Manager and SL Green Operating Partnership, L.P. The asset servicing agreement, which was amended and restated in
April 2006, provides for an annual fee payable to SL Green Operating Partnership, L.P. by us of 0.05% of the book value of all credit tenant lease assets
and non-investment grade bonds and 0.15% of the book value of all other assets. The asset servicing fee may be reduced by SL Green Operating Partnership, L.P. for fees paid
directly to outside servicers by us. The outsource agreement currently provides for an annual fee payable by us, which fee is currently $1,366 per year, increasing 3% annually over the prior year on
the anniversary date of the outsource agreement in August of each year. For the years ended December 31, 2007, 2006 and 2005, we realized expense of $1,343, $1,304 and $1,266, respectively, to
our Manager under the outsource agreement. For the years ended December 31, 2007, 2006 and 2005, we realized expense of $3,564, $2,349 and $1,037, respectively, to our Manager under the asset
servicing agreement.

In
connection with the closing of our first CDO in July 2005, the 2005 Issuer entered into a collateral management agreement with the Manager. Pursuant to the collateral management
agreement, the Manager has agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The
collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum
of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per
annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted
securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the
calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under the first CDO, our Board of Directors has allocated to our Manager
the subordinate collateral management fee paid on CDO notes not held by us. At December 31, 2007 and December 31, 2006 we owned all of the non-investment grade bonds,
preferred equity and equity in each of our CDOs. The senior collateral management fee and balance of the subordinate collateral management fee is allocated to us. For the years ended
December 31, 2007, 2006 and 2005, we realized expense of $2,054, $2,065 and $944, respectively, to the Manager under such collateral management agreement.

Except
for the 2005 CDO, fees payable in connection with CDOs or other securitization vehicles are governed by the management agreement. Pursuant to that agreement, if a collateral
manager is retained as part of the formation of a CDO or other securitization vehicle, the Manager or an affiliate will be the collateral manager and will receive the following fees: (i) 0.25%
per annum of the principal

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amount
outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with us or our Manager, which CDO is structured to own loans secured by
transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a managed non-transitional CDO that are owned by third-party
investors unaffiliated with us or our Manager, which CDOs structured to own loans secured by non-transitional properties, (iii) 0.10% per annum of the principal amount outstanding
of bonds issued by a static CDO that are owned by third party investors unaffiliated with us or our Manager, which CDO is structured to own non-investment grade bonds, and
(iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with us or our Manager, which CDO is structured to
own investment grade bonds. For the purposes of the management agreement, a "managed transitional" CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt
collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net operating income growth, and a "managed non-transitional" CDO
means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by stabilized real estate assets that are not expected to experience
substantial net operating income growth. Both "managed transitional" and "managed non-transitional" CDOs may at any given time during the reinvestment period of the respective vehicles
invest in and own non-debt collateral (in limited quantity) as defined by the respective indentures. If any fees are paid to the collateral manager in excess of the fee structure provided
for above, such fees are paid us. For the year ended December 31, 2007 and 2006 we realized expense of $2,291 and $803, respectively, to our Manager under this agreement. With respect to the
CDO which closed in August, 2007, we realized expense of $284 to our Manager.

In
April 2005, we closed on a $57,503 initial investment in a joint venture with SL Green to acquire, own and operate the South Building located at One Madison Avenue, New York,
New York, or the South Building. The joint venture, which was created to acquire, own and operate the South Building, was owned 45% by a wholly-owned subsidiary of us and 55% by a wholly-owned
subsidiary of SL Green. The joint venture interests arepari passu.Also in April 2005, the joint venture completed the acquisition of the South
Building from Metropolitan Life Insurance Company for the purchase price of approximately $802,800 plus closing costs, financed in part through a $690,000 first mortgage loan on the South Building.
The South Building comprises approximately 1.2 million square feet and is almost entirely net leased to Credit Suisse Securities (USA) LLC (CS) pursuant to a lease with a
15-year remaining term. In August 2007 we sold our entire investment in the joint venture to SL Green Realty Corp. for approximately $147.0 million and realized a gain of
$92,235. In August 2007, an affiliate of SL Green loaned approximately $147.0 million to our Operating Partnership. This loan was to be repaid with interest at an annual rate of 5.80% on
the earlier of September 1, 2007 or the closing of the sale of our 45% interest in One Madison Avenue. As a result of the sale of our interest in August 2007, the loan was repaid with interest
on such date.

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

Commencing
in May 2005 we are party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporate offices at 420 Lexington Avenue, New
York, New York. The lease is for approximately five thousand square feet with an option to lease an additional approximately two thousand square feet and carries a term of ten years with rents on the
entire seven thousand square feet of approximately $249 per annum for year one rising to $315 per annum in year ten. For

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the
years ended December 31, 2007, 2006 and 2005, we paid $235, $252, and $90 under this lease, respectively.

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

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

In
March 2006, we closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green is an
equity holder. The mezzanine loan was repaid in full in May 2006, when we originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint venture. The
loan is secured by office and industrial properties in northern New Jersey and has a book value of $90,389 and $90,049 as of December 31, 2007 and 2006, respectively.

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

In
December 2006, we acquired from a financial institution a pari-passu interest of $125,000 in a $200,000 mezzanine loan, which bears interest at 6.384% and is secured by a
multi-family portfolio in New York, New York. An affiliate of SL Green simultaneously acquired the remaining $75,000 pari-passu interest in the mezzanine loan.

During
the year ended December 31, 2006, we earned fees of $163 from SL Green representing SL Green's proportionate share of fees for financing and structural
advisory services related to a specific potential transaction.

In
January 2007, we originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a portfolio of
multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an office
property. On March 8, 2007 the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event our loan became secured by a first mortgage
lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and one-month LIBOR
plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from us and held a 15.15% pari-passu interest in the mezzanine loan and the whole loan. As of
December 31, 2007, our interest in the whole loan had a carrying value of $65,033. The investment in the mezzanine loan was repaid in full in September 2007.

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

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In
April 2007, we purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34th Street in
New York, New York. The acquisition was financed with a $86,063 ten-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated
third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests arepari passu.As of December 31, 2007, the investment
had a carrying value of $20,390. We recorded our pro rata share of net income of $3,105 for the year ended December 31,
2007.

In
July 2007, we purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land located at
885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a
70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu.As of
December 31, 2007, the investment had a carrying value of $28,332. We recorded ourpro ratashare of net income of $2,480 for the year ended December 31, 2007.

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

In
August 2007, we closed on the purchase from a financial institution of a $12,500 mezzanine loan on a substantially complete residential condominium project in the upper east side of
Manhattan. The investment bears interest at the current pay rate of 11% over LIBOR, and a 19% look-back IRR at maturity. At closing, an affiliate of SL Green simultaneously acquired
a $12,500pari passuinterest in the same tranche of the capital structure.

In
September 2007, we acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter we, along with SL Green, sold our interests in the
loan to an unaffiliated third party. Additionally, we acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same properties as the preceding senior
mezzanine loan. Immediately thereafter we participated 50% of our interest in the loan back to SL Green. In October 2007, we acquired a 50%pari-passuinterest in $57,795 of two additional tranches
in the senior mezzanine loan from an unaffiliated third party. At closing, an affiliate of SL Green simultaneously
acquired the other 50% pari-passu interest in the two tranches.

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

In
November 2007, we acquired from a syndicate comprised of financial institutions a $25,000 interest in a $100,000 junior mezzanine investment secured by a hotel portfolio and franchise
headquarters. An affiliate of SL Green simultaneously acquired and owns another $25,000 interest in the investment. The investment was purchased at a discount and bears interest at an effective
spread to one-month LIBOR of 9.50%.

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

In
December 2007, we acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter we participated 50% of our interest in the loan to
an

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affiliate
of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%.

Bright
Star Couriers LLC, or Bright Star, provides messenger services to us. Bright Star is owned by Gary Green, a son of Stephen L. Green, our Chairman. The aggregate amount of
fees paid by us for such services for the years ended December 31, 2007, 2006 and 2005 was $5, $7 and $3, respectively.

Funds from Operations

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

Funds
from Operations for the years ended December 31, 2007, 2006, and 2005 is as follows (amounts in thousands):

|                                            |                                                                                      | For the
Year ended
December 31,
2007 |            | For the
Year ended
December 31,
2006 |   | For the
Year ended
December 31,
2005 |       
|------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------ | ---------- | ------------------------------------ | - | ------------------------------------ | ------
|Net income available to common stockholders |                                                                                      | $                                    | 155,030    |                                      | $ | 55,902                               |       
|Add:                                        |                                                                                      |                                      |            |                                      |   |                                      |       
|                                            | Depreciation and amortization                                                        |                                      |            | 12,572                               |   |                                      | 6,143 
|                                            | FFO adjustment for unconsolidated joint ventures                                     |                                      |            | 4,802                                |   |                                      | 7,753 
|Less:                                       |                                                                                      |                                      |            |                                      |   |                                      |       
|                                            | Non real estate depreciation and amortization                                        |                                      |            | (10,107                              | ) |                                      | (5,771
|                                            | Gain from sale of unconsolidated joint venture interests                             |                                      |            | (92,235                              | ) |                                      |      
|                                            | Incentive fee attributable to gain on sale of unconsolidated joint venture interests |                                      |            | 18,994                               |   |                                      |      
|                                            |                                                                                      |                                      |            |                                      |   |                                      |       
|Funds from operations                       |                                                                                      | $                                    | 89,056     |                                      | $ | 64,027                               |       
|                                            |                                                                                      |                                      |            |                                      |   |                                      |       
|Cash flows provided by operating activities |                                                                                      | $                                    | 59,574     |                                      | $ | 154,707                              |       
|Cash flows used in investing activities     |                                                                                      | $                                    | (1,229,382 | )                                    | $ | (1,149,526                           | )     
|Cash flows provided by financing activities |                                                                                      | $                                    | 1,443,620  |                                      | $ | 943,557                              |       

Recently Issued Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, or FIN 48, "Accounting for Uncertainty in Income Taxes." This interpretation clarifies the
accounting for uncertainty in income taxes recognized

85

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in
an enterprise's financial statements in accordance with FAS 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, disclosure, and transition. This interpretation was
effective January 1, 2007 for us. The adoption of FIN 48 did not have a material impact on our financial results for the year ended December 31, 2007.

In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements, or SFAS No. 157. SFAS No. 157 provides guidance for using fair value to measure assets
and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157
establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards
require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007. We do not believe the adoption of SFAS No. 157
will have a material impact on our consolidated financial statements.

In
February 2007, the FASB issued Statement No. 159, or SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS 159 permits entities
to choose to measure many financial instruments and certain other items, at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 applies to reporting periods beginning after November 15, 2007. We
will adopt SFAS 159 as required.

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

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

86

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If
the linked transaction does not meet sale accounting requirements, the net investment in the linked transaction is to be recorded as a derivative with the corresponding change in fair value of the
derivative being recorded through earnings. The value of the derivative would reflect changes in the value of the underlying debt investments and changes in the value of the underlying credit provided
by the counterparty. We currently present these transactions gross, with the acquisition of the financial assets in total assets and the related repurchase agreements as financing in total liabilities
on the consolidated balance sheets and the interest income earned on the debt investments and interest expense incurred on the repurchase obligations are reported gross on the consolidated income
statements. FAS 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating the effect, if any, that
this pronouncement will have on our future financial position or results of operations.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market Risk

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

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

We
believe our businesses will ultimately benefit in the long run, from a market environment where assets are priced and structured more conservatively. In addition, our pending merger
with American Financial will combine the existing operating platforms of American Financial with our own to create an integrated commercial real estate finance and operating company, and will
transform us from
primarily a specialty finance company into a $7.6 billion diversified real estate enterprise with complementary business lines consisting of commercial real estate finance and net lease
property investments.

Real Estate Risk

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

Interest Rate Risk

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

88

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control.
A hypothetical 100 basis point increase in interest rates along the entire interest rate curve for the years ended December 31, 2007, 2006 and 2005 would have increased our interest
cost by approximately $25.4 million, $14.1 million and $5.8 million, respectively, offset by an increase in our investment income of approximately $22.3 million,
$15.2 million and $7.9 million, respectively.

Our
operating results will depend in large part on differences between the income from our assets and our borrowing costs. Most of our assets and borrowings are variable-rate
instruments that we finance with variable rate debt. The objective of this strategy is to minimize the impact of interest rate changes on the spread between the yield on our assets and our cost of
funds. We enter into hedging transactions with respect to all liabilities relating to fixed rate assets. If we were to finance fixed rate assets with variable rate debt and the benchmark for our
variable rate debt increased, our net income would decrease. Furthermore, as most of our available financing provides for an ability of the lender to mark-to-market our assets
and make margin calls based on
a change in the value of our assets, financing fixed rate assets with this debt creates the risk that an increase in fixed rate benchmarks (such as "swap" yields) would decrease the value of our fixed
rate assets. We have entered into certain swap transactions in anticipation of drawing upon our mark-to-market debt to hedge against this risk. Some of our loans are subject to
various interest rate floors. As a result, if interest rates fall below the floor rates, the spread between the yield on our assets and our cost of funds will increase, which will generally increase
our returns. Because we generate income principally from the spread between the yields on our assets and the cost of our borrowing and hedging activities, our net income will generally increase if
LIBOR increases and decrease if LIBOR decreases, but this may not always be true in the future. Our exposure to interest rates will also be affected by our overall corporate leverage, which we
generally target to be 70% to 80% of the carrying value of our assets, although our actual leverage may vary depending on our mix of assets.

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

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The
aggregate carrying values, allocated by product type and weighted average coupons of our loans, other lending investments and CMBS as of December 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)
|--------------------------------------------------- | -------------------------- | ---------------------------------- | --------- | ----------------------------- | - | ------------------------- | --------- | -------------------------------------------
|
|Whole loans, floating rate                          |                            | $                                  | 1,594,338 |                               | $ | 1,372,316                 |           | 60                                         
|Whole loans, fixed rate                             |                            |                                    | 204,192   |                               |   | 42,376                    |           | 8                                          
|Subordinate interests in whole loans, floating rate |                            |                                    | 146,901   |                               |   | 236,308                   |           | 6                                          
|Subordinate interests in whole loans, fixed rate    |                            |                                    | 61,890    |                               |   | 48,769                    |           | 2                                          
|Mezzanine loans, floating rate                      |                            |                                    | 413,813   |                               |   | 226,675                   |           | 16                                         
|Mezzanine loans, fixed rate                         |                            |                                    | 203,753   |                               |   | 216,216                   |           | 8                                          
|Preferred equity, fixed rate                        |                            |                                    | 11,858    |                               |   | 44,224                    |           |                                           
|                                                    |                            |                                    |           |                               |   |                           |           |                                            
|                                                    | Subtotal/ Weighted average |                                    | $         | 2,636,745                     |   | $                         | 2,186,884 |                                            
|                                                    |                            |                                    |           |                               |   |                           |           |                                            
|Real Estate Securities, floating rate               |                            |                                    | 23,817    |                               |   |                          |           | 3                                          
|Real Estate Securities, fixed rate                  |                            |                                    | 768,166   |                               |   |                          |           | 97                                         
|                                                    |                            |                                    |           |                               |   |                           |           |                                            
|                                                    | Subtotal/ Weighted average |                                    |           | 791,983                       |   |                           |          |                                            
|                                                    |                            |                                    |           |                               |   |                           |           |                                            
|Total                                               |                            | $                                  | 3,428,728 |                               | $ | 2,186,884                 |           | 100                                        
|                                                    |                            |                                    |           |                               |   |                           |           |                                            

---

The carrying value of our loans, other lending investments and CMBS is net of unamortized fees, discounts and other adjustments of $80,279 and
$35,500 at December 31, 2007 and 2006, respectively, and unfunded commitments of $297,719 and $289,153 at December 31, 2007 and 2006, respectively.

