**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**ý****ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe fiscal year ended December 31, 2004**

 

**or**

 

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition period from          to          .**

 

**CommissionFile No. 1-32248**

 

**GRAMERCY CAPITAL CORP.**

(Exact name ofregistrant as specified in its charter)

 
| **Maryland**                                                      | ** ** | **06-1722127**                            |
|-------------------------------------------------------------------|------------|-------------------------------------------|
| (State or other  jurisdiction  incorporation or organization)     |       | (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 Registered** |
|--------------------------------|------------|------------------------------------------------|
|                           |       |                                           |
| Common Stock,  $.001 Par Value |       | New York Stock  Exchange                       |

 

SECURITIESREGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: **None**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ýNo o.

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2). Yes o No ý.

 

As of March 17,2005, there were 18,833,000 shares of the Registrant’s common stockoutstanding. The aggregate market value of common stock held by non-affiliatesof the registrant (9,447,000  shares) atDecember 3, 2004, was $163,149,690.  Theaggregate market value was calculated by using the price at which our commonstock was last sold, which was $17.27 per share on December 3, 2004.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portions of theregistrant’s Proxy Statement for the 2005 Annual Stockholders’ Meeting to beheld May 18, 2005 and to be filed within 120 days after the close of theRegistrant’s fiscal year are incorporated by reference into Part III of thisAnnual Report on Form 10-K.

 

 

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**GRAMERCYCAPITAL CORP.FORM 10-KTABLE OF CONTENTS**

 

**10-K PART AND ITEM NO.**

 
| **PART I**    | ** **                                                                                  |
|---------------|---------------------------------------------------------------------------------------------|
| ** **    | ** **                                                                                  |
| 1.            | Business                                                                                    |   |
|          |                                                                                        |   |
| 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                                                                     |   |
|          |                                                                                        |
| **PART  III** |                                                                                        |
|          |                                                                                        |   |
| 10.           | Directors  and Executive Officers of the Registrant                                         |   |
|          |                                                                                        |   |
| 11.           | Executive  Compensation                                                                     |   |
|          |                                                                                        |   |
| 12.           | Security  Ownership of Certain Beneficial Owners and Management                             |   |
|          |                                                                                        |   |
| 13.           | Certain  Relationships and Related Transactions                                             |   |
|          |                                                                                        |   |
| 14.           | Principal  Accounting Fees and Services                                                     |   |
|          |                                                                                        |
| **PART IV**   |                                                                                        |
|          |                                                                                        |   |
| 15.           | Exhibits,  Financial Statements, Schedules and Reports on Form 8-K                          |   |
|          |                                                                                        |   |
|          | SIGNATURES                                                                                  |   |

 

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**PART I**

 

**ITEM1.****                            ****BUSINESS**

 

**General**

** **

Gramercy Capital Corp.,(the “Company” or “Gramercy”) was formed in April 2004 and we completed ourinitial public offering in August 2004. We are a commercial real estate specialty finance company focused onoriginating and acquiring, for our own account, whole loans, bridge loans,subordinate interests in whole loans, permanent loans, distressed debt,mortgage backed securities, mezzanine loans and preferred equity interests inentities that own commercial real estate. Our objective is to grow our portfolio through investments thatcompensate us appropriately for the risk of loss associated with them, ratherthan targeting a specific gross interest rate or yield hurdle. We assess thisrisk-adjusted return when evaluating transactions and target transactions withyields that ensure an equitable balance between risks and return. We invest inassets with the potential for appreciation, in addition to providing currentincome.

 

As of December 31, 2004,we held investments of approximately $406.6 million, net of origination feesand discounts.  For the period fromformation through December 31, 2004 we generated revenues of $6.8 million on thoseinvestments.

 

Weconduct substantially all of our operations through GKK Capital LP, or the “OperatingPartnership”, and are 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, 2004, SL Green owned anapproximately 25% interest in the outstanding shares of our common stock.  We have elected to be taxed as a real estateinvestment trust, or REIT, under the Internal Revenue Code and generally willnot be subject to federal income taxes to the extent we distribute our incometo our stockholders.

 

Ourcorporate offices are located in midtown Manhattan at 420 Lexington Avenue, NewYork, New York 10170.  We do notcurrently have any employees, nor do we anticipate hiring any employees in thenear term. Our executive officers are all employed by our Manager orSL Green. We can be contacted at (212) 297-1000.  We maintain a website at *www.gramercycapitalcorp.com*.  On our website, you can obtain, free ofcharge, a copy of our annual report on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K, and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Securities ExchangeAct of 1934, as amended, as soon as practicable after we file such materialelectronically with, or furnish it to, the Securities and ExchangeCommission.  We have also made availableon our website our audit committee charter, compensation committee charter,corporate governance and nominating committee charter, code of business conductand ethics and corporate governance principles.

 

Unless the contextrequires otherwise, all references to “we,” “our,” and “us” in this annualreport means Gramercy Capital Corp., a Maryland corporation, and one or more ofits subsidiaries, including GKK Capital LP, a Delaware limited partnership.

 

**Corporate Structure**

 

Substantiallyall of our assets are held by, and all of our operations are conducted through,our Operating Partnership.  We are thesole general partner and sole owner of the Class A Limited Partner Interests ofthe Operating Partnership.  SL GreenOperating Partnership, L.P., or “SL Green”, and the Manager own 85 units and 15units of the Class B limited partner interests, respectively, which represents100% of all Class B limited partner interests. SL Green Operating Partnership, L.P. intends to own at least 70 units ofthe Class B limited partner interests. To provide an incentive for the Manager to enhance the value of thecommon stock, the Manager and SL Green Operating Partnership, L.P. are entitledthrough their ownership of Class B limited partner interests of the OperatingPartnership to an incentive return equal to 25% of the amount by which fundsfrom operations (as defined in the partnership agreement of the OperatingPartnership) plus certain accounting gains exceed the product of the weightedaverage stockholders equity (as defined in the partnership agreement of theOperating Partnership) multiplied by 9.5% (divided by 4 to adjust for quarterlycalculations).

 

Asof December 31, 2004, SL Green Operating Partnership, L.P. owned an 85%interest in the Manager and intends to own at least a 70% interest in theManager.  The remaining 15% is owned bycertain members of our executive management team who are not also employees ofSL Green.  We pay to the Manager a basemanagement fee equal to one and three-quarters of one percent (1.75%) of ourstockholders’ equity (as defined in the Management Agreement).  In addition, we are obligated to reimbursethe Manager for its costs incurred under an Asset Servicing Agreement and aseparate Outsource Agreement between the Manager and SL Green OperatingPartnership, L.P.  The Asset ServicingAgreement provides for an annual fee payable by us of 0.15% of the book valueof our investments serviced by SL Green Operating Partnership, L.P., excludingcertain defined investments for which other servicing

 

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arrangementsare executed, and further reduced by fees paid directly to outside servicers byGramercy.  The Outsourcing Agreementprovides for an annual fee payable by us of $1.25 million per year, increasing3% annually over the prior year, for management services outlined in theagreement.  The Asset Servicing andOutsourcing Agreements allow us to leverage the experience, resources andrelationships SL Green has established while maintaining a moderate level ofcorporate overhead expenses.

 

**Business and Growth Strategies**

 

We invest in adiversified portfolio of domestic real estate loans and securities includingwhole loans, bridge loans, subordinate interests in whole loans, permanentloans, distressed debt, mortgage-backed securities, mezzanine loans, preferredequity, and other real estate-related assets. We believe these investmentsoffer attractive risk-adjusted returns with long-term principal protectionunder a variety of default and loss scenarios. We actively manage our assetswith a goal of generating cash available for distribution, facilitating capitalappreciation and generating attractive returns to our stockholders.

 

Wegenerate income principally from the spread between the yields on our assetsand the cost of our borrowing and hedging activities. We leverage ourinvestments to enhance returns to shareholders equity.  We finance, or intend to finance, assetsthrough a variety of techniques, including repurchase agreements, securedcredit facilities, issuances of commercial mortgage-backed securities,collateralized debt obligations and other structured financings.  In addition, we match fund interestrates with like-kind debt (i.e., fixed-rate assets are financed with fixed-ratedebt, and floating rate assets are financed with floating rate debt), throughthe use of hedges such as interest rate swaps, caps, or through a combinationof these strategies. This allows us to reduce the impact of changing interestrates 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 businessusing prudent levels of debt financing, syndication of loan interests andstructured financing when feasible, rather than relying solely on equitycapital, in order to increase earnings per share.

 

Our ability to managethe real estate risk underwritten by our Manager and us is a critical componentof our success. We actively manage and maintain the credit quality of ourportfolio by using our management team’s expertise in structuring andrepositioning investments to improve the quality and yield on managedinvestments. When investing in higher leverage transactions, we use guidelinesand standards developed and employed by senior management of the Manager andSL Green, including rigorous underwriting of collateral performance andvaluation, a review of the creditworthiness of the equity investors, additionalforms of collateral and strategies to effect repayment. If defaults occur, wewill employ SL Green’s strong asset management skills to mitigate theseverity of any losses and seek to optimize the recovery from assets in theevent that we foreclose upon them. In New York, Washington, D.C. and elsewhereas appropriate, SL Green will manage these assets and has the right topurchase properties in metropolitan New York and Washington, D.C. that weacquire in foreclosure. In other geographic markets, we often use long-standingrelationships of senior management or SL Green with local operators orinvestors to enhance our ability to underwrite transactions or mitigatedefaults when making or managing investments.

 

We seek to structure thedebt transactions in which we invest, which enhances our ability to mitigateour losses, by having the benefit of loan documents that afford us appropriaterights and control over our collateral, and having the right to control thedebt that is senior to our position. We believe that this level of controlallows us to achieve attractive risk-adjusted returns within a real estate debtcapital structure. We generally avoid investments where we cannot secure adequatecontrol rights, unless we believe the default risk is very low. Our flexibilityto invest in all or any part of a debt capital structure enables us toparticipate in many transactions and to retain only the investments that meetour investment parameters.

 

We believe that ourability to provide a wide range of financing products and our ability tocustomize financing structures to meet borrowers’ needs differentiates us fromour competitors. We are a one-stop shop for real estate financing solutions capableof financing the most senior capital positions through subordinate interests toequity participations. Our senior management team has substantial experience inresponding to unique borrower needs by crafting financial products that aretailored to meet the business plan of a property owner.