As
of December 31, 2007, our loans, other lending investments and CMBS had the following maturity characteristics:

|Year of Maturity             |       | Number of
Investments
Maturing |     | Current
Carrying Value
(In thousands) |           | % of Total |           
|---------------------------- | ----- | ------------------------------ | --- | ------------------------------------- | --------- | ---------- | ----------
|2008                         |       | 30                             |     | $                                     | 998,605   |            | 29        
|2009                         |       | 31                             |     |                                       | 841,312   |            | 25        
|2010                         |       | 12                             |     |                                       | 344,389   |            | 10        
|2011                         |       | 2                              |     |                                       | 56,959    |            | 2         
|2012                         |       | 3                              |     |                                       | 77,433    |            | 2         
|Thereafter                   |       | 27                             |     |                                       | 1,110,030 |            | 32        
|                             |       |                                |     |                                       |           |            |           
|                             | Total |                                | 105 |                                       | $         | 3,428,728  |           
|                             |       |                                |     |                                       |           |            |           
|Weighted average maturity(1) |       |                                |     |                                       |           |            | 4.01 years

---

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Combined
aggregate principal maturities of our consolidated CDOs, repurchase facilities, trust preferred securities, proportionately consolidated mortgage note payable related to our TIC
interest in 55 Corporate Drive, mortgage note relating to 292 Madison Avenue and unsecured revolving credit facility as of December 31, 2007 are as follows:

|           |       | CDOs |           | Repurchase
Facilities |   | Trust
Preferred
Securities |         | Mortgage
Notes
Payable |         | Unsecured
Revolving
Credit
Facility |   | Total  
|---------- | ----- | ---- | --------- | --------------------- | - | -------------------------- | ------- | ---------------------- | ------- | ----------------------------------- | - | -------
|2008       |       | $    |          |                       | $ |                           |         | $                      |        |                                     | $ |       
|2009       |       |      |          |                       |   | 200,197                    |         |                        |        |                                     |   |       
|2010       |       |      |          |                       |   |                           |         |                        |        |                                     |   |       
|2011       |       |      |          |                       |   |                           |         |                        |        |                                     |   |       
|2012       |       |      |           |                       |   |                            |         |                        |         |                                     |   |        
|Thereafter |       |      | 2,735,145 |                       |   |                           |         |                        | 150,000 |                                     |   | 153,624
|           |       |      |           |                       |   |                            |         |                        |         |                                     |   |        
|           | Total |      | $         | 2,735,145             |   | $                          | 200,197 |                        | $       | 150,000                             |   | $      
|           |       |      |           |                       |   |                            |         |                        |         |                                     |   |        

---

The
following table summarizes the notional and fair value of our derivative financial instruments at December 31, 2007. The notional value is an indication of the extent of our
involvement in each 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  |  |                | 699,441 |             | 5.331 | %              | 8/2007  |                 | 1/2018  |            | $
|Interest Rate Swap |       | 3 month LIBOR  |  |                | 347,909 |             | 5.408 | %              | 8/2007  |                 | 5/2017  |            |  
|Interest Rate Swap |       | 1 month LIBOR  |  |                | 42,718  |             | 4.990 | %              | 1/2007  |                 | 1/2017  |            |  
|Interest Rate Swap |       | 1 month LIBOR  |  |                | 24,143  |             | 4.990 | %              | 1/2007  |                 | 1/2017  |            |  
|Interest Rate Swap |       | 1 month LIBOR  |  |                | 16,413  |             | 5.081 | %              | 5/2007  |                 | 5/2017  |            |  
|Interest Rate Swap |       | 3 month LIBOR  |  |                | 12,000  |             | 9.850 | %              | 8/2006  |                 | 8/2011  |            |  
|Interest Rate Swap |       | 3 month LIBOR  |  |                | 3,465   |             | 5.178 | %              | 4/2006  |                 | 3/2010  |            |  
|Interest Rate Swap |       | 3 month LIBOR  |  |                | 14,650  |             | 4.425 | %              | 11/2007 |                 | 7/2015  |            |  
|Interest Rate Swap |       | 1 month LIBOR  |  | $              | 3,465   |             | 4.280 | %              | 7/2005  |                 | 12/2009 |            | $
|                   |       |                |  |                |         |             |       |                |         |                 |         |            |  
|                   | Total |                |  |                | $       | 1,164,204   |       |                |         |                 |         |            |  
|                   |       |                |  |                |         |             |       |                |         |                 |         |            |  

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Schedules

|GRAMERCY CAPITAL CORP.                                                                               |  |    
|---------------------------------------------------------------------------------------------------- |  | ---
|Report of Independent Registered Public Accounting Firm                                              |  | 93 
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                         |  | 95 
|Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005               |  | 96 
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005 |  | 97 
|Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005           |  | 98 
|Notes to Consolidated Financial Statements                                                           |  | 99 
|Schedules                                                                                            |  |    
|Schedule IV Mortgage Loans on Real Estate as of December 31, 2007                                    |  | 136

All
other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders of Gramercy Capital Corp.

We
have audited the accompanying consolidated balance sheets of Gramercy Capital Corp. as of December 31, 2007 and 2006, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period ended December 31, 2007, 2006, and 2005. Our audits also included the financial statement schedule listed in the
Index as Item 15(a)(2). These financial statements and schedule are the responsibility of Gramercy Capital Corp.'s management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gramercy Capital Corp. at December 31,
2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, 2006 and 2005, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly in all material respects, the information set forth therein.

As
discussed in Note 2 to the consolidated financial statements, Gramercy Capital Corp. adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment".

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Gramercy Capital Corp.'s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 13, 2008 expressed an unqualified opinion thereon.

|/s/ERNST & YOUNG LLP |  | 
|-------------------- |  | 

New
York, New York
March 13, 2008

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders of Gramercy Capital Corp.

We
have audited Gramercy Capital Corp.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Gramercy Capital Corp.'s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Gramercy Capital Corp.'s internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, Gramercy Capital Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO
criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Gramercy Capital Corp. as of
December 31, 2007 and 2006, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2007 of
Gramercy Capital Corp. and our report dated March 13, 2008 expressed an unqualified opinion thereon.

|/s/ERNST & YOUNG LLP |  | 
|-------------------- |  | 

New
York, New York
March 13, 2008

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

|                                                                                                                                                                                                                                        |              | December 31,
2007 |           | December 31,
2006
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ----------------- | --------- | -----------------
|Assets:                                                                                                                                                                                                                                 |              |                   |           |                  
|Cash and cash equivalents                                                                                                                                                                                                               |              | $                 | 293,126   |                  
|Restricted cash                                                                                                                                                                                                                         |              |                   | 135,957   |                  
|Loans and other lending investments, net                                                                                                                                                                                                |              |                   | 2,441,747 |                  
|Commercial mortgage backed securities                                                                                                                                                                                                   |              |                   | 791,983   |                  
|Investment in unconsolidated joint ventures                                                                                                                                                                                             |              |                   | 49,440    |                  
|Loans held for sale, net                                                                                                                                                                                                                |              |                   | 194,998   |                  
|Commercial real estate, net                                                                                                                                                                                                             |              |                   | 184,121   |                  
|Accrued interest                                                                                                                                                                                                                        |              |                   | 24,177    |                  
|Deferred financing costs                                                                                                                                                                                                                |              |                   | 44,381    |                  
|Deferred costs                                                                                                                                                                                                                          |              |                   | 2,271     |                  
|Derivative instruments, at fair value                                                                                                                                                                                                   |              |                   |          |                  
|Other assets                                                                                                                                                                                                                            |              |                   | 42,877    |                  
|                                                                                                                                                                                                                                        |              |                   |           |                  
|                                                                                                                                                                                                                                        | Total assets |                   | $         | 4,205,078        
|                                                                                                                                                                                                                                        |              |                   |           |                  
|Liabilities and Stockholders' Equity:                                                                                                                                                                                                   |              |                   |           |                  
|Repurchase agreements                                                                                                                                                                                                                   |              | $                 | 200,197   |                  
|Credit facilities                                                                                                                                                                                                                       |              |                   |          |                  
|Collateralized debt obligations                                                                                                                                                                                                         |              |                   | 2,735,145 |                  
|Mortgage notes payable                                                                                                                                                                                                                  |              |                   | 153,624   |                  
|Management fees payable                                                                                                                                                                                                                 |              |                   | 2,852     |                  
|Incentive fee payable                                                                                                                                                                                                                   |              |                   | 2,765     |                  
|Dividends payable                                                                                                                                                                                                                       |              |                   | 93,992    |                  
|Accounts payable and accrued expenses                                                                                                                                                                                                   |              |                   | 35,188    |                  
|Derivative instruments, at fair value                                                                                                                                                                                                   |              |                   | 72,495    |                  
|Other liabilities                                                                                                                                                                                                                       |              |                   | 10,085    |                  
|Junior subordinated deferrable interest debentures held by trusts that issued trust preferred securities                                                                                                                                |              |                   | 150,000   |                  
|                                                                                                                                                                                                                                        |              |                   |           |                  
|Total liabilities                                                                                                                                                                                                                       |              |                   | 3,456,343 |                  
|                                                                                                                                                                                                                                        |              |                   |           |                  
|Commitments and contingencies                                                                                                                                                                                                           |              |                   |          |                  
|Stockholders' Equity:                                                                                                                                                                                                                   |              |                   |           |                  
|Common stock, par value $0.001, 100,000,000 shares authorized, 34,850,577 and 27,878,391 shares issued and outstanding at December 31, 2007 and December 31, 2006, respectively.                                                        |              |                   | 34        |                  
|Series A cumulative redeemable preferred stock, par value $0.001, liquidation preference $115,000, 4,600,000 shares authorized, 4,600,000 and 0 shares issued and outstanding at December 31, 2007 and
December 31, 2006, respectively. |              |                   | 111,205   |                  
|Additional paid-in-capital                                                                                                                                                                                                              |              |                   | 685,958   |                  
|Accumulated other comprehensive income                                                                                                                                                                                                  |              |                   | (65,658   | )                
|Retained earnings                                                                                                                                                                                                                       |              |                   | 17,196    |                  
|                                                                                                                                                                                                                                        |              |                   |           |                  
|Total stockholders' equity                                                                                                                                                                                                              |              |                   | 748,735   |                  
|                                                                                                                                                                                                                                        |              |                   |           |                  
|Total liabilities and stockholders' equity                                                                                                                                                                                              |              | $                 | 4,205,078 |                  
|                                                                                                                                                                                                                                        |              |                   |           |                  

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

95

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Gramercy Capital Corp.        Consolidated Statements of Income        (Amounts in thousands, except per share data)

|                            |                                                                                                    | Year Ended December 31, |  
|--------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------- | -
|
|Revenues                    |                                                                                                    |                         |  
|                            | Investment income                                                                                  |                         | $
|                            | Rental revenue, net                                                                                |                         |  
|                            | Gain on sales and other income                                                                     |                         |  
|                            |                                                                                                    |                         |  
|                            |                                                                                                    | Total revenues          |  
|                            |                                                                                                    |                         |  
|Expenses                    |                                                                                                    |                         |  
|                            | Interest expense                                                                                   |                         |  
|                            | Management fees                                                                                    |                         |  
|                            | Incentive fee                                                                                      |                         |  
|                            | Depreciation and amortization                                                                      |                         |  
|                            | Marketing, general and administrative                                                              |                         |  
|                            | Provision for loan loss                                                                            |                         |  
|                            |                                                                                                    |                         |  
|                            |                                                                                                    | Total expenses          |  
|                            |                                                                                                    |                         |  
|                            | Income before equity in net income (loss) of unconsolidated joint ventures and provision for taxes |                         |  
|                            | Equity in net income (loss) of unconsolidated joint ventures                                       |                         |  
|                            |                                                                                                    |                         |  
|                            | Income before provision for taxes and gain on sale of unconsolidated join venture interests        |                         |  
|                            | Gain from sale of unconsolidated joint venture interest                                            |                         |  
|                            | Provision for taxes                                                                                |                         |  
|                            |                                                                                                    |                         |  
|                            |                                                                                                    | Net Income              |  
|                            | Preferred stock dividends                                                                          |                         |  
|                            |                                                                                                    |                         |  
|                            | Net income available to common stockholders                                                        |                         | $
|                            |                                                                                                    |                         |  
|Basic earnings per share:   |                                                                                                    |                         |  
|                            | Net income available to common stockholders                                                        |                         | $
|                            |                                                                                                    |                         |  
|Diluted earnings per share: |                                                                                                    |                         |  
|                            | Net income available to common stockholders                                                        |                         | $
|                            |                                                                                                    |                         |  
|                            | Dividends per common share                                                                         |                         | $
|                            |                                                                                                    |                         |  
|                            | Basic weighted average common shares outstanding                                                   |                         |  
|                            |                                                                                                    |                         |  
|                            | Diluted weighted average common shares and common share equivalents outstanding                    |                         |  
|                            |                                                                                                    |                         |  

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

96

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

Common Stock





Accumulated
Other
Comprehensive
IncomeSeries A
Preferred
Stock

Additional
Paid-
In-Capital

Retained
Earnings



Comprehensive
IncomeShares

Par Value

TotalBalance at December 31, 2004

18,813


19

$


$
268,558

$
282

$
100

$
268,959

$
2,334Net income
















31,371


31,371


31,371Net unrealized gain on derivative instruments













2,569





2,569


2,569Net proceeds from common stock offerings

3,833


3





96,028








96,031Stock-based compensationfair value










1,798








1,798Proceeds from stock option exercises

131








1,970








1,970Deferred compensation plan, net

26








1,175








1,175Cash distributions declared ($1.495 per common share of which none represented a return of capital for federal income tax purposes)
















(31,469
)

(31,469
)Balance at December 31, 2005

22,803


22





369,529


2,851


2


372,404

$
33,940Net income
















55,902


55,902

$
55,902Net unrealized gain on derivative instruments













39





39


39Net proceeds from common stock offerings

3,000


3





79,787








79,790Stock-based compensationfair value










2,259








2,259Proceeds from stock option exercises

63


1





1,017








1,018Deferred compensation plan, net

12








1,174








1,174Cash distributions declared ($2.08 per common share of which none represented a return of capital for federal income tax purposes)
















(51,926
)

(51,926
)Balance at December 31, 2006

25,878

$
26




$
453,766

$
2,890

$
3,978

$
460,660

$
55,941Net income
















161,597


161,597

$
161,597Net unrealized loss on derivative instruments













(62,973
)




(62,973
)

(62,973
)Net unrealized gain/(loss) on securities previously available for sale













(5,575
)




(5,575
)

(5,575
)Net proceeds from common stock offering

8,635


8





224,175








224,183Net proceeds from issuance of preferred stock







111,205











111,205Stock-based compensationfair value










1,059








1,059Proceeds from stock option exercises

103


0





2,008








2,008Deferred compensation plan, net

234








4,950








4,950Cash distributions declared ($4.45 per common share of which none represented a return of capital for federal income tax purposes)
















(148,379
)

(148,379
)Balance at December 31, 2007

34,850

$
34

$
111,205

$
685,958

$
(65,658
)
$
17,196

$
748,735

$
93,049


The accompanying notes are an integral part of these financial statements

97

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Gramercy Capital Corp.        Consolidated Statements of Cash Flows        (Amounts in thousands)

|                                                                                                                   |                                                                 | Year Ended December 31, |           
|------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | ----------------------- | ----------
|
|                                                                                                                   | Operating Activities                                            |                         |           
|Net income                                                                                                         |                                                                 | $                       | 161,597   
|Adjustments to reconcile net income available to common stockholders to net cash provided by operating activities: |                                                                 |                         |           
|                                                                                                                   | Depreciation and amortization                                   |                         |           
|                                                                                                                   | Amortization of discount, premium and other fees on investments |                         |           
|                                                                                                                   | Deferred rents receivable                                       |                         |           
|                                                                                                                   | Equity in net income (loss) of unconsolidated joint ventures    |                         |           
|                                                                                                                   | Gain on sale of securities                                      |                         |           
|                                                                                                                   | Amortization of stock compensation                              |                         |           
|                                                                                                                   | Provision for loan loss                                         |                         |           
|                                                                                                                   | Unrealized gain (loss) on derivative instruments                |                         |           
|                                                                                                                   | Net realized gain on loans held for sale and loan commitments   |                         |           
|                                                                                                                   | Net realized gain on sale of Joint Venture Investment           |                         |           
|                                                                                                                   | Gain from early extinguishment of debt                          |                         |           
|Changes in operating assets and liabilities:                                                                       |                                                                 |                         |           
|                                                                                                                   | New investments in loans held for sale                          |                         |           
|                                                                                                                   | Proceeds from sale of loans held for sale                       |                         |           
|                                                                                                                   | Accrued interest                                                |                         |           
|                                                                                                                   | Other assets                                                    |                         |           
|                                                                                                                   | Management fees payable                                         |                         |           
|                                                                                                                   | Incentive fee payable                                           |                         |           
|                                                                                                                   | Settlement of derivative instruments                            |                         |           
|                                                                                                                   | Accounts payable, accrued expenses and other liabilities        |                         |           
|                                                                                                                   |                                                                 |                         |           
|Net cash provided by operating activities                                                                          |                                                                 |                         | 59,574    
|                                                                                                                   |                                                                 |                         |           
|                                                                                                                   | Investing Activities                                            |                         |           
|New investment originations and funded commitments                                                                 |                                                                 |                         | (1,914,626
|Principal collections on investments                                                                               |                                                                 |                         | 1,201,423 
|Proceeds from loan syndications                                                                                    |                                                                 |                         | 238,489   
|Proceeds from sale of Joint Venture Investment                                                                     |                                                                 |                         | 146,665   
|Investment in commercial real estate                                                                               |                                                                 |                         | (76,292   
|Proceeds from the sale of security interests in operating real estate                                              |                                                                 |                         |          
|Investment in commercial mortgage backed securities                                                                |                                                                 |                         | (796,306  
|Investment in joint venture                                                                                        |                                                                 |                         | (42,789   
|Change in restricted cash from investing activities                                                                |                                                                 |                         | 18,640    
|Deferred investment costs                                                                                          |                                                                 |                         | (4,586    
|                                                                                                                   |                                                                 |                         |           
|Net cash used in investing activities                                                                              |                                                                 |                         | (1,229,382
|                                                                                                                   |                                                                 |                         |           
|                                                                                                                   | Financing Activities                                            |                         |           
|Proceeds from unsecured repurchase facilities                                                                      |                                                                 |                         | 1,358,056 
|Repayments of unsecured repurchase facilities                                                                      |                                                                 |                         | (1,435,271
|Proceeds from credit facilities                                                                                    |                                                                 |                         | 129,000   
|Repayments of credit facilities                                                                                    |                                                                 |                         | (144,000  
|Proceeds from issuance of collateralized debt obligation                                                           |                                                                 |                         | 1,043,572 
|Repurchase of collateralized debt obligation                                                                       |                                                                 |                         | (18,944   
|Proceeds from mortgage note payable                                                                                |                                                                 |                         | 59,099    
|Change in restricted cash from financing activities                                                                |                                                                 |                         | 196,314   
|Settlement of derivative instruments                                                                               |                                                                 |                         | 10,826    
|Proceeds from stock options exercised                                                                              |                                                                 |                         | 2,008     
|Net proceeds from sale of preferred stock                                                                          |                                                                 |                         | 111,205   
|Net proceeds from sale of common stock                                                                             |                                                                 |                         | 224,183   
|Issuance of trust preferred securities                                                                             |                                                                 |                         |          
|Deferred financing costs and other liabilities                                                                     |                                                                 |                         | (23,621   
|Dividends paid on common stock                                                                                     |                                                                 |                         | (64,576   
|Dividends paid on preferred stock                                                                                  |                                                                 |                         | (4,231    
|                                                                                                                   |                                                                 |                         |           
|Net cash provided by financing activities                                                                          |                                                                 |                         | 1,443,620 
|                                                                                                                   |                                                                 |                         |           
|Net increase (decrease) in cash and cash equivalents                                                               |                                                                 |                         | 273,812   
|Cash and cash equivalents at beginning of period                                                                   |                                                                 |                         | 19,314    
|                                                                                                                   |                                                                 |                         |           
|Cash and cash equivalents at end of period                                                                         |                                                                 | $                       | 293,126   
|                                                                                                                   |                                                                 |                         |           
|                                                                                                                   | Non-cash activity                                               |                         |           
|                                                                                                                   | Change in investment in unconsolidated joint ventures           |                         | $         
|                                                                                                                   |                                                                 |                         |           
|                                                                                                                   | Supplemental cash flow disclosures                              |                         |           
|                                                                                                                   | Interest paid                                                   |                         | $         
|                                                                                                                   |                                                                 |                         |           
|                                                                                                                   | Income taxes paid                                               |                         | $         
|                                                                                                                   |                                                                 |                         |           

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

98

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1. Organization

Gramercy Capital Corp. (the "Company" or "Gramercy") is a commercial real estate specialty finance company that focuses on the direct origination and acquisition
of whole loans, subordinate interests in whole loans, mezzanine loans, bridge loans, distressed debt, preferred equity, and net lease investments involving commercial properties throughout the United
States. We have also established a CMBS business that focuses on the acquisition, trading and financing of commercial mortgage backed securities, or CMBS, and other real estate related securities.
When evaluating transactions, we assess our risk-adjusted return and target transactions with yields that seek to provide excess returns for the risks being taken.

Substantially
all of the Company's operations are conducted through GKK Capital LP, a Delaware limited partnership, or our Operating Partnership. The Company, as the sole general
partner of, and currently the holder of 100% of the common units of, the Operating Partnership, have responsibility and discretion in the management and control of the Operating Partnership, and the
limited partners of the Operating Partnership, in such capacity, have no authority to transact business for, or participate in the management activities of, the Operating Partnership. Accordingly, we
consolidate the accounts of our Operating Partnership.

The
Company is externally managed and advised by GKK Manager LLC, or the Manager, a majority-owned subsidiary of SL Green Realty Corp., or SL Green. At December 31, 2007,
SL Green owned approximately 22% of the outstanding shares of our common stock. We qualified as a real estate investment trust, or REIT, under the Internal Revenue Code commencing with our taxable
year ending December 31, 2004 and expect to qualify for the current fiscal year. To maintain our tax status as a REIT, we plan to distribute at least 90% of our taxable income.

As
of December 31, 2007, the Company held loans, other lending investments and CMBS of $3,428,728 net of fees, discounts, and unfunded commitments with an average spread to LIBOR
of 397 basis points for our floating rate investments, and an average yield of 7.02% for our fixed rate investments. As of December 31, 2007, the Company also held interests in three credit
tenant net lease investments, or CTL investments, two interests in fee positions on properties subject to long-term ground leases and a 100% fee interest in a property subject to a
long-term ground lease.

2. Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include our accounts and those of our subsidiaries which are wholly-owned or controlled by us, or entities which are
variable interest entities in which we are the primary beneficiaries under FASB Interpretation No. 46, or 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 that absorbs a majority of the VIE's anticipated losses and/or a majority of the
expected returns. The Company has evaluated our investments for potential classification as variable interests by evaluating the sufficiency of the entities' equity investment at risk to absorb
losses, and determined that the Company is not the primary beneficiary for any of its investments. Entities which we do not control and entities which are VIE's, but where we are not the primary
beneficiary, are accounted for under the equity method. All significant intercompany balances and transactions have been eliminated.

Variable Interest Entities

The Company's ownership of the subordinated classes of CMBS from a single issuer may provide us with the right to control the foreclosure/workout process on the
underlying loans. There are certain exceptions to the scope of FIN 46R, one of which provides that an investor that holds a variable interest in a qualifying special-purpose entity ("QSPE")
does not consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. FASB Statement No. 140, or

99

---



2. Significant Accounting Policies (Continued)

SFAS 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides the requirements for an entity to qualify as a QSPE. To maintain the QSPE
exception, the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity's QSPE status can be affected in
future periods by activities by its transferors or other involved parties, including the manner in which certain servicing activities are performed. To the extent that the Company's CMBS investments
were issued by a special-purpose entity that meets the QSPE requirements, we record those investments at the purchase price paid. To the extent the underlying special-purpose entities do not satisfy
the QSPE requirements, we follow the guidance set forth in FIN 46R as the special-purpose entities would be determined to be VIEs.

The
Company has analyzed the pooling and servicing agreements governing each of our controlling class CMBS investments and the Company believes that the terms of those agreements conform
to industry standards and are consistent with the QSPE criteria. However, there is uncertainty with respect to QSPE treatment due to ongoing review by accounting standard setters, potential actions by
various parties involved with the QSPE (discussed in the paragraph above), as well as varying and evolving interpretations of the QSPE criteria under SFAS No. 140. Additionally, the standard
setters continue to review the FIN 46R provisions related to the computations used to determine the primary beneficiary of a VIE.

At
December 31, 2007, the Company owned securities of three controlling class CMBS trusts with a carrying value of $38,007. The total par amounts of CMBS issued by the three CMBS
trusts was $921,654. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not be the primary beneficiary of any of the underlying
special-purpose entities. At December 31, 2007, our maximum exposure to loss as a result of our investment in these QSPEs totaled $38,007, which equals the book value of these investments as of
December 31, 2007.

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

Cash and Cash Equivalents

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

Restricted Cash

Restricted cash at December 31, 2007 consists of $130,633 on deposit with the trustee of our collateralized debt obligations, or CDOs, representing the
proceeds of repayments from loans serving as collateral in our CDOs, which will be used to fund investments to replace those trust assets which are repaid or sold by the trust, interest payments
received by the trustee on investments that serve as collateral for our CDOs, which are remitted to the Company on a quarterly basis, and future funding obligations on certain investments. The
remaining balance consists of interest reserves held on behalf of borrowers and $5,324 representing the Company's proportionate share of the reserves of 55 Corporate Drive.

Loans and 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 unfunded commitments unless such loan or investment is deemed to be impaired. Loans held for sale are carried at the lower of cost or market value
using available market information obtained through

100

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2. Significant Accounting Policies (Continued)

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

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

If
upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created with
a corresponding charge to the provision for possible loan losses. The allowance for each loan is maintained at a level we believe is adequate to absorb possible losses. Impairment losses are
recognized as a direct write-down of the loan investment with a corresponding charge-off to the allowance. We maintained a reserve of $8,658 and $2,460 at December 31,
2007 and December 31, 2006, respectively. During the year ended December 31, 2007, charge-offs totaled $3,200. There were no charge-offs for the year ended
December 31, 2006.

Commercial Mortgage Backed Securities

The Company designates its CMBS investments pursuant to FASB Statement of Financial Accounting Standards No. 115, or FAS 115, on the date of
acquisition of the investment. Held to maturity investments are stated at cost plus the amortization of any premiums or discounts and any premiums or discounts are amortized through the consolidated
statements of income using the level yield method. CMBS securities that the Company does not hold for the purpose of selling them in the near-term but may dispose of prior to maturity, are
designated as available-for-sale and are carried at estimated fair value with the net unrealized gains or losses recorded as a component of accumulated other comprehensive
income (loss) in stockholders equity. Unrealized losses on securities that in the judgment of management are other than temporary are charged against earnings as a loss on the income statement. In
November 2007, subsequent to financing the Company's CMBS investments in its CDOs, the Company redesignated all of its available-for-sale CMBS investments with a book value of
approximately $43.6 million to held to maturity. As of December 31, 2007, the unrealized loss on the redesignated CMBS investments included in other comprehensive income was $5,575.

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

101

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2. Significant Accounting Policies (Continued)

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

In
accordance with SFAS No. 115, when the estimated fair value of the security classified as available-for-sale has been below amortized cost for a
significant period of time and the Company concludes that it no longer has the ability or intent to hold the security for the period of time over which the Company expects the values to recover to
amortized cost, the investment is written down to its fair value, and this loss is realized and charged against earnings. The determination of other than temporary impairment is a subjective process,
and different judgments and assumptions could affect the timing of loss realization.

CTL Investments

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

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

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 or its estimated fair value, less its cost to sell. Once an asset is held for sale, depreciation
expense and straight-line rent adjustments are no longer recorded and historic results are reclassified as Discontinued Operations.

In
accordance with FASB No. 141, or SFAS 141, "Business Combinations," the Company allocates the purchase price of real estate to land and building and, if determined to be
material, intangibles, such as the value of above, below and at-market leases and origination costs associated with the in-place leases. The Company depreciates the amount
allocated to building and other intangible assets over their estimated useful lives, which generally range from three to 40 years. The values of the above and below-market leases are amortized
and recorded as either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to rental income over the remaining term of the associated lease. The value
associated with in-place leases and tenant relationships are amortized over the expected term of the relationship, which includes an estimated probability of the lease renewal, and its
estimated term. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible
will be written off. The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its
contractual expiration date). The Company assesses fair value of the leases based on estimated

102

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2. Significant Accounting Policies (Continued)

cash
flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the
historical operating results, known trends, and market/economic conditions that may affect the property.

Investments in Unconsolidated Joint Ventures

The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting since we exercise significant influence, but does
not unilaterally control, the entities and are not considered to be the primary beneficiary under FIN 46. In the joint ventures, the rights of the other investor are protective and
participating. Unless we are determined to be the primary beneficiary, these rights preclude us from consolidating the investments. The investments are recorded initially at cost as an investment in
unconsolidated joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the investments on
our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in net income (loss) of unconsolidated joint ventures over the lesser of the joint venture term or
40 years. None of the joint venture debt is recourse to the Company. As of December 31, 2007 and 2006, we had investments of $49,440 and $57,567 in unconsolidated joint ventures,
respectively.

Revenue Recognition

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

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

The
Company designates loans as non-performing at such time as: (1) the loan becomes 90 days delinquent; or (2) the loan has a maturity default. All
non-performing loans are placed on non-accrual status and income is recognized only upon actual cash receipt. At December 31, 2007, the Company had one
non-performing loan with a carrying value of $29,058. The Company believes there is adequate collateral and reserves to support the carrying value of the loan. There were no
non-performing loans at December 31, 2006. The Company classifies loans as sub-performing if they are not performing in material accordance with their terms, in all
material respects, but they do not qualify as non-performing loans. The specific facts and circumstances of these loans may cause them to ripen into non-performing loans should
certain events occur. At December 31, 2007, one first mortgage loan with a carrying value of $10,403, and one 40% participation interest in a first mortgage loan with a carrying value of
$22,000, were classified as sub-performing. There were no sub-performing loans at December 31, 2006.

In
some instances the Company may sell all or a portion of its investments to a third party or to SL Green. To the extent the fair value received for an investment exceeds the amortized
cost of that investment and FASB Statement No. 140, or SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," criteria is met, under
which control of the asset that is sold is surrendered making it a "true sale," a gain on the sale will be recorded through earnings as other income. To the extent an investment that is sold has a
discount or fees, which were deferred at

103

---



2. Significant Accounting Policies (Continued)

the
time the investment was made and were being recognized over the term of the investment, the unamortized portion of the discount or fees are recognized at the time of sale and recorded as a gain on
the sale of the investment through other income. For the years ended December 31, 2007, 2006 and 2005, the Company recognized $3,985, $5,349 and $10,474 in net gains from the sale of debt
investments or commitments, respectively.

Rental
revenue is recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying
leases is included in other assets on the accompanying balance sheets. The Company may establish, on a current basis, an allowance against this account for future potential tenant credit losses, which
may occur. The balance reflected on the balance sheet will be net of such allowance.

In
addition to base rent, the tenants in the Company's CTL investments also pay all operating costs of owned property including real estate taxes.

Reserve for Possible Loan Losses

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

If,
upon completion of the valuation, the estimated value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created with a
corresponding charge to the provision for possible loan losses. The allowance for each loan is maintained at a level we believe is adequate to absorb possible losses. Impairment losses are recognized
as a direct write-down of the loan investment with a corresponding charge-off to the allowance. During the year ended December 31, 2007, the Company incurred a
charge-off totaling $3,200 related to a defaulted loan, which has a carrying value of $19,155 at December 31, 2007, and is recorded in other assets. There were no
charge-offs for the year ended December 31, 2006. The Company maintained a reserve for possible loan losses of $8,658 against investments with a carrying value of $264,612 as of
December 31, 2007, and a reserve for possible loan losses of $2,460 against investments with a carrying value of $131,427 as of December 31, 2006. There were no charge-offs
for the year ended December 31, 2006.

Deferred Costs

Deferred costs consist of fees and direct costs incurred to originate new investments and are amortized using the effective yield method over the related term of
the investment. Costs incurred in connection with the Company's merger agreement to acquire American Financial Realty Trust (NYSE: AFR), or American Financial, of $16,897 are included in other assets
at December 31, 2007.

104

---



2. Significant Accounting Policies (Continued)

In March 2006, we recorded a nonrecurring charge of $525 for third-party professional expenses in connection with a possible business combination involving the
acquisition of a publicly-traded commercial real estate finance company with business lines considered by our management to be highly complementary to ours. The decision to expense these costs was
made once management concluded the proposed transaction was unlikely to occur on terms advantageous to us.

Deferred Financing Costs

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

Stock Based Compensation Plans

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

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

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

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

2007

2006Dividend yield

7.9
%
8.0
%Expected life of option

5.9
years
6.7
yearsRisk-free interest rate

4.32
%
4.14
%Expected stock price volatility

28.0
%
21.0
%


Incentive Distribution (Class B Limited Partner Interest)

The Class B limited partner interests are entitled to receive an incentive return equal to 25% of the amount by which funds from operations, or FFO plus
certain accounting gains (as defined in the partnership agreement of the Operating Partnership which was amended and restated in April 2006) exceed the product of our weighted average stockholders
equity (as defined in the amended and

105

---



2. Significant Accounting Policies (Continued)

restated
partnership agreement of the Operating Partnership) multiplied by 9.5% (divided by 4 to adjust for quarterly calculations). The Company will record any distributions on the Class B
limited partner interests as an incentive distribution expense in the period when earned and when payment of such amounts has become probable and reasonably estimable in accordance with the
partnership agreement. These cash distributions will reduce the amount of cash available for distribution to our common unitholders in our Operating Partnership and to common stockholders. The Company
incurred approximately $32,235, $7,609 and $2,276 with respect to such Class B limited partner interests for the years ended December 31, 2007, 2006 and 2005, respectively.

Derivative Instruments

In the normal course of business, the Company uses a variety of commonly used derivative instruments that are considered conventional or "plain vanilla"
derivatives, including interest rate swaps, caps, collars and floors, to manage, or hedge, interest rate risk. The Company requires that hedging derivative instruments be effective in reducing the
interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Some derivative instruments are associated with an anticipated
transaction. In those cases, hedge effectiveness criteria also require that it be probable that the underlying transaction occurs. Instruments that meet these hedging criteria are formally designated
as hedges at the inception of the derivative contract. The Company expressly prohibits the use of unconventional derivative instruments and using derivative instruments for trading or speculative
purposes. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.