 

Wefocus on certain types of investments where we believe we have a competitiveadvantage and that offer appropriate risk adjusted returns. For properties thatwe believe have stable values or where we have specific asset managementcapabilities to mitigate losses, we will target higher leverage investments. Ifwe conclude that a property to be financed will have a more volatile valueunder a variety of market conditions, we target a less leveraged investment. Insuch transactions we may seek a second loss position. We also target theorigination of larger components of financings, including whole loans, toafford us the opportunity to syndicate and securitize our

 

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investments to createretained instruments with above-market returns. We originate investments indirect transactions with borrowers, we co-originate with or acquire existingassets from third parties, primarily financial institutions, and we occasionallyco-invest with SL Green and its affiliates.

 

Our targeted investmentsinclude the following:

 

***Bridge Loans***—We offer floating ratewhole loans to borrowers who are seeking debt capital with a final term tomaturity of not more than five years to be used in the acquisition,construction or redevelopment of a property. Typically, the borrower hasidentified a property in a favorable market that it believes to be poorlymanaged or undervalued. Bridge financing enables the borrower to secureshort-term financing while improving the operating performance and physicalaspects of the property and avoid burdening it with restrictive long-term debt.The bridge loans we originate are predominantly secured by first mortgage lienson the property and are expected to provide interest rates ranging from 225 to400 basis points over applicable index rate indexes.  We expect the stated maturity of our bridgeloans to range from two years to five years, and we expect to hold these investmentsto maturity.

 

We believe our bridge loanswill lead to additional financing opportunities in the future, as bridgefacilities are often a first step toward permanent financing or a sale.  We have experienced that many major financialinstitutions have largely avoided this type of lending because it does not leadto significant trading profits from subsequent securitizations. However, weintend to use securitization as a financing rather than a tradingactivity.  We intend to use thesetransactions to pool together smaller bridge loans and retain the resultingnon-investment grade interests and interest-only certificates (perhaps in asingle bond structure). To increase our volume, enhance financing efficienciesand create a national presence, we may seek joint ventures, mergers or other arrangementswith regional or product specific originators.

 

***Subordinate Interests in Whole Loans (B Notes)***—Wepurchase from third parties, and may retain from whole loans we originate andco-originate and securitize or sell, subordinate interests in first mortgageloans referred to as B Notes. B Notes are loans secured by a firstmortgage and subordinated to a senior interest, referred to as an A Note.The subordination of a B Note is generally evidenced by a co-lender orparticipation agreement between the holders of the related A Note and the BNote. In some instances, the B Note lender may additionally require a securityinterest in the stock or partnership interests of the borrower as part of thetransaction. We originate B Notes directly or acquire B Notes in negotiatedtransactions with originators of the whole loan. When we originate firstmortgage loans, we may divide them, securitizing or selling the A Note andkeeping the B Note for investment. We believe the B Note market willcontinue to grow with the expansion of the commercial mortgage securitizationmarket.

 

B Notes typically bear interest at a rate of 200to 600 basis points over the applicable interest rate index and haveloan-to-value ratios between 65% and 75%. B Note lenders have the same obligations,collateral and borrower as the A Note lender, but typically aresubordinated in recovery upon a default. B Notes share certain creditcharacteristics with second mortgages, in that both are subject to greatercredit risk with respect to the underlying mortgage collateral than thecorresponding first mortgage or A Note.

 

B Notes created from bridge loans generally willhave terms matching those of the whole loan of which they are a part, typicallytwo to five years.  B notes createdfrom permanent loans generally will have terms of five years to fifteenyears.  We expect to hold B notes totheir maturity.

 

When we acquire B Notes fromthird parties, we may earn income on the investment, in addition to theinterest payable on the B Note, in the form offees charged to the borrower under that note (currently approximately 0.25% to1% of the note amount) or by receiving principal payments in excess of thediscounted price (below par value) we paid to acquire the note. When weoriginate B Notes out of whole loans and then sell the A Notes, we allocate ourbasis in the whole loan among the two (or more) components to reflect the fairmarket value of the new instruments. We may realize a profit on sale if ourallocated value is below the sale price. Our ownership of a B Note with controllingclass rights, which typically means we have the unilateral ability to determinewhen, and in what manner, to exercise the rights and remedies afforded theholder of the first mortgage note, may, in the event the financing fails toperform according to its terms, cause us to elect to pursue our remedies asowner of the B Note, which may include foreclosure on, or modification of,the note. In some cases, usually

 

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restricted to situations inwhich the current market value of the underlying commercial property securingthe loan has declined below the aggregate unpaid principal balance of secureddebt senior to our investment, the owner of the A Note may be able to forecloseor modify the note against our wishes as holder of the B Note. As aresult, our economic and business interests may diverge from the interests ofthe holders of the A Note. These divergent interests among the holders ofeach investment may result in conflicts of interest.

 

***Permanent Loans****—*We originate fixed-ratewhole loans with terms of up to 15 years, with the intention of separatingthem into tranches, which can be securitized and resold. We would expect toretain B Notes, mezzanine loans and preferred equity created in connection withthe whole loan origination, where we see the most advantageous risk-adjustedreturns.  We expect the stated maturityof our permanent loan investments to range from five years to 15 years. Wemay sell these investments prior to maturity.

 

***Distressed Debt***—We may also invest indistressed debt, most often sub- and non-performing real estate loans acquiredfrom financial institutions. We will make these investments when we believe ourunderwriting, credit, financing and asset management experience will enable usto generate above-average risk-adjusted returns by resolving these distressedloans expeditiously through refinancings, negotiated repayments with borrowersor foreclosure and subsequent sale of the underlying property. A sub-performingloan is a loan with a very high loan-to-value ratio, with a low debt servicecoverage ratio, and which is likely to default at maturity because the propertysecuring the loan cannot support a refinancing of the loan’s entire unpaid principalbalance. 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 hasnot been repaid. Sub- and non-performing loans are typically purchased at adiscount to the note balance. Our investment return results from a combinationof current cash flow from the note or underlying property, plus any eventualrecovery of loan principal.

 

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

 

***Mortgage-Backed Securities****—*We acquire mortgage-backed securities (“MBS”)that are created when commercial or residential loans are pooled andsecuritized.  These securities may beissued by government sponsored agencies or other entities and may or may not berated investment grade by rating agencies. We may also originatemortgage-backed securities from pools of commercial loans we assemble, in whichevent we expect to retain the more junior interests.

 

Commercial mortgage-backedsecurities (“CMBS”) are secured by or evidenced by ownership interests in asingle commercial mortgage loan or a pool of mortgage loans secured bycommercial properties. Residential mortgage-backed securities are backed bypools of home mortgages. We expect a majority of our mortgage-backed securitiesinvestments to be rated by at least one rating agency.

 

Commercial mortgage-backedsecurities are generally pass-through certificates that represent beneficialownership interests in common law trusts whose assets consist of definedportfolios of one or more commercial mortgage loans. They are typically issuedin multiple tranches whereby the more senior classes are entitled to prioritydistributions from the trust’s income to make specified interest and principalpayments on such tranches. Losses and other shortfalls from expected amounts tobe received on the mortgage pool are borne by the most subordinate classes, whichreceive payments only after the more senior classes have received all principaland/or interest to which they are entitled.

 

The credit quality ofmortgage-backed securities depends on the credit quality of the underlyingmortgage loans, which is a function of factors such as:

 

•                                          theprincipal amount of loans relative to the value of the related properties;

•                                          themortgage loan terms (e.g. amortization);

•                                          marketassessment and geographic location;

•                                          constructionquality of the property; and

•                                            thecreditworthiness of the borrowers.

 

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We focus not on new issues butrather on “Story Securities” available in the secondary market where we areable to analyze and underwrite the underlying assets. “Story Securities” areseasoned securities with identifiable credit risks (such as large defaulted orsub-performing loans or a negative development with respect to the sponsor of alarge loan) that we believe may require complex financial analysis to fullyunderstand the issues and which fixed income money managers cannot efficientlyunderwrite, or which make them unattractive to a significant number of fixedincome investors. We seek capital appreciation, in addition to interest income,by buying these securities at a discount to par value.

 

We expect the stated maturityof our mortgage-backed securities investments to range from several months toup to 15 years for commercial mortgage-backed securities and up to40 years for residential mortgage-backed securities. Such securities donot have stated maturities but rather receive principal payments from theunderlying investments. We expect to hold commercial mortgage-backed securitiesto maturity and may sell residential mortgage-backed securities prior tomaturity.

 

***Mezzanine Loans***—We originatemezzanine loans that are senior to the borrower’s equity in, and subordinate toa first mortgage loan on, a property. These loans are secured by pledges ofownership interests, typically in whole but occasionally in part (but usuallywith effective sole control over all the ownership interests), in entities thatdirectly or indirectly own the real property. In addition, we may require othercollateral to secure mezzanine loans, including letters of credit, personalguarantees, or collateral unrelated to the property.

 

We typically structure our mezzanine loans to receivea stated coupon (benchmarked usually against LIBOR, or occasionally against aTreasury index or a swap index).  We mayin certain, select instances structure our mezzanine loans to receive a statedcoupon plus a percentage of gross revenues and a percentage of the increase inthe fair market value of the property securing the loan, payable upon maturity,refinancing or sale of the property. Mezzanine loans may also have prepayment lockouts, penalties, minimumprofit hurdles and other mechanisms to protect and enhance returns in the eventof premature repayment.

 

These investments typically range in size from $10 to$50 million, have terms from two to ten years and typically bearinterest at a rate of 400 to 1000 basis points over the applicable interestrate index. Some transactions entail the issuance of more than one tranche orclass of mezzanine debt.  Mezzanine loansusually have loan-to-value ratios between 75% and 90%.  Mezzanine loans frequently have maturitiesthat match the maturity of the related mortgage loan but may have shorter orlonger terms.  We expect to hold theseinvestments to maturity.

 

***Preferred Equity***—We originatepreferred equity investments in entities that directly or indirectly owncommercial real estate. Preferred equity is not secured, but holders havepriority relative to common equity holders on cash flow distributions andproceeds from capital events. In addition, preferred holders can often enhancetheir position and protect their equity position with covenants that limit theentity’s activities and grant us the exclusive right to control the propertyafter an event of default. Occasionally, the first mortgage on a propertyprohibits additional liens and a preferred equity structure provides anattractive financing alternative. With preferred equity investments, we maybecome a special limited partner or member in the ownership entity and may beentitled to take certain actions, or cause a liquidation, upon a default.Preferred equity typically is more highly leveraged, with loan-to-value ratiosof 85% to more than 90%.  We expect ourpreferred equity to have mandatory redemption dates (that is, maturity dates)that range from three years to five years, and we expect to hold theseinvestments to maturity.

 

***Other Real Estate-Related Investments—***Wemay also make investments in other types of commercial or multi-family realestate assets. These may include acquisitions of real property and debt issuedby REITs or other real estate companies. We have authority to issue our commonstock or other equity or debt securities in exchange for property. Subject togross income and asset tests necessary for REIT qualification, we may alsoinvest in securities of other REITs, or other entities engaged in real estateactivities or securities of other issuers, including for the purpose ofexercising control over such entities.

 

Some of these investments maybe equity interests in properties with no stated maturity or redemption date,or long-term leasehold interests with expiration dates as long as 40 yearsbeyond the date of our investment. We expect to hold these investments forbetween several months and up to ten years, depending upon the risk profile ofthe investment and our investment rationale. The timing of our sale of theseinvestments, or of their repayment, will frequently be tied to certain eventsinvolving the underlying property, such as new tenants or superior financing.

 

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As of December 31, 2004,our Investment portfolio, net of origination fees and discounts, was comprisedof the following (in thousands);

 

| **Investment Type**             | ** ** | **Carrying Value** | ** ** |
|---------------------------------|------------|--------------------|------------|
| Whole loans                     |       | $                  | 155,215    |   |
| Subordinate  mortgage interests |       | 240,502            |       |
| CMBS                            |       | 10,898             |       |
|                            |       | $                  | 406,615    |   |

 

Wemonitor our portfolio periodically and prior to each acquisition to confirmthat we continue to qualify for the exemption from registration under theInvestment Company Act provided by Section 3(c)(5)(C) of the InvestmentCompany Act. We generally expect permanent loans, bridge loans, whole poolmortgage-backed securities and certain distressed debt securities to bequalifying assets under the Section 3(c)(5)(C) exemption from theInvestment Company Act and make investments so that at least 55% of ourportfolio is comprised of qualifying assets.  The treatment of distressed debt securitiesas qualifying assets is based on the characteristics of the particular type ofloan, including its foreclosure rights. Junior (first loss) interests inmortgage-backed securities pools may constitute qualifying assets underSection 3(c)(5)(C) provided that we have the unilateral right toforeclose, directly or indirectly, on the mortgages in the pool and that we mayact as the controlling class or directing holder of the pool. Similarly, BNotes may constitute qualifying assets under Section 3(c)(5)(C) provided that we have theunilateral right to foreclose, directly or indirectly, on the mortgage and thatwe may act as the controlling class or directing holder of the note.  We generally do not treat mezzanine loans andpreferred equity investments as qualifying assets.  In addition to making investments ofqualifying assets, we also make investments so that at least 80% of ourportfolio is comprised of real estate-related assets.  We expect that all of these classes ofinvestments will be considered real estate-related assets under the InvestmentCompany Act for purposes of the 80% investment threshold. Qualification forthis exemption will limit our ability to make certain investments.

 

On occasion, we utilizea special servicer, which in some instances may be an affiliate of us orSL Green, to manage, modify and resolve loans and other investments thatfail to perform under the terms of the loan agreement, note, indenture, orother governing documents. We will typically negotiate for the right to appointa special servicer as part of the origination or purchase of an investment. Specialservicers are most frequently employed in connection with whole loans,B Notes and first-loss classes of commercial mortgage-backed securities.The rights of the special servicer, which are typically subject to a servicingstandard that requires the special servicer to pursue remedies that maximizethe recovery of investment principal, typically include, among other things,the right to foreclose upon the loan collateral after an event of default.

 

Where we use a specialservicer, our rights, including foreclosure rights we hold, are found in theagreements among the lenders or holders of notes, such as intercreditor orparticipation agreements. Where we hold unilateral foreclosure rights, thoserights generally become exercisable upon the occurrence of events of default,such as nonpayment of the debt. In certain circumstances we may lose ourforeclosure rights. For example, where the appraised value of the collateralfor 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 ofmore senior debt. Generally, we do not expect SL Green or its affiliates tohold these types of senior debt where we hold a more junior instrument.

 

While we intend to holdour investments to maturity, in all instances we may sell an investment priorto its stated maturity for reasons of risk management, liquidity, changinginvestment objectives, or regulatory requirements.

 

**Financing Strategy**

 

We use debt financing invarious forms in an effort to increase the size of our portfolio and potentialreturns to our stockholders. Access to low-cost capital is crucial to ourbusiness, since we earn income based on the spread between the yield on ourinvestments and the cost of our borrowings.

 

Our financing strategyfocuses on the use of match-funded financing structures. This means that weseek to match the maturities of our financial obligations with the maturitiesof our investments to minimize the risk that we have to refinance our liabilitiesprior to the maturities of our assets, and to reduce the impact of changinginterest rates on our cash flow and earnings. In addition, we match fund

 

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interest rates withlike-kind debt (i.e., fixed-rate assets are financed with fixed-rate debt, andfloating rate assets are financed with floating rate debt), through the use ofhedges such as interest rate swaps, caps, or through a combination of thesestrategies. This allows us to reduce the impact on our cash flow and earningsof changing interest rates.  At December31, 2004, approximately 90% of our investments, when measured by carryingvalue, were floating rate instruments based on LIBOR.  These investments had a weighted averageremaining term to initial maturity of 22.4 months.  The remaining 10% of our investments carriedfixed rates of interest, although we have entered into swap contracts thatconvert substantially all of the floating rate financing expenses against theseassets to fixed rate expenses to eliminate basis risk.

 

Weuse short-term financing in the form of our revolving credit facilities,repurchase agreements, bridge financings and bank warehousing facilities, priorto the implementation of longer-term match-funded financing.  At December 31, 2004, we had approximately$238.9 million outstanding under our repurchase facility with Wachovia CapitalMarkets, LLC.  Under ourfacilities with Wachovia Capital Markets LP, an event of default will betriggered if GKK Manager LLC ceases to be the Manager.  Forlonger-term funding, we intend to utilize securitization structures, includingcollateralized debt obligations (“CDO”), as well as other match-fundedfinancing structures. Collateralized debt obligations are multiple class debtsecurities, or bonds, secured by pools of assets, such as mortgage-backedsecurities, B Notes, mezzanine loans and REIT debt. Like typical securitizationstructures, in a CDOthe assets are pledged to a trustee for the benefit of the holders of thebonds. The bonds may be rated by one or more rating agencies. One or moreclasses 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-termfinancing. We believe that CDO’s are a suitable long-term financing vehicle forour investments because they will enable us to maintain our strategy of fundingsubstantially all of our assets and related liabilities using the same LIBORbenchmark, lock-in a long-term cost of funds tied to LIBOR, and reduce the riskthat we have to refinance our liabilities prior to the maturities of ourinvestments.

 

We use different levelsof leverage depending on the specific risk-return characteristics of eachinvestment type. For example, we generally use more leverage with whole loansthan mezzanine loans. We anticipate our overall leverage will be 70% to 80% ofthe carrying value of our assets; but our actual leverage depends on our mix ofassets.  At December 31, 2004, ourleverage as a percentage of total asset value was 46% due to our management’sdecision to fully deploy all of our proceeds from our initial public offeringbefore utilizing our secured credit facilities. The average advance rate against investment assets pledged under ourcredit facility with Wachovia was 75%.

 

Our charter and bylawsdo not limit the amount of indebtedness we can incur. Our leverage policypermits us to leverage up to 80% of the carrying value of our assets. Our boardof directors has discretion to deviate from or change our indebtedness policyat any time. However, we maintain an adequate capital base to protect againstvarious business environments in which our financing and hedging costs mightexceed the interest income from our investments. These conditions could occur, forexample, due to credit losses or when, due to interest rate fluctuations,interest income on our investment lags behind interest rate increases on ourborrowings, which are predominantly variable rate. We use leverage for the solepurpose of financing our portfolio and not for the purpose of speculating onchanges in interest rates.

 

In addition, wecontinuously evaluate other souces of long-term debt and hybrid debt/equitycapital, including perpetual preferred equity and trust preferred equity, whichmay be available to us on competitive market pricing and terms.

 

**Origination, Underwriting and Asset Management**

 

Our Manager andSL Green provide all of our critical investment selection, assetmanagement, servicing and portfolio management and reporting functions fromloan origination to disposition.  Ourorigination and underwriting is based on careful review and preparation, andgenerally proceeds as follows:

 

•                                          Allinvestments are analyzed for consistency with investment parameters developedby our Manager and adopted by our board of directors;

•                                          Alltransactions considered for funding are presented at a weekly pipeline meetingattended by our Manager’s senior executive officers; and

•                                          Allfinancing applications, conditional commitments and submissions to the creditcommittee must be approved by a managing director of our Manager.

 

The affirmative vote of all members of a creditcommittee consisting of all senior officers of our Manager plus our chiefexecutive officer is necessary to approve all transactions over$3 million. The investment committee of our board of directors mustunanimously approve all transactions involving commitments over$15 million; the full board of directors must approve investments over$50 million. Our Manager has full discretion with respect to investmentsunder $15 million.

 

7

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The stages of the investmentprocess are described in more detail below.

 

***Origination***

 

OurManager is primarily responsible for originating all of our assets. In additionto SL Green’s existing customer base, our Manager utilizes an extensivenational network of relationships with property owners, developers, mortgageloan brokers, commercial and investment banks and institutional investors. Thisnetwork has been developed by the senior managers of the Manager and seniorexecutives of SL Green over more than 15 years. We originate investments in direct transactions with borrowers, weco-originate with or acquire existing assets from third parties, primarily financialinstitutions, and we may occasionally co-invest with SL Green and itsaffiliates.  We have been growing ourplatform on a national scale through the creation of strategic partnerships andhiring additional originators who are responsible for generating new financingopportunities. At December 31, 2004 and for the period since inception,approximately 48% of our investments were directly originated by us while theremaining 52% were co-originated with third parties.  Once potential investment opportunitieshave been identified, our Manager determines which financing products best meetthe borrower’s needs. Our Manager works to optimize pricing and structure andcreate a favorable transaction for us while meeting our borrower’s needs. Afteridentifying a suitable structure, our Manager works with the borrower toprepare a loan application and an initial review of the investment beforecommitting underwriting resources. Once a loan is identified as suitable, it isunderwritten by our Manager’s team of experienced underwriters.