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

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

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

106

---



2. Significant Accounting Policies (Continued)

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

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

Income Taxes

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

Our
taxable REIT subsidiaries, or TRSs, are subject to federal, state and local taxes.

Underwriting Commissions and Costs

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

Earnings Per Share

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

Use of Estimates

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

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments, debt investments and accounts
receivable. Gramercy places its cash investments in excess of insured amounts with high quality financial institutions. The Manager performs ongoing

107

---



2. Significant Accounting Policies (Continued)

analysis
of credit risk concentrations in the Company's debt investment portfolio by evaluating exposure to various markets, underlying property types, investment structure, term, sponsors, tenants
and other credit metrics. Six investments accounted for more than 21% of the total carrying value of our debt investments as of December 31, 2007 compared to four investments which accounted
for more than 21% of the total carrying value of our debt investments as of December 31, 2006. Six investments accounted for approximately 21% of the revenue earned on our debt investments for
the year ended December 31, 2007, compared to six investments which accounted for approximately 22% of the revenue earned on our debt investments for the year ended December 31, 2006 and
three investments which accounted for approximately 25% of the revenue earned on our debt investments for the year ended December 31, 2005. The largest sponsor accounted for approximately 5% of
the total carrying value of our debt investments as of December 31, 2007 compared to approximately 8% of the total carrying value of our debt investments as of December 31, 2006. The
largest sponsor accounted for approximately 3% of the revenue earned on our debt investments for the year ended December 31, 2007, compared to approximately 5% of the revenue earned on our debt
investments for the year ended December 31, 2006.

Recently Issued Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, or FIN 48, "Accounting for Uncertainty in Income Taxes." This interpretation, clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FAS 109. This interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, disclosure, and transition. This interpretation was effective January 1, 2007 for the Company. The adoption of FIN 48 did not have a material impact on our financial
results for the year ended December 31, 2007.

In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements, or SFAS No. 157. SFAS No. 157 provides guidance for using fair value to measure assets
and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157
establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards
require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007. The Company believes that the adoption of this
standard on January 1, 2008 will not have a material effect on its financial position or
results of operations. The Company does not believe the adoption of SFAS No. 157 will have a material impact on our consolidated financial statements.

In
February 2007, the FASB issued Statement No. 159, or SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS 159 permits entities
to choose to measure many financial instruments and certain other items, at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 applies to reporting periods beginning after November 15, 2007. The
Company will adopt SFAS 159 as required.

In
June 2007, the American Institute of Certified Public Accountants or AICPA issued Statement of Position ("SOP") 07-01 "Clarification of the Scope of the Audit and
Accounting Guide for Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies" SOP 07-1.
SOP 07-1 clarifies the scope of accounting for investment companies and provides guidance for determining whether an entity is within the scope of

108

---



2. Significant Accounting Policies (Continued)

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

In
February 2008, the FASB issued Staff Position No. 140-3, or FSP 140-3, "Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions." FSP 140-3 provides guidance on the accounting for a purchase of a financial asset from a counterparty and contemporaneous financing of the acquisition through repurchase
agreements with the same counterparty. Under this guidance, the purchase and related financing are linked, unless all of the following conditions are met at the inception of the transaction:
1) the purchase and corresponding financing are not contractually contingent; 2) the repurchase financing provides recourse; 3) the financial asset and repurchase financing are
readily obtainable in the marketplace and are executed at market rates; and 4) the maturity of financial asset and repurchase are not conterminous. A linked transaction would require a
determination under FAS 140 to conclude if the transaction meets the requirements for sale accounting. If the linked transaction does not meet sale accounting requirements, the net investment
in the linked transaction is to be recorded as a derivative with the corresponding change in fair value of the derivative being recorded through earnings. The value of the derivative would reflect
changes in the value of the underlying debt investments and changes in the value of the underlying credit provided by the counterparty. The Company currently presents these transactions gross, with
the acquisition of the financial assets in total assets and the related repurchase agreements as financing in total liabilities on the consolidated balance sheets and the interest income earned on the
debt investments and interest expense incurred on the repurchase obligations are reported gross on the consolidated income statements. FAS 140-3 is effective for financial
statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the effect, if any, that this pronouncement will have on its future financial position
or results of operations.

109

---



3. Loans and Other Lending Investments

The aggregate carrying values, allocated by product type and weighted average coupons of the Company's loans, other lending investments and CMBS as of
December 31, 2007 and December 31, 2006 were as follows:

|                                                    |                            | Carrying Value(1) |           | Allocation by
Investment Type |   | Fixed Rate:
Average Yield |           | Floating Rate:
Average Spread
over LIBOR(2) |    
|--------------------------------------------------- | -------------------------- | ----------------- | --------- | ----------------------------- | - | ------------------------- | --------- | ------------------------------------------- | ---
|
|Whole loans, floating rate                          |                            | $                 | 1,594,338 |                               | $ | 1,372,316                 |           | 60                                          | %  
|Whole loans, fixed rate                             |                            |                   | 204,192   |                               |   | 42,376                    |           | 8                                           | %  
|Subordinate interests in whole loans, floating rate |                            |                   | 146,901   |                               |   | 236,308                   |           | 6                                           | %  
|Subordinate interests in whole loans, fixed rate    |                            |                   | 61,890    |                               |   | 48,769                    |           | 2                                           | %  
|Mezzanine loans, floating rate                      |                            |                   | 413,813   |                               |   | 226,675                   |           | 16                                          | %  
|Mezzanine loans, fixed rate                         |                            |                   | 203,753   |                               |   | 216,216                   |           | 8                                           | %  
|Preferred equity, fixed rate                        |                            |                   | 11,858    |                               |   | 44,224                    |           |                                            |    
|                                                    |                            |                   |           |                               |   |                           |           |                                             |    
|                                                    | Subtotal/ Weighted average |                   | $         | 2,636,745                     |   | $                         | 2,186,884 |                                             | 100
|                                                    |                            |                   |           |                               |   |                           |           |                                             |    
|Real Estate Securities, floating rate               |                            |                   | 23,817    |                               |   |                          |           | 3                                           | %  
|Real Estate Securities, fixed rate                  |                            |                   | 768,166   |                               |   |                          |           | 97                                          | %  
|                                                    |                            |                   |           |                               |   |                           |           |                                             |    
|                                                    | Subtotal/ Weighted average |                   |           | 791,983                       |   |                           |          |                                             | 100
|                                                    |                            |                   |           |                               |   |                           |           |                                             |    
|Total                                               |                            | $                 | 3,428,728 |                               | $ | 2,186,884                 |           | 100                                         | %  
|                                                    |                            |                   |           |                               |   |                           |           |                                             |    

---

The carrying value of the Company's loans, other lending investments and CMBS is net of unamortized fees, discounts, reserves for possible loan
losses, and other adjustments of $80,279 and $35,500 at December 31, 2007 and 2006, respectively, and unfunded commitments of $297,719 and $289,153 at December 31, 2007 and 2006,
respectively.

As
of December 31, 2007, the Company's loans, other lending investments and CMBS had the following maturity characteristics:

Year of Maturity

Number of
Investments
Maturing

Current
Carrying Value

% of Total2008

30

$
998,605

29
%2009

31


841,312

25
%2010

12


344,389

10
%2011

2


56,959

2
%2012

3


77,433

2
%Thereafter

27


1,110,030

32
%Total

105

$
3,428,728

100
%


|
|

Weighted average maturity(1)

4.01 years


110

---



3. Loans and Other Lending Investments (Continued)



For
the years ended December 31, 2007, 2006, and 2005 the Company's investment income from loans, other lending investments and CMBS was generated by the following investment
types:

|                                     |       | For the Year Ended
December 31, 2007 |         | For the Year Ended
December 31, 2006 |    | For the Year Ended
December 31, 2005 |  
|------------------------------------ | ----- | ------------------------------------ | ------- | ------------------------------------ | -- | ------------------------------------ | -
|
|Whole loans                          |       | $                                    | 171,798 |                                      | 58 | %                                    | $
|Subordinate interests in whole loans |       |                                      | 23,852  |                                      | 8  | %                                    |  
|Mezzanine loans                      |       |                                      | 78,254  |                                      | 26 | %                                    |  
|Preferred equity                     |       |                                      | 3,139   |                                      | 1  | %                                    |  
|CMBS                                 |       |                                      | 20,669  |                                      | 7  | %                                    |  
|                                     |       |                                      |         |                                      |    |                                      |  
|                                     | Total |                                      | $       | 297,712                              |    | 100                                  | %
|                                     |       |                                      |         |                                      |    |                                      |  

At
December 31, 2007 and December 31, 2006, the Company's loans and other lending investments, excluding CMBS, by form of investment are as follows:

2007

2006Form of investment

Carrying
Value

% of
Total

Carrying
Value

% of
TotalWhole loan

$
1,798,530

68
%
$
1,414,692

65
%Subordinate


208,791

8
%

285,078

13
%Mezzanine


617,566

23
%

442,891

20
%Preferred equity


11,858

1
%

44,222

2
%Total

$
2,636,745

100
%

2,183,883

100
%


At
December 31, 2007 and December 31, 2006, the Company's loans and other lending investments, excluding CMBS, had the following geographic diversification:

2007

2006Region

Carrying
Value

% of
Total

Carrying
Value

% of
TotalNortheast

$
1,130,799

43
%
$
1,169,790

53
%West


714,045

27
%

579,568

27
%South


405,410

15
%

310,909

14
%Midwest


79,750

3
%

41,894

2
%Southwest


103,217

4
%



Mid-Atlantic


150,300

6
%



Various


53,224

2
%

84,723

4
%Total

$
2,636,745

100
%
$
2,186,884

100
%


111

---



3. Loans and Other Lending Investments (Continued)

At
December 31, 2007 and December 31, 2006, the Company's loans and other lending investments, excluding CMBS, by property type are as follows:

2007

2006Property Type

Carrying Value

% of Total

Carrying Value

% of TotalOffice

$
970,362

37
%
$
825,232

38
%Hotel(1)


468,604

18
%

329,446

15
%Multifamily


366,665

14
%

263,829

12
%Retail


217,223

8
%

212,341

10
%Land-commercial


200,445

7
%

187,851

8
%Land-residential(2)


138,771

5
%

152,548

7
%Condominium


126,771

5
%

101,574

5
%Mixed-use


80,784

3
%




%Industrial


50,730

2
%

74,130

3
%Other


16,390

1
%

39,933

2
%Total

$
2,636,745

100
%
$
2,186,884

100
%


---

The
following is a summary of the Company's CMBS investments at December 31, 2007:

|Description       |                    | Number of
Securities |    | Face
Value |         | Book
Value |   | Gross
Unrealized
Gain |         | Gross
Unrealized
Loss |     | Fair
Value
|----------------- | ------------------ | -------------------- | -- | ---------- | ------- | ---------- | - | --------------------- | ------- | --------------------- | --- | ----------
|Held to maturity: |                    |                      |    |            |         |            |   |                       |         |                       |     |           
|                  | Floating rate CMBS |                      | 6  |            | $       | 25,164     |   | $                     | 23,817  |                       |    |           
|                  | Fixed rate CMBS    |                      | 53 |            |         | 796,578    |   |                       | 768,166 |                       | 793 |           
|                  |                    |                      |    |            |         |            |   |                       |         |                       |     |           
|Total             |                    | 59                   |    | $          | 821,742 |            | $ | 791,983               |         | 793                   |     | (25,377   
|                  |                    |                      |    |            |         |            |   |                       |         |                       |     |           

112

---



3. Loans and Other Lending Investments (Continued)

The
following is a summary of the underlying credit rating of the Company's CMBS investments at December 31, 2007:

Book Value

PercentageAAA

$
737,559

93
%AA


16,276

2BBB-


11,781

1BB+


7,401

1BB


4,555

1B+


4,634

1B


3,975

B-


4,873

1Not rated


929

Total

$
791,983

100
%


For
the year ended December 31, 2007, the Company recognized $3,985 in gains from the sale or syndication of loans and other lending investments totaling $181,586, of which $289
represents the recognition of unamortized discounts or fees at the time of sale. For the year ended December 31, 2006, the Company recognized $5,349 in gains from the sale or syndication of
debt investments totaling $173,391, of which $313 represents the recognition of unamortized discounts or fees at the time of sale. For the year ended December 31, 2005, the Company recognized
$10,474 in gains from the sale or syndication of debt investments totaling $182,035, of which $1,849 represented the recognition of unamortized discounts or fees at the time of sale.

The
Company recorded provisions for loan losses of $9,398, $1,430 and $1,038 for the years ended December 31, 2007, 2006, and 2005, These provisions represent increases in loan
loss reserves based on management's estimates considering delinquencies, loss experience and collateral quality by individual asset or category of asset.

During
the year ended December 31, 2007, the Company incurred a charge-off totaling $3,200, relating to one defaulted loan which has a carrying value of $19,155 at
December 31, 2007. There were no charge-offs for the year ended December 31, 2006.

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

Reserve for possible loan losses, December 31, 2005

$
1,030Additional provision for loan losses


1,430Charge-offs


Reserve for possible loan losses, December 31, 2006


2,460Additional provision for loan losses


9,398Charge-offs


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

$
8,658


The
Company evaluates CMBS investments to determine if there has been an other-than-
temporary impairment. Certain of the Company's CMBS investments have an unrealized loss as the carrying value is in excess of the market value. These unrealized losses are primarily the result of
market factors other than credit impairment which is generally indicated by significant change in estimated cash flows from the cash flows previously estimated due to actual prepayments and credit

113

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3. Loans and Other Lending Investments (Continued)

loss
experience. The Company's CMBS investments have been in a continuous loss for less than 12 months. The Company believes the carrying value of the securities are fully recoverable over
their expected holding period. The Company possesses both the intent and the ability to hold the securities until it has recovered the amortized costs. Accordingly, the Company does not believe any of
the securities are other than temporarily impaired. The unrealized loss on our CMBS continued subsequent to year end.

In
connection with a preferred equity investment, which was repaid in October 2006, the Company has guaranteed a portion of the outstanding principal balance of the first mortgage loan
that is a financial obligation of the entity in which we have invested in the event of a borrower default under such loan. The loan matures in 2032. This guarantee is considered to be an
off-balance-sheet arrangement and will survive until the repayment of the first mortgage loan. As compensation, the Company received a credit enhancement fee of $125 from the borrower,
which is recognized as the fair value of the guarantee and has been recorded on its balance sheet as a liability. The liability will be amortized over the life of the guarantee using the
straight-line method and corresponding fee income will be recorded. The Company's maximum exposure under this guarantee is approximately $1,424 as of December 31, 2007. Under the
terms of the guarantee, the investment sponsor is required to reimburse us for the entire amount paid under the guarantee until the guarantee expires.

4. Property Acquisitions

55 Corporate Drive

In June 2006, the Company closed on the acquisition of a 49.75% TIC interest in 55 Corporate Drive, located in Bridgewater, New Jersey, with a 0.25% interest to
be acquired in the future. The property is comprised of three buildings totaling 670,000 square feet which is 100% net leased to an entity whose obligations are guaranteed by Sanofi-Aventis Group
through April 2023. The transaction was valued at $236,000 and was financed with a $190,000, 10-year, fixed-rate first mortgage loan. The remaining 50% of the property is owned
as a TIC interest by an affiliate of SL Green. Upon closing the acquisition of the property, the $90,000 whole loan previously held by the Company was repaid in full using proceeds from the new
mortgage financing. The Company recorded itspro ratashare of net income of the property of $30 and $275 for the years ended December 31, 2007
and 2006, respectively.

The
following is a schedule of our proportionate share of future minimum rent payments to be received under the lease at 55 Corporate Drive:

Rent
Payments2008


6,1402009


7,9962010


7,9962011


8,1072012


8,163Thereafter


92,762$
131,164


292 Madison

In July 2007, the Company acquired a 100% fee interest in the property located at 292 Madison Avenue, New York, NY, from an affiliate of SL Green for $71,871. The
purchase contract was

114

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4. Property Acquisitions (Continued)

negotiated
directly between SL Green and the third party, and we took an assignment of the purchase contract at closing. The Company entered into a 70-year ground lease with the
unaffiliated third party which negotiated the purchase contract with the third party then simultaneously purchased from SL Green, the Class B office building situated on the property. The
Company's acquisition of the fee interest was financed with a $59,099 ten-year fixed rate mortgage loan. The Company recorded operating income on the property of $1,224 for the year ended
December 31, 2007.

5. Disposition of Security Interests in Property

200 Franklin Square Drive

On September 6, 2005, the Company closed on the acquisition of a 100% fee interest in 200 Franklin Square Drive, located in Somerset, New Jersey. The
property is a 200,000 square foot building which is 100% net leased to Philips Holding USA Inc., a wholly-owned subsidiary of Royal Philips Electronics, through December 2021. The property was
acquired for a purchase 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 into a Delaware statutory trust, or DST, we sold approximately 29.3% of our security
interests in the DST to a third party. Subsequently, we sold an additional 45.7% of our security interests in the DST to the same party, reducing our final ownership interest to 25.0%. The Company
received total cash consideration of $12,800 for these interests and the buyer assumed 75% of the DST's underlying mortgage debt. The disposition resulted in a net gain of $4,530, after transaction
costs. As a result of the disposition, this investment is now classified as an investment in joint venture and accounted for using the equity method. As of December 31, 2007, the investment has
a carrying value of $2,269. The Company recorded itspro ratashare of net income of the joint venture of $118 and $109 for the years ended
December 31, 2007 and 2006, respectively.

6. Investments in Unconsolidated Joint Ventures

South Building at One Madison Avenue, New York, New York

In April 2005, the Company closed on a $57,503 initial investment in a joint venture with SL Green to acquire, own and operate the South Building located at One
Madison Avenue, New York, New York, or the South Building. The joint venture was owned 45% by the Company's wholly-owned subsidiary and 55% by the Company's wholly-owned subsidiary of SL Green. The
joint venture interests arepari passu. Also in April 2005, the joint venture completed the acquisition of the South Building from Metropolitan Life
Insurance Company for the purchase price of approximately $802,800 plus closing costs, financed in part through a $690,000 first mortgage loan on the South Building. The first
mortgage was non-recourse to the Company. The South Building comprises approximately 1.2 million square feet and is almost entirely net leased to Credit Suisse Securities
(USA) LLC, or CS, pursuant to a lease with a 15-year remaining term. We recorded ourpro ratashare of net losses of the joint
venture of $759, $1,728, and $1,358 for the years ended December 31, 2007, 2006 and 2005, respectively. On July 2, 2007, the Company entered into an agreement to sell our entire
investment in the One Madison Avenue joint venture to SL Green for approximately $147.0 million, subject to an external appraisal, which was to be approved by the board of directors of both
parties. On August 1, 2007, an affiliate of SL Green loaned approximately $147.0 million to the Operating Partnership. This loan was to be repaid with interest at an annual rate of 5.80%
on the earlier of September 1, 2007 or the closing of the sale of our 45% interest in One Madison Avenue. The sale transaction closed on August 17, 2007, at which time we realized a gain
of $92,235 and simultaneously repaid the entire loan amount with interest due through such date.

115

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6. Investments in Unconsolidated Joint Ventures (Continued)

101 S. Marengo Avenue, Pasadena, California

On November 29, 2005, the Company closed on the purchase of a 50% interest in an office building in Pasadena, CA. The Company also acquired an interest in
certain related assets as part of the transaction. The 345,000 square foot office property, which is net leased to Bank of America through September 2015, assuming the exercise of options, and related
collateral were acquired for $52,000 plus closing costs, using a non-recourse, $50,000, Ten-year fixed-rate first mortgage loan. For the years ended
December 31, 2007, 2006 and 2005, the Company recorded itspro ratashare of net losses of the joint ventures of $1,431, $1,341 and $131,
respectively.

2 Herald Square, New York, New York

In April 2007, the Company purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along
34th Street in New York, New York. The acquisition was financed with a $86,063 ten-year fixed rate mortgage loan. The property is subject to a long-term
ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. As of
December 31, 2007, the investment had a carrying value of $20,390. The Company recorded ourpro
ratashare of net income of $3,105 for the year ended December 31, 2007.

885 Third Avenue, New York, New York

In July 2007, the Company purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position
in a parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 ten-year fixed-rate mortgage loan. The
property is subject to a 70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests
arepari passu. As of December 31, 2007, the investment had a carrying value of $28,332. The Company recorded itspro
ratashare of net income of $2,480 for the year ended December 31, 2007.

7. Junior Subordinated Debentures

On January 27, 2006, the Company completed a third issuance of $50,000 in unsecured trust preferred securities through a separate newly formed DST,
Gramercy Capital Trust III, or GCTIII, that is a wholly-owned subsidiary of the Operating Partnership. The securities bear interest at a fixed rate of 7.65% for the first ten years ending January
2016, with an effective rate of 7.43% when giving effect to the swap arrangement previously entered into in contemplation of this financing. Thereafter, the interest rate will float based on the
three-month LIBOR plus 270 basis points.

In
May and August 2005, the Company completed issuances of $50,000 each in unsecured trust preferred securities through two DSTs, Gramercy Capital Trust I, or GCTI, and Gramercy Capital
Trust II, or GCTII, that are also wholly-owned subsidiaries of the Operating Partnership. The securities issued in May 2005 bear interest at a fixed rate of 7.57% for the first ten years ending June
2015 and the securities issued in August 2005 bear interest at a fixed rate of 7.75% for the first ten years ending October 2015. Thereafter the rates will float based on the three-month LIBOR plus
300 basis points.

All
issuances of trust preferred securities require quarterly interest distributions; however, payments may be deferred while the interest expense is accrued for a period of up to four
consecutive quarters if our Operating Partnership exercises its right to defer such payments, which it may elect to do on more than one occasion. The trust preferred securities are redeemable, at the
option of our

116

---



7. Junior Subordinated Debentures (Continued)

Operating
Partnership, in whole or in part, with no prepayment premium any time after June 30, 2010, October 30, 2010 or January 30, 2011 for the securities issued by GCTI, GCTII
and GCTIII, respectively.

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

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

8. Collateralized Debt Obligations

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

On
August 24, 2006, the Company issued an additional approximately $1,000,000 of CDOs through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO
2006-1 Ltd., or the 2006 Issuer, and Gramercy Real Estate CDO 2006-1 LLC, or the 2006 Co-Issuer. The CDO consists of $903,750 of investment grade
notes, $38,750 of non-investment grade notes, which were co-issued by the 2006 Issuer and the 2006 Co-Issuer, and $57,500 of preferred shares, which were issued by
the 2006 Issuer. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.37%. The Company incurred approximately $11,273 of
costs related to Gramercy Real Estate CDO 2006-1, which are amortized on a level yield basis over the average life of the CDO.

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

117

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8. Collateralized Debt Obligations (Continued)

The
Company retained all non-investment grade securities, the preferred shares and the common shares in the Issuers and Co-Issuer. The Issuers and the
Co-Issuers holds assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans and preferred equity investments, and CMBS, which serve as collateral
for the CDO. Each CDO may be replenished, pursuant to certain rating agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid during the
first five years of the CDO. Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as loans are repaid. The financial statements of
the Issuers are consolidated in our financial statements. The investment grade notes are treated as a secured financing, and are non-recourse to us. Proceeds from the sale of the
investment grade notes issued in each CDO were used to repay outstanding debt under our repurchase agreements and to fund additional investments.

In
November 2007, the Company repurchased $17,750 of Class C notes and $5,000 of Class E notes in the 2006 Issuer at a dollar price of approximately $0.80 and $0.84,
respectively. The Company recorded a net gain of $3,806 in connection with the repurchase of the class C and class E notes.

9. Debt Obligations

Repurchase Facilities

The Company has two repurchase facilities, one with Wachovia Capital Markets, LLC or one or more of its affiliates, or Wachovia, and one with Goldman Sachs
Mortgage Company, or Goldman.

The
repurchase facility with Wachovia is a $500,000 facility. This facility was initially established as a $250,000 facility, was increased to $350,000 from $250,000 effective January,
2005, and was subsequently increased to $500,000 effective April, 2005. In June, 2007, the Company modified the facility by further reducing the credit spreads. As a result of the modifications, the
$500,000 facility bears interest at spreads of 0.65% to 2.50% over one-month LIBOR and, based on its expected investment activities, provides for advance rates that vary from 60% to 95%
based upon the collateral provided under a borrowing base calculation. In October, 2006, the Company extended the facility's maturity date until October 2009. The lender has a consent right with
respect to the inclusion of investments in this facility, determines periodically the market value of the investments, and has the right to require additional collateral, a partial repayment of the
facility (margin call), or a reduction in unused availability under the facility, sufficient to rebalance the facility if the estimated market value of the included investments declines. The aggregate
reduction in availability that would otherwise be available against investments pledged against the facility at December 31, 2007 was $5,782. The Company had no accrued interest and borrowings
of $165,286 at a weighted average spread to LIBOR of 1.33% as of December 31, 2007, and 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 December 31, 2007 and December 31, 2006 were secured by the following investments:

Carrying ValueInvestment Type

2007

2006Whole loans

$
276,869

$
117,328Subordinate interests in whole loans





Mezzanine loans


148,164


139,680Preferred equity





14,955Total

$
425,033

$
271,963


118

---



9. Debt Obligations (Continued)

The
Company also has a repurchase facility with Goldman. In October, 2006 the Company increased this facility from $200,000 to $400,000 and extended its maturity date until September
2009. In June, 2007, it modified the facility by further reducing the credit spreads. As a result of the modifications, the facility bears interest at spreads of 1.00% to 1.50% over
one-month LIBOR and, based on its expected investment activities, provides for advance rates that vary from 70% to 90% based upon the collateral provided under a borrowing base
calculation. As with the Wachovia facility, the lender has a consent right to the inclusion of investments in this facility, determines periodically the market value of the investments, and has the
right to require additional collateral, a partial repayment of the facility (margin call), or a reduction in unused availability under the facility, sufficient to rebalance the facility if the
estimated market value of the included investments declines. The aggregate reduction in availability that would otherwise be available against investments pledged against the facility at
December 31, 2007 was $592. The Company had accrued interest of $189 and borrowings of $34,911 at a weighted average spread to LIBOR of 1.07% as of December 31, 2007, and accrued
interest of $261 and borrowings of $126,009 at a weighted average spread to LIBOR of 1.51% under this facility at December 31, 2006.

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

Carrying ValueInvestment Type

2007

2006Whole loans

$
151,679

$
97,795Mezzanine loans





71,798Total

$
151,679

$
169,593


The
terms of the Company's repurchase facilities (together with any related guarantees) include covenants that (a) limit our maximum total indebtedness to no more than 85% of
total assets, (b) require us to maintain minimum liquidity of at least $15,000, (c) require our fixed charge coverage ratio to be at no time less than 1.25 to 1.00, (d) require
the Company's minimum interest coverage ratio to be at no time less than 1.35 to 1.00, and (e) require the Company to maintain minimum tangible net worth of not less than (i) $400,000,
plus (ii) 75% of the net proceeds of our subsequent equity issuances following the date of the June 2007 amendments. The covenants also restrict 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 any case pay distributions necessary to maintain our REIT status. An event of default can be
triggered on the Company's repurchase facilities if, among other things, GKK Manager LLC is terminated as the Manager. As of December 31, 2007 and 2006, the Company was in compliance
with all such covenants.

The
repurchase facilities require that the Company pay down borrowings under these facilities as principal payments on the loans and investments pledged to these facilities are received.
Assets pledged as collateral under these facilities may include stabilized and transitional whole loans, subordinate interests in whole loans, mezzanine loans, and rated CMBS or commercial real estate
CDO securities originated or acquired by the Company.

Unsecured Revolving Credit Facility

In May 2006, the Company closed on a $100,000 senior unsecured revolving credit facility with KeyBank National Association, or KeyBank, with an initial term of
three years and a one-year extension option. The initial facility was supported by a negative pledge of an identified asset base

119

---



9. Debt Obligations (Continued)

(involving
substitution rights) with advance rates that vary from 30% to 90% of the asset value provided under a borrowing base calculation. The lender also had consent rights to the inclusion of
assets in the borrowing base calculation. The facility bore interest at 1.90% over one-month LIBOR to the extent our leverage ratio, defined as total liabilities to total assets, including
our proportionate share of the liabilities and assets of our unconsolidated subsidiaries, is less than 80% and 2.10% over one-month LIBOR to the extent out leverage ratio is equal to or
greater than 80%. In June 2007 the facility was increased to $175,000 and interest spreads on the facility were reduced. The facility is supported by a negative pledge of an identified asset base with
advance rates that vary from 30% to 90% of the asset value provided under a borrowing base calculation. The lender also has consent rights to the inclusion of assets in the borrowing base calculation.
Following the modifications in June 2007, the facility bears interest at 1.65% over one-month LIBOR. The Company had no accrued interest and no borrowings as of December 31, 2007
and accrued interest of $75 and borrowings of $15,000 at a spread to LIBOR of 2.10% against this facility as of December 31, 2006.

The
terms of the unsecured revolving credit facility include covenants that (a) limit the Company's maximum total indebtedness to no more than 85% of total assets,
(b) require the Company's fixed charge coverage ratio to be at no time less than 1.50, (c) require the Company's minimum interest coverage ratio to be at no time less than 1.70,
(d) require the Company to maintain minimum tangible net worth of not less than $370,000 plus 75% of the net proceeds from equity offerings completed after the closing of the facility and
(e) restrict the maximum amount of the Company's total indebtedness. The covenants also restrict the Company from making distributions in excess of a maximum of 100% of our FFO (as defined by
the National Association of Real Estate Investment Trusts, or NAREIT), except that the Company may in any case pay distributions necessary to maintain REIT qualification. An event of default can be
triggered on the unsecured revolving credit facility if, among other things, GKK Manager LLC is terminated as the Manager. As of December 31, 2007 and 2006, the Company was in compliance
with all such covenants.

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

Mortgage Loan

The Company has two consolidated interest-only mortgage loans related to 55 Corporate Drive and 292 Madison Avenue. The mortgage loan that financed
the acquisition of 55 Corporate Drive in June 2006 has an outstanding principal balance of $190,000, of which we have consolidated our ownership percentage of 49.75% or $94,525. This loan has an
effective interest rate of 5.75% and a term of ten years. Interest on this mortgage was capitalized for a portion of the year ended December 31, 2006 as the property was redeveloped.
Capitalized interest was $1,841 for the year ended December 31, 2006. The mortgage loan that financed the acquisition of 292 Madison Avenue in July 2007 has an outstanding balance of $59,099,
with an effective interest rate of 6.17% and a term of ten years.

Combined
aggregate principal maturities of the Company's consolidated CDOs, repurchase facilities, trust preferred securities, proportionately consolidated mortgage note payable related
to its

120

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9. Debt Obligations (Continued)

TIC
interest in 55 Corporate Drive, mortgage not related to 292 Madison Avenue, and unsecured revolving credit facility as of December 31, 2007 are as follows:

|           |       | CDOs |           | Repurchase
Facilities |   | Trust
Preferred
Securities |         | Mortgage
Note
Payable |         | Unsecured
Revolving
Credit
Facility |   | Total  
|---------- | ----- | ---- | --------- | --------------------- | - | -------------------------- | ------- | --------------------- | ------- | ----------------------------------- | - | -------
|2008       |       | $    |          |                       | $ |                           |         | $                     |        |                                     | $ |       
|2009       |       |      |          |                       |   | 200,197                    |         |                       |        |                                     |   |       
|2010       |       |      |          |                       |   |                           |         |                       |        |                                     |   |       
|2011       |       |      |          |                       |   |                           |         |                       |        |                                     |   |       
|2012       |       |      |           |                       |   |                            |         |                       |         |                                     |   |        
|Thereafter |       |      | 2,735,145 |                       |   |                           |         |                       | 150,000 |                                     |   | 153,624
|           |       |      |           |                       |   |                            |         |                       |         |                                     |   |        
|           | Total |      | $         | 2,735,145             |   | $                          | 200,197 |                       | $       | 150,000                             |   | $      
|           |       |      |           |                       |   |                            |         |                       |         |                                     |   |        

---

10. Operating Partnership Agreement / Manager

At December 31, 2007, the Company owned all of the Class A limited partnership interests in our Operating Partnership. At December 31, 2007,
the majority of the Class B limited partnership interests were owned by the Manager and SL Green Operating Partnership, L.P. Interests were also held by certain officers and employees of
SL Green, including some of whom are our executive officers, certain of which interests are subject to performance thresholds.

At
December 31, 2007, the majority of the interests in the Manager were held by SL Green Operating Partnership, L.P. Interests were also held by certain officers and
employees of SL Green, including some of whom are our executive officers, certain of which interests are subject to performance thresholds.

11. Related Party Transactions

In connection with the Company's initial public offering, it entered into a management agreement with the Manager, which was subsequently amended and restated in
April 2006. The management agreement provides for a term through December 2009 with automatic one-year extension options and is subject to certain termination rights. The Company pays the
Manager an annual management fee equal to 1.75% of our gross stockholders equity (as defined in the management agreement) inclusive of our trust preferred securities. The Company incurred expense to
the Manager under this agreement of an aggregate of $13,135, $10,147 and $6,337 for the years ended December 31, 2007 and 2006 and 2005, respectively.

To
provide an incentive to enhance the value of the Company's common stock, the holders of the Class B limited partner interests of the Operating Partnership are entitled to an
incentive return equal to 25% of the amount by which FFO plus certain accounting gains and losses (as defined in the partnership agreement of the Operating Partnership) exceed the product of our
weighted average stockholders equity (as defined in the partnership agreement of the Operating Partnership) multiplied by 9.5% (divided by 4 to adjust for quarterly calculations). The Company will
record any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payments of such amounts have become probable and
reasonably estimable in accordance

121

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11. Related Party Transactions (Continued)

with
the partnership agreement. We incurred $32,235, $7,609 and $2,276 with respect to such Class B limited partner interests for the years ended December 31, 2007, 2006 and 2005.