 

***Underwriting***

 

Once a potentialinvestment has been identified, our Manager’s underwriters performcomprehensive financial, structural, operational and legal due diligence toassess the risks of the investment. Our Manager’s underwriters analyze the loanapplication package and conduct follow-up due diligence on each borrower aspart of the underwriting process. The Manager’s underwriters generally reviewthe following criteria as part of the underwriting process:

 

•                                          thehistoric, in-place and projected property revenues and expenses;

 

•                                          thepotential for near-term revenue growth and opportunity for expense reductionand increased operating efficiencies;

 

•                                          onhigher leverage loans secured by leased properties, accountants may be engagedto audit operating expense recovery income;

 

•                                          theproperty’s location and its attributes;

 

•                                          thevaluation of the property based upon financial projections prepared by ourManager’s underwriters and confirmed by an independent “as is” and/or “as stabilized”appraisal;

 

•                                          marketassessment, including, review of tenant lease files, surveys of property salesand leasing comparables based on conversations with local property owners,leasing brokers, investment sales brokers and other local market participants,and an analysis of area economic and demographic trends, and a review of anacceptable mortgagee’s title policy;

 

•                                          marketrents, and in the case of certain high-leverage loans, leasing projections formajor vacant spaces and near-term vacancies, to be provided by a leasing brokerwith local knowledge;

 

•                                          structuraland environmental review of the property, including review of engineering andenvironmental reports and a site inspection, to determine future maintenanceand capital expenditure requirements;

 

•                                          therequirements for any reserves, including those for immediate repairs orrehabilitation, replacement reserves, tenant improvement and leasing commissioncosts, real estate taxes and property, casualty and liability insurance;

 

•                                          the“Underwritten Net Cash Flow” for a property, which is a set of calculations andadjustments prepared for the underwriting process to assist in evaluating aproperty’s cash flows. The Underwritten Net Cash Flow is generally theestimated stabilized annual revenue derived from the use and operation of theproperty (consisting primarily of rental income and reimbursement

 

8

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of expenses where applicable) after an allowance forvacancies, concessions and credit losses, less estimated stabilized annualexpenses;

 

•                                          creditquality of the borrower through background checks and review of financialstrength and real estate operating experience; and

 

•                                          theloan documents, to ensure that we have the necessary protections, rights andremedies.

 

Key factors that areconsidered in credit decisions include, but are not limited to, debt servicecoverage, loan-to-value ratios and property and financial and operatingperformance. Consideration is also given to other factors such as the experience,financial strength, reputation, and investment track record of the borrower,additional forms of collateral and identified likely strategies to effectrepayment. Our Manager will continue to refine its underwriting criteria basedupon actual loan portfolio experience and as market conditions and investorrequirements evolve. Once diligence is completed and our Manager has reviewedthe Underwritten Net Cash Flow, sponsorship and the deal structure, our Managerdetermines the level in the capital structure at which an investment will bemade and the required legal and structural protections.

 

***Servicing and Asset Management***

 

SL Green servicessubstantially all of our assets through a sub-contract with our Manager. Theloan servicing platform is designed to provide timely, responsive customerservice as well as accurate and timely information for account follow-up,financial reporting and management review. In addition, the servicingoperations include enforcement of the loan documents and standard asset managementfunctions, including monitoring of property performance and condition andmarket analysis. The asset management group monitors the investments toidentify any potential underperformance of the asset and work with the borrowerto remedy the situation in an expeditious manner in order to mitigate anyeffects of underperformance. The asset manager is responsible for understandingthe borrower’s business plan with respect to each collateral property andmonitoring performance measured against that plan. We differentiate ourselvesby leveraging our Manager’s real estate knowledge and proactive approach toasset management by providing approvals and processing requests on a moretimely and efficient basis. We believe that asset management is a vital componentof the borrower and lender relationship because it leaves a lasting positiveimpression, and our ability to gain mutual respect with our borrowers andquickly respond to their needs will help us to develop strong and meaningfulrelationships that will lead to repeat business.

 

**Operating Policies**

 

***Investment and Borrowing Guidelines***

 

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

 

•                                          noinvestments are made that would cause us to fail to qualify as a REIT;

•                                          noinvestments are made that would cause us to be regulated as an investmentcompany under the Investment Company Act;

•                                          substantiallyall assets are financed through securitization, syndication and securedborrowings, and assets intended for inclusion in traditional securitizationtransactions will be hedged against movements in the applicable swap yieldthrough customary techniques;

•                                          hedgingis done through the bank providing the related credit facility on market terms,or through other dealers. We engage an outside advisory firm to assist inmonitoring hedges and advising management on the appropriateness of suchhedges;

•                                          ourleverage generally will not exceed 80% of the carrying value of our assets; and

•                                            wewill not co-invest with SL Green or any of its affiliates unless the termsof such transaction are approved by a majority of our independent directors.

 

These investmentguidelines may be changed by our board of directors without the approval of ourstockholders.

 

**Origination Agreement**

 

We have an originationagreement with SL Green pursuant to which SL Green will notoriginate, acquire or participate in fixed income investments in the UnitedStates, subject to certain conditions and exclusions described below. Fixedincome investments include debt obligations or interests in debt obligationsbearing a fixed-rate of return and collateralized by real property or interestsin real property.

 

9

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SL Green has alsoagreed not to acquire, originate or participate in preferred equity investmentswhich bear a fixed rate of return in the United States, unless we havedetermined not to pursue that opportunity.

 

Under the agreement,SL Green has the following rights:

 

(a)          toretain any fixed income investments and/or preferred equity investments itowned or committed to own on the date of our initial public offering;

 

(b)         tooriginate fixed income investments or acquire interests in fixed incomeinvestments and/or preferred equity investments in connection with the sale ofany real estate or real estate-related assets or fixed income investments itcurrently owns or owns at any future time, in part or whole, directly orindirectly;

 

(c)          tooriginate or acquire fixed income and/or preferred equity investments that providea rate of return tied to the cash flow, appreciation or both of the underlyingreal property or interests in real property;

 

(d)         tomodify or refinance any portion of the investments in item (a), (b) or(c) above including, but not limited to, changes in principal, rate ofreturn, maturity or redemption date, lien priority, return priority and/orborrower; and

 

(e)          tooriginate, acquire or participate in any distressed debt, where there is apayment default, an acceleration, bankruptcy or foreclosure, when a default ishighly likely because the loan-to-value ratio is over 100% or when the debtservice exceeds the available cash flow from the property on both a current andprojected basis.

 

Wewill agree that we will not:

 

•                                          acquire real property in metropolitan New York andWashington, D.C. (except by foreclosure or similar conveyance) resulting from afixed income investment;

•                                          originateor acquire investments described in (c) above or distressed debt, in eachcase located in metropolitan New York or Washington, D.C.; and

•                                          originateor acquire participations in any investments described in item (b) or(d) above.

 

We will also agree that,when we acquire direct or indirect ownership interests in property inmetropolitan 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 toour unpaid asset balance on the date we foreclosed or acquired the asset, plusinterest at the last stated contract (non-default) rate and, to the extentpayable by the borrower under the initial documentation evidencing theproperty, legal costs incurred by us directly related to the conveyance and thefee, if any, due upon the repayment or prepayment of the investment which iscommonly referred to as an “exit fee” (but not including default interest, latecharges, prepayment penalties, extension fees or other premiums of any kind)through the date of SL Green’s purchase (this amount is called “Par Value”).If we seek to sell the asset and receive a bona fide third party offer toacquire the asset for cash that we desire to accept, SL Green may purchasethe asset at the lower of the Par Value or the third party’s offer price. Ifthe asset is not sold within one year, SL Green has the right to purchasethe property at its appraised value. The appraised value will be determined asfollows: we will select an appraiser and SL Green will select anappraiser, who will each appraise the property. These two appraisers jointlywill select a third appraiser, who will then choose one of the two appraisalsas the final appraised value. These rights may make it more difficult to sellsuch assets because third parties may not want to incur the expense and effortto bid on assets when they perceive that SL Green may acquire them at thelower 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 mightreceive from an independent third party submitting an offer through acompetitive bidding process.

 

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

 

**In the event the Management Agreement is terminated for cause by us or ifneither SL Green nor any of its affiliates shall be the managing member of ourManager, then the non-compete provisions in the origination agreement willsurvive such termination for a period of one year with respect only topotential investments by us as to which our Manager has commenced duediligence.**

** **

***Hedging Activities***

 

We use derivativeinstruments, including forwards, futures, swaps and options, in our riskmanagement strategy to limit the effects of changes in interest rates on ouroperations. Our primary hedging strategy consists of entering into interestrate swap contracts.

 

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Additionally, we may incertain select instances choose to hedge our exposure to fluctuations incommercial mortgage-backed securities credit spreads by purchasing swapswritten against a broad-based commercial mortgage-backed securities index. Thevalue of our forwards, futures and swaps may fluctuate over time in response tochanging market conditions, and will tend to change inversely with the value ofthe risk in our liabilities that we intend to hedge. Hedges are sometimesineffective because the correlation between changes in value of the underlyinginvestment and the derivative instrument is less than was expected when thehedging transaction was undertaken. Since most of our hedging activity coversthe period between origination or purchase of loans and their eventual sale orsecuritization, unmatched losses in our hedging program will tend to occur whenthe planned securitization fails to occur, or if the hedge proves to beineffective. We continuously monitor the effectiveness of our hedgingstrategies and adjust our strategies as appropriate. These transactions mayinclude interest rate swaps, the purchase or sale of interest rate collars,caps or floors, options, other hedging instruments and such other hedginginstruments as may be developed in the future and which we determine aresuitable to achieve our hedging objectives.

 

We have retained theservices of an outside financial services firm with expertise in the use ofderivative instruments to advise us on our overall hedging strategy, to effecthedging trades, and to provide the appropriate designation and accounting ofall hedging activities from a GAAP and tax accounting and reportingperspective.

 

These instruments areused to hedge as much of the interest rate risk as our Manager determines is inthe best interest of our stockholders, given the cost of such hedges and theneed to maintain our status as a REIT. To the extent that we enter into ahedging contract to reduce interest rate risk on indebtedness incurred toacquire or carry real estate assets, any income that we derive from thecontract is qualifying income for purposes of the REIT 95% gross income test,but not for the 75% gross income test. Our Manager can elect to have us bear alevel 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 evaluatesour assets on a regular basis to determine if they continue to satisfy ourinvestment criteria. Subject to certain restrictions applicable to REITs, ourManager may cause us to sell our investments opportunistically and use theproceeds of any such sale for debt reduction, additional acquisitions orworking capital purposes.

 

***Equity Capital Policies***

 

Subject to applicablelaw, our board of directors has the authority, without further stockholderapproval, to issue additional authorized common stock and preferred stock orotherwise 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 certaincircumstances, repurchase our common stock in private transactions with ourstockholders if those purchases are approved by our board of directors. Ourboard of directors has no present intention of causing us to repurchase anyshares, and any action would only be taken in conformity with applicablefederal 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 REIT.

 

***Other Policies***

 

We operate in a mannerthat will not subject us to regulation under the Investment Company Act. We mayinvest in the securities of other issuers for the purpose of exercising controlover such issuers. We do not underwrite the securities of other issuers.

 

***Future Revisions in Policies and Strategies***

 

Our board of directorshas the power to modify or waive our investment guidelines, policies andstrategies. Among other factors, developments in the market that either affectthe policies and strategies mentioned herein or that change our assessment ofthe market may cause our board of directors to revise our investmentguidelines, policies and strategies. However, if such modification or waiverinvolves the relationship of, or any transaction between, us and our Manager orany affiliate of our Manager, the approval of a majority of our independentdirectors is also required. We may not, however, amend our charter to changethe requirement that a majority of our board of directors consist ofindependent directors or the requirement that a majority of our independentdirectors approve related party transactions without the approval of two-thirdsof the votes entitled to be cast by our stockholders.

 

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**Acquisitions**

 

During the year endedDecember 31, 2004 we acquired, either through direct origination,co-origination with third parties, or acquisition from third parties, thefollowing investments (in thousands):

 
| **Investment Type**              | ** ** | **Underlying  Property  Type** | ** ** | **Carrying  Value** | ** ** | **Principal  Outstanding** | ** ** | **Senior  Financing** | ** ** | **Effective  Maturity Date (1)** | ** ** | **Interest Payment Rate (2)** | ** **    |
|----------------------------------|------------|--------------------------------|------------|---------------------|------------|----------------------------|------------|-----------------------|------------|----------------------------------|------------|-------------------------------|---------------|
| CMBS                             |       | Office                         |       | $                   | 10,898     |                       | $          | 11,847                |       | $                                | 109,996    |                          | December 2007 |   | 8.544% - 10.736% |   |
| Subordinate  mortgage interests: |       |                           |       |                |       |                       |       |                  |       |                             |       |                          |          |
| C Note                           |       | Office                         |       | 24,728              |       | 25,000                     |       | 190,000               |       | July 2006                        |       | LIBOR + 3.00%                 |          |
| D Note                           |       | Office                         |       | 19,782              |       | 20,000                     |       | 215,000               |       | July 2006                        |       | LIBOR + 7.50%                 |          |
|                             |       |                           |       | 44,510              |       | 45,000                     |       | 405,000               |       |                             |       |                          |          |
| Subordinate  mortgage interests: |       |                           |       |                |       |                       |       |                  |       |                             |       |                          |          |
| C Note                           |       | Office                         |       | 34,286              |       | 34,440                     |       | 275,405               |       | July 2007                        |       | LIBOR + 5.00%                 |          |
| D Note                           |       | Office                         |       | 32,875              |       | 34,439                     |       | 309,900               |       | July 2007                        |       | LIBOR + 12.50%                |          |
|                             |       |                           |       | 67,161              |       | 68,879                     |       | 585,305               |       |                             |       |                          |          |
| Subordinate mortgage  interest   |       | Office                         |       | 31,215              |       | 36,500                     |       | 255,500               |       | November 2009                    |       | 5.41% (4)                     |          |
| Subordinate  mortgage interest   |       | Multifamily                    |       | 9,906               |       | 10,000                     |       | 50,300                |       | February 2007                    |       | LIBOR + 6.30%                 |          |
| Whole loan                       |       | Hotel                          |       | 42,000              |       | 42,000                     |       | —                |       | April 2005                       |       | LIBOR + 5.25%                 |          |
| Subordinate  mortgage interest   |       | Golf Courses                   |       | 47,954              |       | 47,954                     |       | 467,000               |       | February 2006                    |       | LIBOR + 5.50%                 |          |
| Whole loan (3)                   |       | Other                          |       | 28,723              |       | 29,094                     |       | —                |       | November 2006                    |       | LIBOR + 3.50%                 |          |
| Subordinate  mortgage interest   |       | Office                         |       | 4,952               |       | 5,000                      |       | 68,000                |       | August 2006                      |       | LIBOR + 7.00%                 |          |
| Subordinate  mortgage interest   |       |                           |       |                |       |                       |       |                  |       |                             |       |                          |          |
| C Note                           |       | Office                         |       | 17,402              |       | 17,500                     |       | 85,000                |       | November 2006                    |       | LIBOR + 2.75%                 |          |
| D Note                           |       | Office                         |       | 17,402              |       | 17,500                     |       | 102,500               |       | November 2006                    |       | LIBOR + 7.25%                 |          |
|                             |       |                           |       | 34,804              |       | 35,000                     |       | 187,500               |       |                             |       |                          |          |
| Whole loan                       |       | Office/ Industrial             |       | 84,492              |       | 84,704                     |       | —                |       | September 2007                   |       | LIBOR + 3.05%                 |          |
|                             |       |                           |       | $                   | 406,615    |                       | $          | 415,978               |       | $                                | 2,128,601  |                          |          |   |   |   |
|                                  |            |                                |            |                     |            |                            |            |                       |            |                                  |            |                               |               |  |  |  |  |  |

 

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(1) Reflects the initial maturity of the investment anddoes not consider any options to extend that are at the discretion of theborrower.

 

(2) All variable-rate loans are based on 30-day LIBORand reprice monthly.

 

(3) There is an obligation to fund an additional $11million to the borrower. This obligation is contingent upon the borrower’sability to obtain the appropriate approvals to continue their acquisition ofparcels of land for development which would serve as additional collateral onthe loan.  Should the borrower not begranted these approvals, there is no future obligation to fund.

 

(4) The effective yield of the investment is 8.29%taking into consideration our purchase discount.

 

**Competition**

 

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

 

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To the extent that a competitoris willing to risk larger amounts of capital in a particular transaction or toemploy more liberal underwriting standards when evaluating potential loans thanwe are, our origination volume and profit margins for our investment portfoliocould be adversely affected. Our competitors may also be willing to acceptlower returns on their investments and may succeed in originating or acquiringthe assets that we have targeted for origination or acquisition. Although webelieve that we are well positioned to compete effectively in each facet of ourbusiness, there is considerable competition in our market sector and there canbe no assurance that we will compete effectively or that we will not encounterfurther increased competition in the future that could limit our ability toconduct our business effectively.

 

**Industry Segments**

 

We are focused on originating and acquiringloans and other securities related to commercial real estate and currentlyoperate in only one segment.

 

**Employees**

 

Wedo not currently have any employees, nor do we anticipate hiring any employeesin the near term. Our executive officers and other staff are all employed byour Manager or SL Green who are then reimbursed for the cost of theseemployees through a management fee and outsourcing fee, respectively, under therequirements of our Management Agreement and Outsourcing Agreement.

 

**EnvironmentalMatters**

 

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

 

**Forward-Looking Information**

 

This report includescertain statements that may be deemed to be “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended, or theAct, and Section 21E of the Securities Exchange Act of 1934, as amended, or theExchange Act.  Such forward-lookingstatements relate to, without limitation, our future capital expenditures,dividends and acquisitions (including the amount and nature thereof) and othertrends of the real estate industry, debt capital and commercial markets,business strategies, and the expansion and growth of our operations.  These statements are based on certainassumptions and analyses made by us in light of our Manager’s experience andour Manager’s perception of historical trends, current conditions, expectedfuture developments and other factors we believe are appropriate.  We intend such forward-looking statements tobe covered by the safe harbor provisions for forward-looking statements containedin Section 27A of the Act and Section 21E of the Exchange Act.  Such statements are subject to a number ofassumptions, risks and uncertainties which may cause our actual results,performance or achievements to be materially different from future results,performance or achievements expressed or implied by these forward-lookingstatements.  Forward-looking statementsare generally identifiable by the use of the words “may,” “will,” “should,” “expect,”“anticipate,” “estimate,” “believe,” “intend,” “project,” “continue,” or thenegative of these words, or other similar words or terms.  Readers are cautioned not to place unduereliance on these forward-looking statements. These assumptions, risks and uncertainties include, but are not limitedto:

 

•                  thesuccess or failure of our efforts to implement our current business strategy;

•                  economicconditions generally and in the commercial finance and commercial real estatemarkets specifically;

•                  theperformance and financial condition of borrowers and corporate customers;

•                  theactions of our competitors and our ability to respond to those actions;

 

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•                  thecost of our capital, which depends in part on our asset quality, the nature ofour relationships with our lenders and other capital providers, our businessprospects and outlook and general market conditions;

•                  GKKManager LLC remaining as our Manager;

•                  ourability to qualify as a REIT in any taxable year;

•                  changesin governmental regulations, tax rates and similar matters; and

•                  legislativeand regulatory changes (including changes to laws governing the taxation ofREITs), and other factors, many of which are beyond our control.

 

We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of future events, new information or otherwise.

 

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

 

**ITEM 2.****                            ****PROPERTIES**

 

Ourcorporate offices are located in midtown Manhattan at 420 Lexington Avenue, NewYork, New York 10170.  We can becontacted at (212) 297-1000.  We maintaina website at *www.gramercycapitalcorp.com*.

 

**ITEM 3.****                             LEGALPROCEEDINGS**

 

As of December 31,2004, we were not involved in any material litigation nor, to management’sknowledge, is any material litigation threatened against us or our Manager.

 

**ITEM4.**                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

** **

No matters were submittedto a vote of our stockholders during the fourth quarter ended December 31,2004.

 

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** **

**PART II**

** **

**ITEM5.**                             MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

 

Our common stock began trading on the New York Stock Exchange (“NYSE”)on August 2, 2004 under the symbol “GKK.” On March 16, 2005, the reportedclosing sale price per share of common stock on the NYSE was $21.61 and therewere approximately 23 holders of record of our common stock.  The table below sets forth the quarterly highand low closing sales prices of our common stock on the NYSE since our initialpublic offering and the distributions paid by us with respect to the periodsindicated.

 

| **Quarter Ended**                              | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|------------------------------------------------|------------|----------|------------|---------|------------|---------------|------------|
| September 30,  2004 (from August 2, 2004) |       | $        | 16.20      |    | $          | 14.00         |       | $ | 0.00 |   |
| December 31,  2004                        |       | $        | 21.30      |    | $          | 15.20         |       | $ | 0.15 |   |
|                                                |            |          |            |         |            |               |            |  |  |  |  |

 

If dividendsare declared in a quarter, those dividends will be paid during the subsequentquarter.  We expect to continue ourpolicy of generally distributing 100% of our taxable income through regularcash dividends on a quarterly basis, although there is no assurance as tofuture dividends because they depend on future earnings, capital requirementsand financial condition.  See Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Dividends” for additional information regarding our dividends.