The
Company is obligated to reimburse the Manager for its costs incurred under an asset servicing agreement between the Manager and an affiliate of SL Green Operating
Partnership, L.P. and a separate outsource agreement between the Manager and SL Green Operating Partnership, L.P. The asset servicing agreement, which was amended and restated in April
2006, provides for an annual fee payable to SL Green Operating Partnership, L.P. by the Company of 0.05% of the book value of all credit tenant lease assets and non-investment grade
bonds and 0.15% of the book value of all other assets. The asset servicing fee may be reduced by SL Green Operating Partnership, L.P. for fees paid directly to outside servicers by the Company.
The outsource agreement currently provides for an annual fee payable by the Company, which fee is currently $1,366 per year, increasing 3% annually over the prior year on the anniversary date of the
outsource agreement in August of each year. For the years ended December 31, 2007, 2006 and 2005, the Company realized expense of $1,343, $1,304 and $1,266, respectively, to the Manager under
the outsource agreement. For the years ended December 31, 2007, 2006 and 2005, the Company realized expense of $3,564, $2,349 and $1,037, respectively, to the Manager under the asset servicing
agreement.

In
connection with the closing of our first CDO in July 2005, the 2005 Issuer entered into a collateral management agreement with the Manager. Pursuant to the collateral management
agreement, the Manager has agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The
collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum
of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per
annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted
securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the
calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under the first CDO, our Board of Directors has allocated to the Manager
the subordinate collateral management fee paid on CDO notes not held by the Company. At December 31, 2007 and December 31, 2006 the Company owned all of the non-investment
grade bonds, preferred equity and equity in each of the Company's three CDOs. The senior collateral management fee and balance of the subordinate collateral management fee is allocated to the Company.
For the years ended December 31, 2007, 2006 and 2005, the Company realized expense of $2,054, $2,065 and $944, respectively, to the Manager under such collateral management agreement.

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

122

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11. Related Party Transactions (Continued)

or
the Manager, which CDO is structured to own non-investment grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are
owned by third-party investors unaffiliated with the Company or the Manager, which CDO is structured to own investment grade bonds. For the purposes of the management agreement, a "managed
transitional" CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by non-stabilized real estate assets that are
expected to experience substantial net operating income growth, and a "managed non-transitional" CDO means a CDO that is actively managed, has a reinvestment period and is structured to
own debt collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net operating income growth, and a "managed
non-transitional" CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by stabilized real estate assets that are
not expected to experience substantial net operating income growth. Both "managed transitional" and "managed non-transitional" CDOs may at any given time during the reinvestment period of
the respective vehicles invest in and own non-debt collateral (in limited quantity) as defined by the respective indentures. If any fees are paid to the collateral manager in excess of the
fee structure provided for above, such fees are paid to the Company. For the year ended December 31, 2007 and 2006 the Company realized expense of $2,291 and $803, respectively, to the Manager
under this agreement. With respect to the CDO which closed in August, 2007, the Company realized expense of $284 to the Manger.

In
April 2005, the Company closed on a $57,503 initial investment in a joint venture with SL Green to acquire, own and operate the South Building located at One Madison Avenue, New York,
New York, or the South Building. The joint venture, which was created to acquire, own and operate the South Building, was owned 45% by a wholly-owned subsidiary of us and 55% by a wholly-owned
subsidiary of SL Green. The joint venture interests arepari passu. Also in April 2005, the joint venture completed the acquisition of the South
Building from Metropolitan Life Insurance Company for the purchase price of approximately $802,800 plus closing costs, financed in part through a $690,000 first mortgage loan on the South Building.
The South Building comprises approximately 1.2 million square feet and is almost entirely net leased to Credit Suisse Securities (USA) LLC ("CS") pursuant to a lease with a
15-year remaining term. In August 2007 we sold our entire investment in the joint venture to SL Green Realty Corp. for approximately $147.0 million and realized a gain of $92,235.
In August 2007, an affiliate of SL Green loaned approximately $147.0 million to the Operating Partnership. This loan was to be repaid with interest at an annual rate of 5.80% on the earlier of
September 1, 2007
or the closing of the sale of our 45% interest in One Madison Avenue. As a result of the sale of the Company's interest in August 2007, the loan was repaid with interest on such date.

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

Commencing
in May 2005 the Company is party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for the Company's corporate offices at 420 Lexington
Avenue, New York, New York. The lease is for approximately five thousand square feet with an option to lease an additional approximately two thousand square feet and carries a term of ten years with
rents on the entire seven thousand square feet of approximately $249 per annum for year one rising to $315 per

123

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11. Related Party Transactions (Continued)

annum
in year ten. For the years ended December 31, 2007, 2006 and 2005, we paid $235, $252, and $90 under this lease, respectively.

In
July 2005, the Company closed on the purchase from an SL Green affiliate of a $40,000 mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained an
interest-only participation. The Company has determined that the yield on our mezzanine loan after giving effect to the interest-only participation retained by the seller is at
market. The mezzanine loan is secured by the equity interests in an office property in New York, New York.

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

In
March 2006, the Company closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green is an
equity holder. The mezzanine loan was repaid in full in May 2006, when the Company originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint
venture. The loan is secured by office and industrial properties in northern New Jersey and has a book value of $90,389 and $90,049 as of December 31, 2007 and 2006, respectively.

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

In
December 2006, the Company acquired from a financial institution a pari-passu interest of $125,000 in a $200,000 mezzanine loan, which bears interest at 6.384% and is
secured by a multi-family portfolio in New York, New York. An affiliate of SL Green simultaneously acquired the remaining $75,000 pari-passu interest in the mezzanine loan.

During
the year ended December 31, 2006, the Company earned fees of $163 from SL Green representing SL Green's proportionate share of fees for financing and structural advisory
services related to a specific potential transaction.

In
January 2007, the Company originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a
portfolio of multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an
office property. On March 8, 2007 the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event the Company's loan became secured by a
first mortgage lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and
one-month LIBOR plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from us and currently held a 15.15% pari-passu interest in the mezzanine
loan and the whole loan. As of December 31, 2007, the Company's interest in the whole loan had a carrying value of $65,033. The investment in the mezzanine loan was repaid in full in September
2007.

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

124

---



11. Related Party Transactions (Continued)

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

In
April 2007, the Company purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along
34th Street in New York, New York. The acquisition was financed with a $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term
ground lease with an unaffiliated third party for a term of
70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests arepari passu. As of
December 31, 2007, the investment had a carrying value of $20,390. The Company recorded itspro ratashare of net income of $3,105 for the year
ended December 31, 2007.

In
July 2007, the Company purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land
located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a
70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. As of December 31,
2007, the investment had a carrying value of $28,332. The Company recorded itspro
ratashare of net income of $2,480 for the year ended December 31, 2007.

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

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

In
September 2007, the Company acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter we, along with SL Green, sold our interests in the loan to
an unaffiliated third party. Additionally, the Company acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same properties as the preceding senior mezzanine
loan. Immediately thereafter the Company participated 50% of its interest in the loan back to SL Green. In October 2007, the Company acquired a 50% pari-passuinterest in $57,795 of two additional
tranches in the senior mezzanine loan from an unaffiliated third party. At closing, an
affiliate of SL Green simultaneously acquired the other 50% pari-passu interest in the two tranches.

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

In
November 2007, the Company acquired from a syndicate comprised of financial institutions a $25,000 interest in a $100,000 junior mezzanine investment secured by a hotel portfolio and
franchise
headquarters. An affiliate of SL Green simultaneously acquired and owns another $25,000 interest in the investment. The investment was purchased at a discount and bears interest at an effective spread
to one-month LIBOR of 9.50%.

125

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11. Related Party Transactions (Continued)

In
December 2007, the Company acquired a $52,000 interest in a senior mezzanine loan from a financial institution. Immediately thereafter we participated 50% of our interest in the loan
to an affiliate of SL Green. The investment, which is secured by a retail property in New York, New York, was purchased at a discount and bears interest at an effective spread to one-month
LIBOR of 5.00%.

In
December 2007, the Company acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter the Company participated 50% of our
interest in the loan to an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%.

Bright
Star Couriers LLC, or Bright Star, provides messenger services to the Company. Bright Star is owned by Gary Green, a son of Stephen L. Green, the Company's Chairman. The
aggregate amount of fees paid by the Company for such services for the years ended December 31, 2007, 2006 and 2005 was $5, $7 and $3, respectively.

12. Deferred Costs

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

2007

2006Deferred financing

$
59,294

$
35,103Deferred acquisition


4,320


2,19563,315


37,298Less accumulated amortization


(16,962
)

(8,571
)$
46,652

$
28,727


Deferred
financing costs relate to the Company's existing repurchase facilities with Wachovia and Goldman, our unsecured revolving credit facility with KeyBank, our CDOs and the trust
preferred securities. These costs are amortized on a straight-line basis to interest expense based over the remaining term of the related financing.

Deferred
acquisition costs consist of fees and direct costs incurred to originate our investments and are amortized over the related term of the investment.

13. Fair Value of Financial Instruments

The FASB Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", or FAS 107, requires
disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows based upon market yields or by using other valuation methodologies.
Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on
disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

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

Cash and cash equivalents, accrued interest, and accounts payable:These balances reasonably approximate their fair values
due to the short maturities of these items.

126

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13. Fair Value of Financial Instruments (Continued)

Derivative instruments:The Company's derivative instruments, which are primarily comprised of interest rate swap agreements,
are carried at fair value based upon third party valuations.

Lending investments:These instruments are presented at the lower of cost or market value and not at fair value. The fair
values were estimated by using market yields for floating rate and fixed rate (as appropriate) loans with similar credit characteristics.

CMBS:These investments are presented on a held-to-maturity basis and not at fair value. The fair
values were based upon valuations obtained from dealers of those securities.

Repurchase agreements:The repurchase agreements are presented on the basis of the proceeds received and are not at a fair
value. The fair value was estimated by using market yields for similarly placed financial instruments.

Collateralized debt obligations:These obligations are presented on the basis of proceeds received at issuance and not at
fair value. The fair value was estimated based upon the amount at which similarly placed financial instruments would be valued today.

Junior subordinated debentures:These instruments bear interest at fixed rates. The fair value was estimated by calculating
the present value based on current market interest rates.

The
following table presents the carrying value in the financial statements, and approximate fair value of other financial instruments at December 31, 2007 and December 31,
2006:

|                       |                                 | December 31, 2007 |   | December 31, 2006
|---------------------- | ------------------------------- | ----------------- | - | -----------------
|
|Financial assets:      |                                 |                   |   |                  
|                       | Lending investments             |                   | $ | 2,636,745        
|                       | CMBS                            |                   | $ | 791,983          
|Financial liabilities: |                                 |                   |   |                  
|                       | Repurchase agreements           |                   | $ | 200,197          
|                       | Credit facilities               |                   | $ |                 
|                       | Collateralized debt obligations |                   | $ | 2,735,145        
|                       | Mortgage note payable           |                   | $ | 153,624          
|                       | Junior subordinated debentures  |                   | $ | 150,000          

Disclosure
about fair value of financial instruments is based on pertinent information available to the Company at December 31, 2007. Although we are not aware of any factors that
would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2007 and current
estimates of fair value may differ significantly from the amounts presented herein.

14. Stockholders' Equity

The Company's authorized capital stock consists of 125,000,000 shares, $0.001 par value, of which we have authorized the issuance of up to 100,000,000 shares of
common stock, $0.001 par value per share, and 25,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2007, 34,850,577 shares of common stock and 4,600,000 shares
of preferred stock were issued and outstanding.

127

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14. Stockholders' Equity (Continued)

Preferred Stock

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

Common Stock

As of the date of its formation, April 12, 2004, the Company had 500,000 shares of common stock outstanding valued at approximately $200. On
August 2, 2004 the Company completed its initial public offering of 12,500,000 shares of common stock resulting in net proceeds of approximately $172,900, which was used to fund investments and
commence our operations. As of December 31, 2007, 594,333 restricted shares had also been issued under our 2004 Equity Incentive Plan, or the Equity Incentive Plan. These shares have a vesting
period of three to four years and are not entitled to receive
distributions declared by the Company on its common stock until such time as the shares have vested, or the shares have been designated to receive dividends by the Compensation Committee of our Board
of Directors.

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

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

In
May 2006, the Company sold 3,000,000 shares of our common stock, at a price of $26.75 per share, resulting in net proceeds of approximately $79,787. A total of 2,250,000 shares were
sold through a public offering and an additional 750,000 shares were sold to SL Green Operating Partnership, L.P. pursuant to its contractual right to choose to maintain up to a 25% ownership
interest in the outstanding shares of our common stock. After this offering, SL Green Operating Partnership, L.P. owned 6,418,333 shares of our common stock. Net proceeds were used for loan
acquisitions and originations, repayment of outstanding principal under our repurchase facilities and general corporate purposes.

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

128

---



14. Stockholders' Equity (Continued)

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

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

Equity Incentive Plan

As part of its initial public offering, the Company instituted its Equity Incentive Plan. The Equity Incentive Plan, as amended, authorizes (i) the grant
of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or ISOs, (ii) the grant of stock options that do not qualify,
or NQSOs, (iii) the grant of stock options in lieu of cash directors' fees and (iv) grants of shares of restricted and unrestricted common stock. The exercise price of stock options will
be determined by the compensation committee, but may not be less than 100% of the fair market value of the shares of common stock on the date of grant. At December 31, 2007, 1,146,181 shares of
common stock were available for issuance under the Equity Incentive Plan.

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

129

---



14. Stockholders' Equity (Continued)

A summary of the status of our stock options as of December 31, 2007 and December 31, 2006 are presented below:

2007

2006Options
Outstanding

Weighted
Average
Exercise
Price

Options
Outstanding

Weighted
Average
Exercise
PriceBalance at beginning of year

830,001

$
18.02

733,584

$
16.47Granted

770,500

$
27.76

197,500

$
23.49Exercised

(103,330
)
$
19.44

(63,749
)
$
15.95Lapsed or cancelled

(69,002
)
$
25.29

(37,334
)
$
20.18Balance at end of period

1,428,169

$
22.82

830,001

$
18.02


All
options were granted within a price range of $22.55 to $33.54. The remaining weighted average contractual life of the options was 8.2 years. Compensation expense of $1,635
will be recorded over the course of the next 14 months, representing the remaining weighted average vesting period of the option awards as of December 31, 2007. Compensation expense of
$831, $324, and $172 was recorded for the years ended December 31, 2007, 2006 and 2005, respectively, related to the issuance of stock options.

Through
December 31, 2007, 594,333 restricted shares had been issued under the Equity Incentive Plan, of which 63% have vested. The vested and unvested shares are currently
entitled to receive distributions declared by us on our common stock. Holders of restricted shares are prohibited from selling such shares until they vest but are provided the ability to vote such
shares beginning on the date of grant. Compensation expense of $1,888 will be recorded over the course of the next eight months, representing the remaining weighted average vesting period of the
restricted stock awards as of December 31, 2007. Compensation expense of $3,301, $1,669, and $1,577 was recorded for the years ended December 31, 2007, 2006 and 2005, respectively,
related to the issuance of restricted shares.

Outperformance Plan

In June 2005, the compensation committee of the Company's board of directors approved a long-term incentive compensation program, the 2005
Outperformance Plan. Participants in the 2005 Outperformance Plan, all of whom are co-leased employees, will share in a "performance pool" if our total return to stockholders for the
period from June 1, 2005 through May 31, 2008 exceeds a cumulative total return to stockholders of 30% during the measurement period over a base share price of $20.21 per share. The size
of the pool will be 10% of the outperformance amount in excess of the 30% benchmark, subject to a maximum limit equal to the lesser of 4% of our outstanding shares and units of limited partnership
interest as of the end of the performance period, or 1,200,000 shares. If our total return to stockholders from June 1, 2005 to any subsequent date exceeds 80% and remains at that level or
higher for 30 consecutive days, then a minimum performance pool will be established. In the event the potential performance pool reaches the maximum dilution cap before May 31, 2008 and remains
at that level or higher for 30 consecutive days, the performance period will end early and the pool will be formed on the last day of such 30-day period. Each participant's award under the
2005 Outperformance Plan is designated as a specified percentage of the aggregate performance pool to be allocated to such participant assuming the 30% benchmark is achieved. Individual awards under
the 2005 Outperformance Plan will be made in the form of partnership units, or LTIP Units, that may ultimately become exchangeable for shares of our common stock or cash, at our election. Under the
2005 Outperformance Plan, LTIP Units have been granted and additional LTIP Units may be granted in the future prior to the determination of the performance pool; however, these LTIP Units will only

130

---



14. Stockholders' Equity (Continued)

vest
upon satisfaction of performance and other thresholds, and will not be entitled to distributions until after the performance pool, or minimum performance pool, is established. The 2005
Outperformance Plan provides that if a pool is established, each participant will also be entitled to the distributions that would have been paid on the number of LTIP Units earned, had they been
issued at the beginning of the performance period. Those distributions will 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 per unit basis equal to the dividends per share paid on our common stock, whether or not they are vested. Any LTIP Units that are not earned upon the
establishment of the performance pool will be automatically forfeited, and the LTIP Units that are earned will be subject to time-based vesting, with 50% of the LTIP Units earned vesting
in May 2009 and the balance vesting one year later based on continued employment with the Manager or SL Green. The Company will record the expense of the restricted stock award in accordance with FASB
Statement No. 123(R). Compensation expense of $1,533, $1,174 and $1,174 was recorded for the years ended December 31, 2007, 2006 and 2005, respectively, related to the 2005
Outperformance Plan.