 

We declared aquarterly dividend of $0.15 per share, payable on January 14, 2005, forstockholders of record of our common stock on December 31, 2004.

 

**SALE OF UNREGISTERED AND REGISTERED SECURITIES**

 

On December 3,2004 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 of 1933.  A totalof 4,225,000 shares were sold to various institutional investors and anadditional 1,275,000 were sold to SL Green Operating Partnership, L.P., anaffiliate of SL Green Realty Corp., pursuant to its contractual right to chooseto maintain a 25% ownership interest in the outstanding shares of our commonstock.  After the private placement, SLGreen Operating Partnership, L.P. owned 4,710,000 shares of our common stock.  On December 31, 2004, 2,000,000 shares soldin the offering were issued.  Theremaining 3,500,000 shares were issued on January 3, 2005.  At December 31, 2004 $60.5 million was heldin a stock subscription receivable representing the value of the 3,500,000shares that were settled in January 2005. The gross proceeds from the offering (approximately $95.0 million) wereused to fund additional investments, repay borrowings and for general corporatepurposes.

 

**USE OF PROCEEDS**

 

On August 2,2004, we consummated the initial public offering of our common stock, $0.001par value per share.  The underwritersfor the offering were Wachovia Capital Markets, LLC, Merrill Lynch, Pierce,Fenner & Smith Incorporated, Banc of America Securities LLC and JMPSecurities LLC.  The shares of commonstock sold in the offering were registered under the Securities Act of 1933, asamended, on a Registration Statement (Registration No. 333-114673) on Form S-11that was declared effective by the Securities and Exchange Commission on July27, 2004.  All 12,500,000 shares ofcommon stock registered under the Registration Statement were sold at a priceto the public of $15.00 per share, generating gross proceeds of approximately$187.5 million.  The net proceeds to uswere approximately $172.9 million after deducting an aggregate of approximately$14.6 million in underwriting discounts and commissions paid to theunderwriters and other offering expenses, including a $1.6 millionreimbursement to SL Green for organization and offering expenses incurred onour behalf, and $800,000 to reimburse SL Green for a consulting fee of $400,000paid by SL Green to each of Messrs. Foley and Hall.  SL Green owns slightly more than 25% of ouroutstanding common stock.  All of theshares of common stock were sold by us and there were no selling stockholdersin the offering.  The offering did notterminate until after the sale of all of the securities registered on theRegistration Statement, which occurred on August 2, 2004.

 

We contributedthe net proceeds from the offering to the Operating Partnership to makeinvestments in commercial real estate-related loans and securities and forgeneral corporate purposes, including financing and operating expenses andother expenses of our company.

 

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**ITEM 6.****                            ****SELECTEDFINANCIAL DATA**

 

The followingtable sets forth our selected financial data and should be read in conjunctionwith our Financial Statements and notes thereto included in Item 8, “FinancialStatements and Supplementary Data” and Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in this Form 10-K.

 

**Operating Data**

 

| **(In thousands, except per share data)**                                        | ** ** | **For the Period  April 12, 2004  (formation)  through  December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| Total revenue                                                                    |       | $                                                                            | 7,151      |   |
| Interest expense                                                                 |       | 1,463                                                                        |       |
| Management fees                                                                  |       | 1,965                                                                        |       |
| Depreciation and  amortization                                                   |       | 38                                                                           |       |
| Marketing,  general and administrative                                           |       | 1,358                                                                        |       |
| Total expenses                                                                   |       | 4,824                                                                        |       |
| Income from  continuing operations                                               |       | 2,327                                                                        |       |
| GKK formation  costs                                                             |       | 275                                                                          |       |
| Income available  to common stockholders                                         |       | $                                                                            | 2,052      |   |
| Net income per  common share -Basic                                              |       | $                                                                            | 0.15       |   |
| Net income per  common share -Diluted                                            |       | $                                                                            | 0.15       |   |
| Cash dividends  declared per common share                                        |       | $                                                                            | 0.15       |   |
| Basic weighted  average common shares outstanding                                |       | 13,348                                                                       |       |
| Diluted weighted  average common shares and common share equivalents outstanding |       | 13,411                                                                       |       |

 

**Balance Sheet Data**

 

| **(In thousands)**                          | ** ** | **As of  December 31,  2004** | ** ** |
|---------------------------------------------|------------|-------------------------------|------------|
| Loans and other  lending investments, net   |       | $                             | 395,717    |   |
| Commercial  mortgage backed securities, net |       | 10,898                        |       |
| Total assets                                |       | 514,047                       |       |
| Credit  facilities                          |       | 238,885                       |       |
| Total  liabilities                          |       | 245,088                       |       |
| Stockholders’  equity                  |       | 268,959                       |       |
|                                             |            |                               |            |  |

 

**Other Data**

** **

| **(In thousands)**                           | ** ** | **For the Period  April 12, 2004  (formation)  through  December 31,  2004** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| Funds from  operations (1)                   |       | $                                                                            | 2,052      |   |
| Cash flows  provided by operating activities |       | 1,145                                                                        |       |
| Cash flows used  in investing activities     |       | (407,056                                                                     | )          |
| Cash flows  provided by financing activities |       | 444,805                                                                      |       |
|                                              |            |                                                                              |            |  |

 

----

(1) FFO is awidely recognized measure of REIT performance. We compute FFO in accordance with standards established by the

 

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NationalAssociation of Real Estate Investment Trusts, or NAREIT, which may not becomparable to FFO reported by other REITs that do not compute FFO in accordancewith the NAREIT definition, or that interpret the NAREIT definition differentlythan we do.  The revised White Paper onFFO approved by the Board of Governors of NAREIT in April 2002 defines FFO asnet income (loss) (computed in accordance with GAAP), excluding gains (orlosses) from debt restructuring and sales of properties, plus real estaterelated depreciation and amortization and after adjustments for unconsolidatedpartnerships and joint ventures.  Wepresent FFO because we consider it an important supplemental measure of ouroperating performance and believe that it is frequently used by securitiesanalysts, investors and other interested parties in the evaluation ofREITs.  FFO is intended to exclude GAAPhistorical cost depreciation and amortization of real estate and relatedassets, which assumes that the value of real estate assets diminishes ratablyover time.  Historically, however, realestate values have risen or fallen with market conditions.  Because FFO excludes depreciation andamortization unique to real estate, gains and losses from property dispositionsand extraordinary items, it provides a performance measure that, when comparedyear over year, reflects the impact to operations from trends in occupancyrates, rental rates, operating costs, interest costs, providing perspective notimmediately apparent from net income. FFO does not represent cash generated from operating activities inaccordance with GAAP and should not be considered as an alternative to netincome (determined in accordance with GAAP), as an indication of our financialperformance or to cash flow from operating activities (determined in accordancewith GAAP) as a measure of our liquidity, nor is it indicative of fundsavailable to fund our cash needs, including our ability to make cashdistributions.

 

Areconciliation of FFO to net income computed in accordance with GAAP isprovided under the heading of “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Funds From Operations”.

 

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**ITEM 7.****                            ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Overview**

 

We are a commercial realestate specialty finance company formed in April of 2004 focused on originatingand acquiring, for our own account, whole loans, bridge loans, subordinateinterests in whole loans, permanent loans, distressed debt, mortgage-backedsecurities, mezzanine loans, preferred equity interests in entities that owncommercial real estate.  We conductsubstantially all of our operations through our operating partnership, GKKCapital LP.  We are externally managedand advised by GKK Manager LLC, or the Manager, a majority-owned subsidiary ofSL Green Realty Corp.  We have elected tobe taxed as a REIT under the Internal Revenue Code and generally will not besubject to federal income taxes to the extent we distribute our income to ourstockholders.  However, we may establishtaxable REIT subsidiaries to effect various taxable transactions.  Those taxable REIT subsidiaries would incurfederal, state and local taxes on the taxable income from theiractivities.  Unless the context requiresotherwise, all references to “we,” “our” and “us” means Gramercy Capital Corp.

 

In each financing transaction we undertake, we seek to control as muchof the capital structure as possible in order to be able to identify and retainthat portion that provides the best risk adjusted returns.  This is generally achieved through the directorigination of whole loans, the ownership of which permits a wide variety ofsyndication and securitization executions to achieve excess returns.  By providing a single source of financing fordevelopers and sponsors, we intend to streamline the lending process, providegreater certainty for borrowers and retain the high yield debt instruments thatwe manufacture.  By creating, rather thanbuying, whole loans, subordinate mortgage participations, mezzanine debt andpreferred equity, we strive to deliver superior returns to our shareholders.

 

Since our inception, we have completed transactions in a variety ofmarkets and secured by several property types, while maintaining concentrationsin the Tri-State region and the office sector in which we have a strong presence.  During this period, the market for commercialreal estate debt has continued to demonstrate low rates of default, highrelative returns and tremendous inflows of capital.  Consequently, the market for debt instrumentshas evidenced declining yields and more flexible credit standards and loanstructures.  In particular, “conduit”originators who package whole loans for resale to investors have driven down debtyields while maintaining substantial liquidity because of the strong demand forthe resulting securities.  When workingwith a securitized lender, we focus on opportunities where we can co-originatein order to assist with underwriting and structuring loan terms. Consequently,in most of the secondary market transactions we have closed to date, we have avoidedfirst loss risk. We have also focused on whole loan origination in markets andtransactions where we have an advantage due to knowledge or relationships wehave or our largest shareholder, SL Green, has or where we have an ability toassess and manage risks over time.  Inthis environment we look for areas where we have comparative advantages ratherthan competing for product merely on the basis of yield or structure.  Because of the significant increase in thevalue of institutional quality assets relative to historic norms, we typicallyfocus on positions in which a customary refinancing at loan maturity wouldprovide for a return of our investment. Because of our relatively small size at this time, we can meet ourgrowth objectives with a moderate amount of new investment activity.

 

Because of the high relative valuation of debt instruments in thecurrent market and a generally increasing rate environment, we have carefullymanaged our exposure to interest rate changes that could affect our liquidity.  We generally match our assets and liabilitiesin terms of base interest rate (generally 30-day LIBOR) and expectedduration.  We raised $95.0 million ofadditional equity in December 2004 and January 2005 to reduce our outstandingindebtedness and maintain sufficient liquidity for our investment portfolio.  We continue to assess the utilization of avariety of structured financing techniques to extend the duration of ourliabilities and create financing with availability and advance rates that arenot subject to prevailing market conditions. We continue to assess whether an issuance of a CDO would achieve ourfinancing and return objectives.  Whileour exposure to market conditions would generally increase as we approach the consumationof a CDO, we continue to carefully manage our liquidity.