Deferred Stock Compensation Plan for Directors

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

As
of December 31, 2007 and December 2006, there were approximately 29,713, and 15,301 phantom stock units outstanding, respectively, of which 19,713 and 11,301 phantom stock
units are vested as of December 31, 2007 and 2006, respectively.

Earnings per Share

Earnings per share for the years ended December 31, 2007, 2006 and 2005 is computed as follows:

Numerator (Income)

For the Year
Ended
December 31,
2007

For the Year
Ended
December 31,
2006

For the Year
Ended
December 31,
2005Basic Earnings:Net income available to common stockholders

$
155,030

$
55,902

$
31,371Effect of dilutive securities








Diluted Earnings:Net income available to common stockholders

$
155,030

$
55,902

$
31,371


131

---



14. Stockholders' Equity (Continued)

Denominator (Weighted Average Shares)BasicShares available to common stockholders


27,968


24,722


20,027Effect of Diluted Securities:Stock-based compensation plans


1,380


1,272


752Phantom stock units


31


15


2Diluted Shares


29,379


26,009


20,781


15. Benefit Plans

The Company does not maintain a defined benefit pension plan, post-retirement health and welfare plan, 401(k) plan or other benefits plans as we do
not have any employees. These benefits are provided to its employees by the Manager, a majority-owned subsidiary of SL Green.

16. Commitments and Contingencies

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

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

The
following is a schedule of future minimum lease payments under our operating lease as of December 31, 2007.

Operating Lease2008

$
2612009


2652010


2832011


2972012


302Thereafter


752Total minimum lease payments

$
2,160


132

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17. Financial Instruments: Derivatives and Hedging

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

The
following table summarizes the notional and fair value of our derivative financial instrument at December 31, 2007. The notional value is an indication of the extent of our
involvement in each 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  |  |                | 699,441 |             | 5.331 | %              | 8/2007  |                 | 1/2018  |            | $
|Interest Rate Swap |       | 3 month LIBOR  |  |                | 347,909 |             | 5.408 | %              | 8/2007  |                 | 5/2017  |            |  
|Interest Rate Swap |       | 1 month LIBOR  |  |                | 42,718  |             | 4.990 | %              | 1/2007  |                 | 1/2017  |            |  
|Interest Rate Swap |       | 1 month LIBOR  |  |                | 24,143  |             | 4.990 | %              | 1/2007  |                 | 1/2017  |            |  
|Interest Rate Swap |       | 1 month LIBOR  |  |                | 16,413  |             | 5.081 | %              | 5/2007  |                 | 5/2017  |            |  
|Interest Rate Swap |       | 3 month LIBOR  |  |                | 12,000  |             | 9.850 | %              | 8/2006  |                 | 8/2011  |            |  
|Interest Rate Swap |       | 3 month LIBOR  |  |                | 3,465   |             | 5.178 | %              | 4/2006  |                 | 3/2010  |            |  
|Interest Rate Swap |       | 3 month LIBOR  |  |                | 14,650  |             | 4.425 | %              | 11/2007 |                 | 7/2015  |            |  
|Interest Rate Swap |       | 1 month LIBOR  |  | $              | 3,465   |             | 4.280 | %              | 7/2005  |                 | 12/2009 |            | $
|                   |       |                |  |                |         |             |       |                |         |                 |         |            |  
|                   | Total |                |  |                | $       | 1,164,204   |       |                |         |                 |         |            |  
|                   |       |                |  |                |         |             |       |                |         |                 |         |            |  

At December 31, 2007, derivative instruments were reported at their fair value as liabilities of $72,495. Offsetting adjustments are
represented as deferred losses in Accumulated Other Comprehensive Income of $60,083. For the year ended December 31, 2007 we recognized in interest expense $259 attributable to the ineffective
component of our derivative instruments designated as cash flow hedges. For the same period we recognized a $1,289 increase to earnings representing the change in value of undesignated derivatives
which are not speculative for economic purposes. Currently, all derivative instruments are designated as cash flow hedging instruments. Over time, the realized and unrealized gains and losses held in
Accumulated Other Comprehensive Income will be reclassified into earnings in the same periods in which the hedged interest payments affect earnings. The Company estimates that approximately $8,280 of
the current balance held in Accumulated Other Comprehensive Income will be reclassified into earnings within the next 12 months.

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

133

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18. Income Taxes

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

For
the years ended December 31, 2007, 2006 and 2005, the Company recorded $1,341, $1,808 and $900 of income tax expense, respectively, in income from continuing operations for
income attributable to its wholly-owned TRSs. The Company has assumed an effective tax rate for the year ended December 31, 2007 of 44% taking into consideration the anticipated applicable U.S.
federal statutory tax rate at December 31, 2007 of 34% and state and local taxes.

19. Environmental Matters

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

20. Segment Reporting

Statement of Financial Accounting Standard No. 131, or "SFAS No. 131," establishes standards for the way that public entities report information
about operating segments in their annual financial statements. The Company is a REIT focused primarily on originating and acquiring loans and securities related to real estate and under the provisions
of SFAS No. 131 currently operate in only one segment.

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

Following the conversion of the entity that owns 200 Franklin Square Drive into a DST, we sold approximately 75% of our security interests in the DST to a third
party, reducing our final ownership interest to 25.0%. The Company received total cash consideration of $12,800 for these interests and the buyer assumed 75% of the DST's underlying mortgage debt. As
a result of the transaction, the property is no longer consolidated onto the Company's balance sheet, but instead is accounted for as an equity method investment.

The
following table represents non-cash activities recognized in other comprehensive income:

|                                                                           |  | 2007 |        | 2006 |   | 2005
|-------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ----
|Deferred gains/(losses) and other non-cash activity related to derivatives |  | ($   | 62,973 | )    | $ | 39  
|Deferred gains/(losses) related to securities available-for-sale           |  | ($   | 5,575  | )    |   |    
|                                                                           |  |      |        |      |   |     
|                                                                           |  | ($   | 68,548 | )    | $ | 39  
|                                                                           |  |      |        |      |   |     

134

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22. Quarterly Financial Data (unaudited)

Quarterly data for the last three years is presented below (in thousands).

|2007 Quarter Ended                                                                                                       |            | December 31 |        | September 30 |   | June 30 |        | March 31 |       
|------------------------------------------------------------------------------------------------------------------------ | ---------- | ----------- | ------ | ------------ | - | ------- | ------ | -------- | ------
|Total revenues                                                                                                           |            | $           | 90,634 |              | $ | 90,214  |        | $        | 78,303
|                                                                                                                         |            |             |        |              |   |         |        |          |       
|Income equity in net income (loss) of unconsolidated joint ventures and provision for taxes                              |            |             | 23,118 |              |   | 3,989   |        |          | 21,805
|Equity in net income (loss) of unconsolidated joint ventures                                                             |            |             | 2,460  |              |   | 1,264   |        |          | 484   
|                                                                                                                         |            |             |        |              |   |         |        |          |       
|Income from continuing operations before provision for taxes and gain from sale of unconsolidated joint venture interest |            |             | 25,578 |              |   | 5,253   |        |          | 22,289
|Gain from sale of unconsolidated joint venture interest                                                                  |            |             |       |              |   | 92,235  |        |          |      
|Provision for taxes                                                                                                      |            |             | (40    | )            |   | (338    | )      |          | (429  
|                                                                                                                         |            |             |        |              |   |         |        |          |       
|                                                                                                                         | Net Income |             |        | 25,538       |   |         | 97,150 |          |       
|                                                                                                                         |            |             |        |              |   |         |        |          |       
|Preferred stock dividends                                                                                                |            |             | (2,336 | )            |   | (2,336  | )      |          | (1,895
|                                                                                                                         |            |             |        |              |   |         |        |          |       
|Net income available to common stockholders                                                                              |            | $           | 23,202 |              | $ | 94,814  |        | $        | 19,965
|                                                                                                                         |            |             |        |              |   |         |        |          |       
|Net income per common shareBasic                                                                                        |            | $           | 0.69   |              | $ | 3.60    |        | $        | 0.77  
|                                                                                                                         |            |             |        |              |   |         |        |          |       
|Net income per common shareDiluted                                                                                      |            | $           | 0.67   |              | $ | 3.43    |        | $        | 0.73  
|                                                                                                                         |            |             |        |              |   |         |        |          |       

|
|

|2006 Quarter Ended                                                                        |  | December 31 |        | September 30 |   | June 30 |   | March 31 |       
|----------------------------------------------------------------------------------------- |  | ----------- | ------ | ------------ | - | ------- | - | -------- | ------
|Total revenues                                                                            |  | $           | 67,264 |              | $ | 50,455  |   | $        | 43,505
|                                                                                          |  |             |        |              |   |         |   |          |       
|Income before equity in net loss of unconsolidated joint ventures and provision for taxes |  |             | 19,495 |              |   | 16,065  |   |          | 13,782
|Equity in net loss of unconsolidated joint ventures                                       |  |             | (870   | )            |   | (734    | ) |          | (630  
|                                                                                          |  |             |        |              |   |         |   |          |       
|Income before provision for taxes                                                         |  |             | 18,625 |              |   | 15,331  |   |          | 13,152
|Provision for taxes                                                                       |  |             | (630   | )            |   | (795    | ) |          | (335  
|                                                                                          |  |             |        |              |   |         |   |          |       
|Net income available to common stockholders                                               |  | $           | 17,995 |              | $ | 14,536  |   | $        | 12,817
|                                                                                          |  |             |        |              |   |         |   |          |       
|Net income per common shareBasic                                                         |  | $           | 0.70   |              | $ | 0.56    |   | $        | 0.53  
|                                                                                          |  |             |        |              |   |         |   |          |       
|Net income per common shareDiluted                                                       |  | $           | 0.66   |              | $ | 0.54    |   | $        | 0.50  
|                                                                                          |  |             |        |              |   |         |   |          |       

|
|

|2005 Quarter Ended                                                                        |  | December 31 |        | September 30 |   | June 30 |   | March 31
|----------------------------------------------------------------------------------------- |  | ----------- | ------ | ------------ | - | ------- | - | --------
|Total revenues                                                                            |  | $           | 32,045 |              | $ | 26,592  |   | $       
|                                                                                          |  |             |        |              |   |         |   |         
|Income before equity in net loss of unconsolidated joint ventures and provision for taxes |  |             | 11,247 |              |   | 9,587   |   |         
|Equity in net loss of unconsolidated joint ventures                                       |  |             | (575   | )            |   | (510    | ) |         
|                                                                                          |  |             |        |              |   |         |   |         
|Income before provision for taxes                                                         |  |             | 10,672 |              |   | 9,077   |   |         
|(Provision)/recovery for taxes                                                            |  |             | 100    |              |   | (500    | ) |         
|                                                                                          |  |             |        |              |   |         |   |         
|Net income available to common stockholders                                               |  | $           | 10,772 |              | $ | 8,577   |   | $       
|                                                                                          |  |             |        |              |   |         |   |         
|Net income per common shareBasic                                                         |  | $           | 0.47   |              | $ | 0.44    |   | $       
|                                                                                          |  |             |        |              |   |         |   |         
|Net income per common shareDiluted                                                       |  | $           | 0.45   |              | $ | 0.41    |   | $       
|                                                                                          |  |             |        |              |   |         |   |         

135

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23. Subsequent Events

On February 13, 2008, the Company held a special meeting of its stockholders for the purpose of approving the issuance of shares of its common stock in the
merger with American Financial Realty Trust ("the Proposal"). The total number of shares of common stock entitled to vote at the meeting was 34,842,244 shares, of which 27,768,617 shares, or 79.7%,
were present in person or by proxy. 27,633,652 shares, or approximately 79.3%, voted for the Proposal, 102,525 shares, or approximately 0.3%, voted against the Proposal, and 32,440 shares, or
approximately 0.1%, abstained from voting.

On
March 14, 2008, the non-performing first mortgage loan with a carrying value of $29,058 was repaid in full, along with accrued interest and substantially all other fees and
charges due to the Company.

In
January, February and March 2008, the Company sold by participation or assignment, interests in three separate mortgage loans. Had these transactions occurred as of
December 31, 2007, the Company's aggregate unfunded loan commitments would have been reduced by $117,691. None of these transactions resulted in a material gain or loss on sale.

136

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Gramercy Capital Corp.        Schedule IVMortgage Loans on Real Estate        December 31, 2007        (Dollars in thousands)

|Loan                  |  | Location                     |  | Interest Rate(1)                      |  | Final Maturity
Date(2)       |  | Periodic Payment
Terms |  | Prior Liens |            | Face Amount
of Loans |   | Carrying
Amount of
Loans
|--------------------- |  | ---------------------------- |  | ------------------------------------- |  | ---------------------------- |  | ---------------------- |  | ----------- | ---------- | -------------------- | - | ------------------------
|Commercial, mixed use |  | New York, NY                 |  | LIBOR + 2.50%                         |  | February 2008                |  | Interest only          |  | $           |           |                      | $ | 85,069                  
|Suburban office       |  | Other Tri-State
(NY/NJ/Comm) |  | LIBOR + 2.75%                         |  | May 2008                     |  | Interest only          |  |             |           |                      |   | 90,287                  
|Retail                |  | Bay Area                     |  | LIBOR + 4.10%                         |  | September 2008               |  | Interest only          |  |             |           |                      |   | 102,263                 
|Office                |  | New York, NY                 |  | LIBOR + 2.38%                         |  | April 2009                   |  | Interest only          |  |             |           |                      |   | 116,750                 
|Whole loans <3%       |  |                              |  | 6.50%  12.01%
LIBOR + 1.75%  6.00%  |  | January 2008  April 2017    |  |                        |  |             |           |                      |   | 1,415,654               
|                      |  |                              |  |                                       |  |                              |  |                        |  |             |            |                      |   |                         
|                      |  |                              |  |                                       |  |                              |  |                        |  |             |           |                      |   | 1,810,023               
|                      |  |                              |  |                                       |  |                              |  |                        |  |             |            |                      |   |                         
|Subordinate Loans <3% |  |                              |  | 7.97%  9.89%
LIBOR + 1.06%  12.50%  |  | February 2008
March 2017    |  |                        |  |             | 1,145,105  |                      |   | 212,241                 
|                      |  |                              |  |                                       |  |                              |  |                        |  |             |            |                      |   |                         
|Mezzanine loans <3%   |  |                              |  | 8.54%  10.02%
LIBOR + 2.40%  11.00% |  | February 2008
December 2016 |  |                        |  |             | 20,051,229 |                      |   | 651,766                 
|                      |  |                              |  |                                       |  |                              |  |                        |  |             |            |                      |   |                         
|Preferred equity <3%  |  |                              |  | 10.09%
LIBOR + 9.00%                  |  | January 2008
August 2011    |  |                        |  |             | 45,475     |                      |   | 12,000                  
|                      |  |                              |  |                                       |  |                              |  |                        |  |             |            |                      |   |                         
|TOTAL PORTFOLIO       |  |                              |  |                                       |  |                              |  |                        |  | $           | 21,241,809 |                      | $ | 2,686,030               
|                      |  |                              |  |                                       |  |                              |  |                        |  |             |            |                      |   |                         

---

137

---





ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in
Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures. Also, we have investments in certain unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to such
entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

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

Management's Annual Report on Internal Control over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, we concluded that our internal control over financial reporting was effective as of
December 31, 2007.

Our
internal control over financial reporting during the year ended December 31, 2007 has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report, appearing on page 93, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of
December 31, 2007.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal control over financial reporting during the year ended December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reports.

ITEM 9B.    OTHER INFORMATION

None.

138

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

The information required by Item 10 will be set forth in our Definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, expected to be filed
pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended, prior to April 30, 2008 (the "2008 Proxy Statement"), and is incorporated herein by reference.

ITEM 11.    EXECUTIVE AND DIRECTOR COMPENSATION

The information required by Item 11 will be set forth in the 2008 Proxy Statement and is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 will be set forth in the 2008 Proxy Statement and is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by Item 13 will be set forth in the 2008 Proxy Statement and is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

The information regarding principal accounting fees and services and the audit committee's pre-approval policies and procedures required by this
Item 14 is incorporated herein by reference to the 2008 Proxy Statement.