 

As of December 31, 2004,we held investments of approximately $406.6 million, net of origination feesand discounts.  The aggregate carryingvalues, allocation by product type and weighted average coupons of our investmentsas of December 31, 2004 were as follows:

 
| ** **                              | ** ** | **Investments net of  fees and discounts  ($ in thousands)** | ** ** | **Allocation by  Investment  Type** | ** ** | **Fixed Rate:  Average Yield** | ** ** | **Floating Rate:  Average  Spread over  LIBOR** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|-------------------------------------------------|------------|
| Whole Loans                             |       | $                                                                 | 155,215    |                                | 38         | %                              | —     |                                            | 373        | bps |
| Subordinate  Investments, Floating Rate |       | 209,286                                                           |       | 51                                  | %          | —                         |       | 640                                             | bps        |
| Subordinate  Investments, Fixed Rate    |       | 31,216                                                            |       | 8                                   | %          | 9.57                           | %          | —                                          |       |
| Commercial  Mortgage Backed Securities  |       | 10,898                                                            |       | 3                                   | %          | 13.49                          | %          | —                                          |       |
| Total / Average                         |       | $                                                                 | 406,615    |                                | 100        | %                              | 10.58      | %                                               | 526        | bps |

 

The following discussionrelated to our consolidated financial statements should be read in conjunctionwith the financial statements appearing in Item 8 of the Annual Report on Form10-K.

 

**CriticalAccounting Policies**

** **

Our discussion andanalysis of financial condition and results of operations is based on ourfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States, known as GAAP. Theseaccounting principles require us to make some complex and subjective decisionsand assessments.  Our most criticalaccounting polices involve decisions and assessments which could significantlyaffect our reported assets, liabilities and contingencies, as well as our reportedrevenues and expenses.  We believe thatall of the decisions and assessments upon which our financial statements arebased were reasonable at the time made based upon information available to usat that time.  We evaluate thesedecisions and assessments on an ongoing basis. Actual results may differ from these estimates under differentassumptions or conditions.  We haveidentified our most critical accounting policies to be the following:

 

**Loans and Investments**

 

Loans held for investment intended to be held to maturity are carriedat cost, net of unamortized loan origination costs and fees, unless such loanor investment is deemed to be impaired. At such time as we invest in preferred equity interests that allow us toparticipate in a percentage of the underlying property’s cash flows from operationsand proceeds from a sale or refinancing, we must determine whether suchinvestment should be accounted for as a loan, joint venture or as real estateat the inception of the investment.  Wedid not own any preferred equity investments at December 31, 2004.

 

Specific valuation allowances are established for impaired loans basedon the fair value of collateral on an individual loan basis.  The fair value of the collateral isdetermined by an evaluation of operating cash flow from the property during theprojected holding period, and estimated sales value computed by applying anexpected capitalization rate to the stabilized net operating income of thespecific property, less selling costs, discounted at market discount rates.

 

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If upon completion of thevaluation, the fair value of the underlying collateral securing the impairedloan is less than the net carrying value of the loan, an allowance is createdwith a corresponding charge to the provision for loan losses.  The allowance for each loan is maintained ata level we believe is adequate to absorb probable losses.  There was no loan loss allowance at December31, 2004.

 

Our Manager evaluates our assets on a regular basis to determine ifthey continue to satisfy our investment criteria. Subject to certainrestrictions applicable to REITs, our Manager may cause us to sell ourinvestments opportunistically and use the proceeds of any such sale for debtreduction, additional acquisitions or working capital purposes.

 

#### **Classifications of Mortgage-BackedSecurities**

#### ** **

In accordance withapplicable GAAP, mortgage-backed securities are classified asavailable-for-sale securities.  As aresult, changes in fair value will be recorded as a balance sheet adjustment toaccumulated other comprehensive income, which is a component of stockholdersequity, rather than through our statement of operations.  If available-for-sale securities wereclassified as trading securities, there could be substantially greater volatilityin earnings from period-to-period as these investments would be marked tomarket and any reduction in the value of the securities versus the previouscarrying value would be considered an expense on our statement of operations.  The Company had no investments as of December31 2004 that were accounted for as trading securities.

 

#### **Valuations of Mortgage-BackedSecurities**

#### ** **

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

 

When the fair value of an available-for-sale security is less than theamortized cost, we consider whether there is an other-than-temporary impairmentin the value of the security (for example, whether the security will be soldprior to the recovery of fair value). If, in our judgment, an other-than-temporary impairment exists, the costbasis of the security is written down to the then-current fair value, and thisloss is realized and charged against earnings. The determination of other-than-temporary impairment is a subjectiveprocess, and different judgments and assumptions could affect the timing ofloss realization.

 

#### **Revenue Recognition**

#### ** **

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

 

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

 

#### **Reserve for Possible Credit Losses**

#### ** **

The expense for possible credit losses in connection with debtinvestments is the charge to earnings to increase the allowance for possiblecredit losses to the level that management estimates to be adequate consideringdelinquencies, loss experience and collateral quality.  Other factors considered relate to geographictrends and project diversification, the size of the portfolio and currenteconomic

 

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conditions.  Based upon thesefactors, we establish the provision for possible credit losses by category ofasset.  When it is probable that we willbe unable to collect all amounts contractually due, the account is consideredimpaired.

 

Where impairment is indicated, a valuation write-down or write-off ismeasured based upon the excess of the recorded investment amount over the netfair value of the collateral, as reduced by selling costs.  Any deficiency between the carrying amount ofan asset and the net sales price of repossessed collateral is charged to theallowance for credit losses.  As ofDecember 31, 2004, we did not have an allowance for credit losses.

 

**Incentive Distribution (Class B Limited PartnerInterest)**

 

The Class B limitedpartner interest will be entitled to receive quarterly profit distributionsbased on our financial performance.  Wewill record any distributions on the Class B limited partner interests as anincentive distribution expense in the period when earned and when payment ofsuch amounts has become probable and reasonably estimable in accordance withthe partnership agreement.  These cashdistributions will reduce the amount of cash available for distribution to ourcommon unitholders in the Operating Partnership and to commonstockholders.  No amounts were earned oraccrued under this agreement as of December 31, 2004.

 

**Derivative Instruments**

** **

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

** **

**Todetermine the fair value of derivative instruments, we use a variety of methodsand assumptions that are based on market conditions and risks existing at eachbalance sheet date.  For the majority offinancial instruments including most derivatives, long-term investments andlong-term debt, standard market conventions and techniques such as discounted cashflow analysis, option-pricing models, replacement cost, and termination costare used to determine fair value.  Allmethods of assessing fair value result in a general approximation of value, andsuch value may never actually be realized.**

** **

In the normal course of business, we are exposed to the effect ofinterest rate changes and limit these risks by following established riskmanagement policies and procedures including the use of derivatives.  To address exposure to interest rates, we usederivatives primarily to hedge the mark-to-market risk of our liabilities withrespect to certain of our assets.

 

We use a variety ofcommonly used derivative products that are considered plain vanilladerivatives.  These derivatives typicallyinclude interest rate swaps, caps, collars and floors.  We expressly prohibit the use ofunconventional derivative instruments and using derivative instruments fortrading or speculative purposes.  Further,we have a policy of only entering into contracts with major financial institutionsbased upon their credit ratings and other factors.

 

**FASB No. 133, or SFAS 133, “Accounting for Derivative Instruments andHedging Activities,” requires us to recognize all derivatives on the balancesheet at fair value.  Derivatives thatare not hedges must be adjusted to fair value through income.  If a derivative is a hedge, depending on thenature of the hedge, changes in the fair value of the derivative will either beoffset against the change in fair value of the hedged asset, liability, or firmcommitment through earnings, or recognized in other comprehensive income untilthe hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will beimmediately recognized in earnings.  SFAS133 may increase or decrease reported net income and stockholders’ equityprospectively, depending on future levels of LIBOR interest rates and othervariables affecting the fair values of derivative instruments and hedged items,but will have no effect on cash flows, provided the contract is carried throughto full term.**

** **

We may employ swaps, forwards or purchased options to hedge qualifyingforecasted transactions.  Gains andlosses related to these transactions are deferred and recognized in net incomeas interest expense in the same period or periods that the underlyingtransaction occurs, expires or is otherwise terminated.

 

All hedges held by us aredeemed to be fully effective in meeting the hedging objectives established byour corporate policy governing interest rate risk management.

 

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**Income Taxes**

 

We intend to elect to be taxed as a REIT, under Sections 856 through860 of the Internal Revenue Code beginning with our taxable year endingDecember 31, 2004.  To qualify as a REIT,we must meet certain organizational and operational requirements, including arequirement to distribute at least 90% of our ordinary taxable income tostockholders.  As a REIT, we generallywill not be subject to federal income tax on taxable income that we distributeto our stockholders.  If we fail toqualify as a REIT in any taxable year, we will then be subject to federalincome taxes on our taxable income at regular corporate rates and we will notbe permitted to qualify for treatment as a REIT for federal income tax purposesfor four years following the year during which qualification is lost unless theInternal Revenue Service grants us relief under certain statutoryprovisions.  Such an event couldmaterially adversely affect our net income and net cash available fordistributions to stockholders.  However,we believe that we will be organized and operate in such a manner as to qualifyfor treatment as a REIT and we intend to operate in the foreseeable future insuch a manner so that we will qualify as a REIT for federal income taxpurposes.  We may, however, be subject tocertain state and local taxes.

 

**Results of Operations**

 

***For the period from April 12, 2004 (formation) through December 31,2004 (dollars in thousands)***

 

*Revenue*

 

Investment income of$6,841 for the period from formation through December 31, 2004 was generated onour whole loans, senior mortgage interests, subordinate mortgage interests andCMBS investments.  $1,204 was earned onfixed rate investments with a weighted average yield of 10.58%.  The remaining $5,637 relates to floating rateinvestments with a weighted average interest rate of LIBOR plus 5.26%.

 

Other income of $310 forthe period from formation through December 31, 2004 represents interest earnedon cash balances, including the proceeds from our initial public offering.

 

*Expenses*

 

Interest expense was $1,463 for the period from formation throughDecember 31, 2004, of which $949 represents interest on borrowings on ourmaster repurchase facility which had a weighted average spread to LIBOR of 199basis points for the same period.  Theremaining balance in interest expense is comprised of $224 of interest expenserelated to our two interest rate swap contracts and $290 of amortization ofdeferred financing costs related, primarily, to the closing of our threefacilities with Wachovia Capital Markets, LLC.