139

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)
Consolidated Financial Statements

GRAMERCY CAPITAL CORP.

|Report of Independent Registered Public Accounting Firm                                              |  | 93 
|---------------------------------------------------------------------------------------------------- |  | ---
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                         |  | 95 
|Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005               |  | 96 
|Consolidated Statements of Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005 |  | 97 
|Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005           |  | 98 
|Notes to Consolidated Financial Statements                                                           |  | 99 
|(a)(2) Financial Statement Schedules                                                                 |  |    
|Schedule IV-Mortgage Loans on Real Estate as of December 31, 2007                                    |  | 137

Schedules
other than those listed are omitted as they are not applicable or the required or equivalent information has been included in the financial statements or notes thereto.

(a)(3)
Exhibits
See Index to Exhibits on following page

140

---





INDEX TO EXHIBITS

|Exhibit
No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Agreement and Plan of Merger, dated as of November 2, 2007, by and among the Company, GKK Capital LP, GKK Stars Acquisition LLC, GKK Stars Acquisition Corp., GKK Stars Acquisition LP, American Financial Realty Trust and First
State Group, L.P., incorporated by reference to the Company's Current Report on Form 8-K, dated November 2, 2007, filed with the SEC on November 8, 2007.
|3.1         |  | Articles of Incorporation of the Company, incorporated by reference to the Company's Registration Statement on Form S-11 (No. 333-114673), declared effective by the SEC on July 27, 2004.                                                                                                                                                                                                 
|3.2         |  | Amended and Restated Bylaws of the Company, incorporated by reference to the Company's Current Report on Form 8-K, dated December 12, 2007, filed with the SEC on December 14, 2007.                                                                                                                                                                                                       
|3.3         |  | Articles Supplementary designating the 8.125% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.001 per share, dated April 18, 2007, incorporated by reference to the Company's Current
Report on Form 8-K, dated April 13, 2007, filed with the SEC on April 18, 2007.                                                                
|4.1         |  | Specimen Common Stock Certificate, incorporated by reference to the Company's Current Report on Form 8-K, dated April 13, 2007, filed with the SEC on April 18, 2007.                                                                                                                                                                                                                      
|4.2         |  | Form of stock certificate evidencing the 8.125% Series A Cumulative Redeemable Preferred Stock of the Company, liquidation preference $25.00 per share, par value $0.001 per share, incorporated by reference to the Company's Current Report on
Form 8-K, dated April 13, 2007, filed with the SEC on April 18, 2007.                                                                     
|10.1        |  | Third Amended and Restated Agreement of Limited Partnership of GKK Capital LP, dated April 18, 2007, incorporated by reference to the Company's Current Report on Form 8-K, dated April 13, 2007, filed with the SEC on April 18,
2007.                                                                                                                                                    
|10.2        |  | First Amendment to the Third Amended and Restated Agreement of Limited Partnership of GKK Capital LP, dated April 18, 2007, incorporated by reference to the Company's Current Report on Form 8-K, dated April 13, 2007, filed with
the SEC on April 18, 2007.                                                                                                                             
|10.3        |  | Form of Amended and Restated Origination Agreement, by and between the Company and SL Green Operating Partnership, L.P., incorporated by reference to the Company's Current Report on Form 8-K, dated April 19, 2006, filed with the SEC on
April 20, 2006.                                                                                                                                
|10.4        |  | Form of Amended and Restated Asset Servicing Agreement, by and between GKK Manager LLC and SLG Gramercy Services LLC, incorporated by reference to the Company's Current Report on Form 8-K, dated April 19, 2006, filed with the SEC
on April 20, 2006.                                                                                                                                   
|10.5        |  | Form of Amended and Restated Outsource Agreement, by and between GKK Manager LLC and SL Green Operating Partnership, L.P., incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2006.                                                                                                                                           
|10.6        |  | Form of Collateral Management Agreement, by and between Gramercy Real Estate CDO 2005-1, Ltd., as issuer and GKK Manager LLC, as collateral manager, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2005.                                                                                                                  

141

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|10.7  |  | Collateral Management Agreement, dated as of August 24, 2006, by and between Gramercy Real Estate CDO 2006-1, Ltd., as issuer and GKK Manager LLC, as collateral manager, incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 2006.                                                                                                                                                                                                                                                       
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8  |  | Second Amended and Restated Master Repurchase Agreement, dated as of June 28, 2007, by and among Gramercy Warehouse Funding II LLC, GKK Trading Warehouse II LLC and Goldman Sachs Mortgage Company, incorporated by reference to the
Company's Current Report on Form 8-K, dated June 28, 2007 filed with the SEC on July 5, 2007.                                                                                                                                                                                                                       
|10.9  |  | Annex I to Second Amended and Restated Master Repurchase Agreement, dated as of June 28, 2007, by and among Gramercy Warehouse Funding II LLC, GKK Trading Warehouse II LLC and Goldman Sachs Mortgage Company, incorporated by
reference to the Company's Current Report on Form 8-K, dated June 28, 2007, filed with the SEC on July 5, 2007.                                                                                                                                                                                                           
|10.10 |  | Second Amended and Restated Guaranty, dated as of June 28, 2007, by and among the Company, Gramercy Investment Trust and GKK Trading Corp., incorporated by reference to the Company's Current Report on Form 8-K, dated June 28, 2007,
filed with the SEC on July 5, 2007.                                                                                                                                                                                                                                                                               
|10.11 |  | Amended and Restated Master Repurchase Agreement, dated as of October 13, 2006, by and among Gramercy Warehouse Funding I LLC, GKK Trading Warehouse I LLC, GKK 450 LEX LLC, and the additional sellers from time to time parties
thereto, the buyers from time to time parties thereto, Wachovia Bank, National Association, as agent, and Wachovia Capital Markets, LLC, as the sole lead arranger, incorporated by reference to the Company's Current Report on Form 8-K, dated
October 18, 2006, filed with the SEC on October 19, 2006.              
|10.12 |  | First Amendment to Third Amended and Restated Master Repurchase Agreement, dated as of June 28, 2007, by and among Gramercy Warehouse Funding I LLC, GKK Trading Warehouse I LLC, GKK 450 LEX LLC, and the additional sellers from
time to time parties thereto, the buyers from time to time parties thereto, Wachovia Bank, National Association, as agent, and Wachovia Capital Markets, LLC, as the sole lead arranger, incorporated by reference to the Company's Current Report on
Form 8-K, dated June 28, 2007 filed with the SEC on July 5, 2007.
|10.13 |  | First Amended and Restated Credit Agreement, dated as of June 28, 2007, by and between the Company and Wachovia Capital Markets, LLC, incorporated by reference to the Company's Registration Statement on Form S-11 (No. 333-114673),
declared effective by the SEC on July 27, 2004.                                                                                                                                                                                                                                                                    
|10.14 |  | Fourth Amended and Restated Guarantee Agreement, dated as of June 28, 2007, by and among the Company, GKK Capital LP, Gramercy Investment Trust and GKK Trading Corp., incorporated by reference to the Company's Current Report on
Form 8-K, dated June 28, 2007, filed with the SEC on July 5, 2007.                                                                                                                                                                                                                                                    
|10.15 |  | Form of Indenture, by and among Gramercy Real Estate CDO 2005-1, Ltd., as issuer, Gramercy Real Estate CDO 2005-1 LLC, as co-issuer, GKK Liquidity LLC, as advancing agent and Wells Fargo Bank, National Association, as trustee, paying
agent, calculation agent, transfer agent, custodial securities intermediary, backup advancing agent, notes registrar, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2005.                                                                      

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|10.16 |  | Form of 2004 Equity Incentive Plan, incorporated by reference to the Company's Registration Statement on Form S-11 (No. 333-114673), declared effective by the SEC on July 27, 2004.                                                                                                                                                                                                                 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17 |  | Form of Gramercy Capital Corp. Director's Deferral Program, incorporated by reference to the Company's Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 2005.                                                                                                                                                                                                                   
|10.18 |  | Form of Gramercy Capital Corp. 2005 Long-Term Outperformance Program Award Agreement, incorporated by reference to the Company's Current Report on Form 8-K, dated December 14, 2005, filed with the SEC on December 20, 2005.                                                                                                                                                                       
|10.19 |  | Form of Employment Agreement, by and between Hugh Hall and GKK Manager LLC, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004.                                                                                                                                                                                                       
|10.20 |  | Form of Employment Agreement, by and between Robert R. Foley and GKK Manager LLC, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004.                                                                                                                                                                                                 
|10.21 |  | Form of Second Amended and Restated Registration Rights Agreement by and between the Company and SL Green Operating Partnership, L.P., incorporated by reference to the Company's Form 8-K, dated April 19, 2006, filed with the SEC on
April 20, 2006.                                                                                                                                              
|10.22 |  | Form of Registration Rights Agreement, by and between various holders of the Company's common stock and the Company, incorporated by reference to the Company's Form 8-K, dated December 9, 2004, filed with the SEC on December 9,
2004.                                                                                                                                                            
|10.23 |  | Form of Purchase Agreement, by and among the Company and various investors in the Company's common stock, incorporated by reference to the Company's Form 8-K, dated December 3, 2004 filed with the SEC on December 3, 2004.                                                                                                                                                                        
|10.24 |  | Form of Amended and Restated Trust Agreement by and among GKK Capital LP, as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as Delaware trustee, and the administrative trustees
named therein, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005.               
|10.25 |  | Form of Junior Subordinated Indenture between GKK Capital LP and JPMorgan Chase Bank, National Association, as trustee, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2005.                                                                                                                                                         
|10.26 |  | Form of Amended and Restated Trust Agreement among GKK Capital LP, as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as Delaware trustee, and the administrative trustees named
therein, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2005.                 
|10.27 |  | Form of Junior Subordinated Indenture between GKK Capital LP and JPMorgan Chase Bank, National Association, as trustee, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
2005.                                                                                                                                                    
|10.28 |  | Form of Amended and Restated Trust Agreement among GKK Capital LP, as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as Delaware trustee, and the administrative trustees named
therein, dated January 27, 2006, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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|10.29 |  | Form of Junior Subordinated Indenture between GKK Capital LP and JPMorgan Chase Bank, National Association, as trustee, dated January 27, 2006, incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.                                                                                                                                                                                                                                                
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.30 |  | Indenture, dated as of August 24, 2006, by and among Gramercy Real Estate CDO 2006-1, Ltd., as issuer, Gramercy Real Estate CDO 2006-1 LLC, as co-issuer, GKK Liquidity LLC, as advancing agent, and Wells Fargo Bank, National
Association, as trustee, paying agent, calculation agent, transfer agent, custodial securities intermediary, backup advancing agent and notes registrar, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2006.
|10.31 |  | Form of Underwriting Agreement among the Company., GKK Capital LP, GKK Manager LLC and Wachovia Capital Markets, LLC, as underwriter, dated May 11, 2006, incorporated by reference to the Company's Form 8-K, dated May 16,
2006, filed with the SEC on May 17, 2006.                                                                                                                                                                                                                                            
|10.32 |  | Form of LLC Agreement, by and between GKK Madison Investment LLC, a wholly-owned subsidiary of the Company, and SLG Madison Investment LLC, a wholly-owned subsidiary of SL Green Realty Corp., incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005.                                                                                                                                                                                             
|10.33 |  | Form of Sales Agreement, dated May 10, 2006, by and among the Company, GKK Capital LP, GKK Manager LLC and Cantor Fitzgerald & Co., incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2006.                                                                                                                                                                                                                                                         
|10.34 |  | Form of Sales Agreement, dated May 10, 2006, by and among the Company, GKK Capital LP and Merrill Lynch & Co., Merrill Lynch, Pierce Fenner & Smith Incorporated, incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2006.                                                                                                                                                                                                                           
|10.35 |  | Indenture, dated as of August 8, 2007, by and among Gramercy Real Estate CDO 2007-1, Ltd., Gramercy Real Estate CDO 2007-1, LLC, GKK Liquidity LLC and Wells Fargo Bank, National Association, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007.                                                                                                                                                                                          
|10.36 |  | Collateral Management Agreement, dated as of August 8, 2007, by and between Gramercy Real Estate CDO 2007-1, Ltd. And GKK Manager LLC, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2007.                                                                                                                                                                                                                                                  
|10.37 |  | Form of Amended and Restated Management Agreement by and between the Company and GKK Manager LLC, incorporated by reference to the Company's Current Form 8-K, dated April 19, 2006, filed with the SEC on April 20, 2006.                                                                                                                                                                                                                                                                                        
|10.38 |  | First Amendment to the Amended and Restated Management Agreement, dated as of September 18, 2007, by and between the Company, GKK Capital LP and GKK Manager LLC, incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 2007.                                                                                                                                                                                                                       
|10.39 |  | Limited Partnership Unit Purchase Agreement, dated as of November 2, 2007, by and among GKK Capital LP, Nicholas S. Schorsch and Meadowcourt Trust, incorporated by reference to the Company's Current Report on Form 8-K, dated
November 2, 2007, filed with the SEC on November 8, 2007.                                                                                                                                                                                                                        

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|10.40 |  | Subscription Agreement, dated as of November 2, 2007, by and among the Company, GKK Capital LP, SSF III Gemini, LP, and solely for the purposes of Section 1.1(b) and Section 1.4(a) thereof, Morgan Stanley Real Estate Special
Situations Fund III, L.P., incorporated by reference to the Company's Current Report on Form 8-K, dated November 2, 2007, filed with the SEC on November 8, 2007.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.41 |  | Registration Rights Agreement, dated as of November 2, 2007, by and among the Company, SSF III Gemini, LP, and solely for purposes of Sections 4, 8, 9 and 11 thereof, SL Green Operating Partnership, L.P., incorporated by reference
to the Company's Current Report on Form 8-K, dated November 2, 2007, filed with the SEC on November 8, 2007.                                               
|10.42 |  | Stockholders Agreement, dated as of November 2, 2007, by and among the Company, SSF III Gemini, LP and SL Green Operating Partnership, L.P., incorporated by reference to the Company's Current Report on Form 8-K, dated
November 2, 2007, filed with the SEC on November 8, 2007.                                                                                                               
|10.43 |  | First Amended and Restated Credit Agreement, dated June 28, 2007, among GKK Capital LP, Keybank National Association and Keybanc Capital Markets, incorporated by reference to the Company's Current Report Form 8-K, dated June 28,
2007, filed with the SEC on July 5, 2007.                                                                                                                    
|10.44 |  | Underwriting Agreement, by and among the Company, GKK Capital LP, GKK Manager LLC and Deutsche Bank Securities Inc., dated as of September 21, 2007, incorporated by reference to the Company's Current Report on Form 8-K, dated
September 21, 2007, filed with the SEC on September 26, 2007.                                                                                                   
|10.45 |  | Form of Restricted Stock Award Agreement, filed herewith.                                                                                                                                                                                                                                                                                                                                         
|10.46 |  | Form of Option Award Agreement, filed herewith.                                                                                                                                                                                                                                                                                                                                                   
|10.47 |  | Form of Phantom Share Award Agreement, filed herewith.                                                                                                                                                                                                                                                                                                                                            
|21.1  |  | Subsidiaries of the Registrant, filed herewith.                                                                                                                                                                                                                                                                                                                                                   
|23.1  |  | Consent of Independent Registered Public Accounting Firm, filed herewith.                                                                                                                                                                                                                                                                                                                         
|24.1  |  | Power of Attorney (included on signature page).                                                                                                                                                                                                                                                                                                                                                   
|31.1  |  | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                           
|31.2  |  | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                           
|32.1  |  | Certification by the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                            
|32.2  |  | Certification by the Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                            

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                      |  | GRAMERCY CAPITAL CORP.
|--------------------- |  | ----------------------
|Dated: March 17, 2008 |  | By:                   

KNOW
ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of Gramercy Capital Corp. hereby severally constitute Marc Holliday and Robert R. Foley, and each of them
singly, our true and lawful attorneys and with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Annual Report on
Form 10-K filed herewith and any and all amendments to said Annual Report on Form 10-K, and generally to do all such things in our names and in our capacities as
officers and directors to enable Gramercy Capital Corp. to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Annual Report on Form 10-K and any and all amendments thereto.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated:

|Signatures                              |  | Title                                                                         |  | Date          
|--------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|/s/STEPHEN L. GREENStephen L. Green     |  | Chairman of the Board of Directors                                            |  | March 17, 2008
|/s/MARC HOLLIDAYMarc Holliday           |  | Chief Executive Officer, President and Director (Principal Executive Officer) |  | March 17, 2008
|/s/ROBERT R. FOLEYRobert R. Foley       |  | Chief Financial Officer (Principal Financial and Accounting Officer)          |  | March 17, 2008
|/s/HUGH F. HALLHugh Hall                |  | Chief Operating Officer and Director                                          |  | March 17, 2008
|/s/ALLAN J. BAUMAllan J. Baum           |  | Director                                                                      |  | March 17, 2008
|/s/JEFFREY E. KELTERJeffrey E. Kelter   |  | Director                                                                      |  | March 17, 2008
|/s/PAUL J. KONIGSBERGPaul J. Konigsberg |  | Director                                                                      |  | March 17, 2008
|/s/CHARLES S. LAVENCharles S. Laven     |  | Director                                                                      |  | March 17, 2008

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