 

Management fees of $1,965 for the period from formation throughDecember 31, 2004 represents fees paid or payable to the Manager of $1,349under our management agreement and fees paid or payable to SL Green OperatingPartnership, L.P. of $521 and $95 under our outsourcing and servicingagreements, respectively.  These fees andthe relationship between us, the Manager and SL Green Operating Partnership,L.P. are discussed further in “Related Party Transactions”.

 

Marketing, general and administrative expenses were $1,358 for theperiod from formation through December 31, 2004, which represents professionalfees, stock-based compensation, insurance and general overhead costs.

 

Stock-based compensation expense included in marketing, general andadministrative expenses was $404 for the period from formation through December31, 2004.  This represents the cost ofrestricted stock and options granted to certain of our executive officers anddirectors.  Of the shares of restrictedstock issued, approximately 89% will vest equally over a three-year period andthe remaining 11% will vest equally over a four-year period.  Of the options granted 59% will vest equallyover a three-year period and the remaining 41% will vest equally over afour-year period.  The compensationexpense recorded for the quarter and the period from formation through December31, 2004 represents a ratable portion of the expense of the issuance of theseshares over their vesting period.

 

**Capitalization (dollars inthousands)**

** **

As of the date of our formation, April 12, 2004, we had 500,000 sharesof common stock outstanding valued at approximately $200 held by members of ourmanagement.  On August 2, 2004 wecompleted our initial public offering of 12,500,000 shares of common stockresulting in net proceeds of approximately $177,600, which was used to fundinvestments and commence our operations. As of

 

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December 31, 2004, 312,500 restricted shares had also been issued underour Equity Incentive Plan.  These shareshave a vesting period of three to four years and are not entitled to receivedistributions declared by us on our common stock until such time as the shareshave vested.  Unvested shares may beentitled to receive dividends at the discretion of the Compensation Committeeof Gramercy’s Board of Directors.

 

On December 3, 2004 wesold 5,500,000 shares of common stock under a private placement exemption fromthe registration requirements of Section 5 of the Securities Act of 1933 forgross proceeds of approximately $95,000. A total of 4,225,000 shares were sold to various institutionalinvestors, and an additional 1,275,000 were sold to SL Green OperatingPartnership, L.P., an affiliate of SL Green Realty Corp., pursuant to itscontractual right to choose to maintain a 25% ownership interest in theoutstanding shares of our common stock. After the private placement, SL Green Operating Partnership, L.P. owned4,710,000 shares of our common stock. On December 31, 2004, 2,000,000 sharessold in the offering were issued.  Theremaining 3,500,000 shares were issued on January 3, 2005.  At December 31, 2004, $60,445 was held in astock subscription receivable representing the value of the 3,500,000 sharesthat were settled in January 2005.  Theproceeds from this offering were used to fund additional investments, repayborrowings and for general corporate purposes.

 

On December 31, 2004, we had 18,812,500 shares of common stockoutstanding.  A total of 3,500,000 of the18,812,500 shares outstanding represented a stock subscription receivable andwere included in weighted average shares outstanding for purposes of calculatingbasic earnings per share.

 

**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 andinvestments, pay dividends and other general business needs.**  Webelieve that our principal sources of working capital and funds for additionalinvestments will primarily include: 1) cash flow from operations; 2) borrowingsunder our repurchase and credit facilities; 3) other forms of financing orsecuritizations; 4) proceeds from common or preferred equity offerings and, toa lesser extent, 5) the proceeds from principal payments on ourinvestments.  We believe these sources offinancing will be sufficient to meet our short-term liquidity needs.

** **

Our ability to meet our long-term liquidity and capital resourcerequirements will be subject to obtaining additional debt financing and equitycapital.  If we are unable to renew,replace or expand our sources of financing on substantially similar terms, itmay have an adverse effect on our business and results of operations.  In addition, an event of default is triggeredunder our facility with Wachovia Capital Markets LP if the management agreementwith GKK Manager LLC is terminated. Depending on market conditions, our debt financing will be in the rangeof 70% to 80% of the carrying value of our total assets.  Any indebtedness we incur will likely besubject to continuing covenants and we will likely be required to makecontinuing representations and warranties about our Company in connection withsuch debt.  Our debt financing terms mayrequire us to keep uninvested cash on hand, or to maintain a certain portion ofour assets free of liens, each of which could serve to limit our borrowingability.  Moreover, our debt may besecured by our assets.  If we default inthe payment of interest or principal on any such debt, breach anyrepresentation or warranty in connection with any borrowing or violate anycovenant in any loan document, our lender may accelerate the maturity of suchdebt requiring us to immediately repay all outstanding principal.  If we are unable to make such payment, ourlender could foreclose on our assets that are pledged as collateral to suchlender.  The lender could also sue us orforce us into bankruptcy.  Any such eventwould have a material adverse effect on our liquidity and the value of ourcommon stock.  In addition, postingadditional collateral to support our credit facilities will reduce ourliquidity and limit our ability to leverage our assets.

 

To maintain our status as a REIT under the Internal Revenue Code, wemust distribute annually at least 90% of our taxable income.  These distribution requirements limit ourability to retain earnings and thereby replenish or increase capital foroperations.  However, we believe that oursignificant capital resources and access to financing will provide us withfinancial flexibility at levels sufficient to meet current and anticipatedcapital requirements, including funding new lending and investmentopportunities.

 

**Market Capitalization**

 

AtDecember 31, 2004, borrowings under our repurchase facilities and our revolvingcredit facilities represented 38% of our consolidated market capitalization of$626 million (based on a common stock price of $20.60 per share, the closingprice of our common stock on the New York Stock Exchange on December 31,2004).  Market capitalization includesour consolidated debt and common stock.

 

22

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**Indebtedness**

** **

**The table below summarizes borrowings under our Wachovia repurchasefacility at December 31, 2004 (dollars in thousands).**

** **

| **Debt Summary:**                     | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| **Balance**                           |       |                   |       |
| Fixed rate                            |       | $                      | —     |   |
| Variable rate                         |       | 238,885                |       |
| Total                                 |       | $                      | 238,885    |   |
|                                  |       |                   |       |
| Effective  interest rate for the year |       | LIBOR + 1.99%          |       |

** **

**Repurchase Facilities**

** **

We currently have two repurchase facilitieswith an aggregate of $550 million of total debt capacity.  In August 2004 we closed on a $250 millionrepurchase facility with Wachovia Capital Markets LP.  This facility was then increased to $350million on January 3, 2005.  It has aninitial term of three years with one 12-month extension option. The facilityprovides for a pricing rate of a spread of 1.25% to 3.50% over 30-day LIBORand, based on our investment activities, provides for an advance rate thatvaries from 50% to 95% based upon the collateral provided under a borrowingbase calculation.  The lender has aconsent right with respect to the inclusion of investments in this facility,will determine periodically the market value of the investments, and will havethe right to require additional collateral if the estimated market value of theincluded investments declines.   AtDecember 31, 2004 we had an outstanding balance of $238.9 million on thisfacility at a weighted average spread to LIBOR of 1.99%.  Borrowings under this facility were securedby the following investments (in thousands):

 

| **Investment Type**             | ** ** | **Carrying Value** | ** ** |
|---------------------------------|------------|--------------------|------------|
| Whole loans                     |       | $                  | 113,216    |   |
| Subordinate  mortgage interests |       | 200,745            |       |
| CMBS                            |       | 10,898             |       |
|                            |       | $                  | 324,859    |   |

** **

**On January 3, 2005 we closed an additional repurchase facility of $200million with Goldman Sachs Mortgage Company, an affiliate of Goldman Sachs& Co.  This facility has an initialterm of three years with one six-month extension option.  This facility provides for a pricing rate ofa spread of 1.125% to 2.75% over a 30-day LIBOR and, based on our investmentactivities, provides for an advance rate that varies from 75% to 90% based uponthe collateral provided under a borrowing base calculation.  As with the Wachovia repurchase facility, thelender will have a consent right to the inclusion of investments in thisfacility, will determine periodically the market value of the investments, andwill have the right to require additional collateral if the estimated marketvalue of the included investments declines**.

** **

The repurchase facilities require that we pay down borrowings underthese facilities as principal payments on our loans and investments arereceived.

 

**Assets pledged as collateral under thesefacilities may include stabilized and transitional first mortgage whole loans,first mortgage B-notes, mezzanine loans, and rated CMBS or commercial realestate CDO securities originated or acquired by us.**

** **

**Credit Facilities**

** **

We currently have twocredit facilities with Wachovia CapitalMarkets LP.  The first facility isa $50 million repurchase facility with a term of two years and also has one12-month extension option.  This facilitybears interest at a spread over LIBOR of 225 basis points.  The advance rate on this facility varies withthe collateral being acquired.  Amountsdrawn under this facility must be repaid within 210 days.

 

23

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Thesecond facility is a $25 million revolving credit facility with a term of twoyears.  Amounts drawn under this facilityfor liquidity purposes bear interest at a rate equal to a spread over LIBOR of525 basis points.  Amounts drawn underthis facility for acquisition purposes bear interest at a spread over LIBOR of225 basis points.  Amounts drawn underthis facility for liquidity purposes must be repaid within 90-days.  Amounts drawn under this facility generallywill be secured by assets established under a borrowing base calculation unlesscertain financial covenants are satisfied. These covenants are generally more restrictive that those set forthbelow.  At December 31, 2004 we did nothave any borrowings under our credit facilities.

 

**The credit facilities require that we pay down borrowings under thesefacilities as principal payments on our loans and investments are received.**

** **

**Restrictive Covenants**

** **

**The terms of both of our repurchase facilities and our two creditfacilities include covenants that (a) limit our maximum total liabilities to nomore than 85%, (b) require us to maintain minimum liquidity of at least $10million for the first two years and $15 million thereafter, (c) our fixedcharge coverage ratio shall at no time be less than 1.50 to 1.00, (d) ourminimum interest coverage ratio shall at no time be less than 1.75 to 1.00, (e)require us to maintain minimum tangible net worth of not less than the greaterof (i) $129.75 million, or (i) plus (ii) 75% of the proceeds of our subsequentequity issuances and (f) restrict the maximum amount of our total indebtedness.  The covenants also restrict us from makingdistributions in excess of a maximum of 103% of our funds from operations (asdefined by the National Association of Real Estate Investment Trusts) throughJuly 2005 and 100% thereafter, except that we may in any case pay distributionsnecessary to maintain our REIT status. Under our facilities with Wachovia Capital Markets LP, an event ofdefault will be triggered if GKK Manager LLC ceases to be the Manager.  As of December 31, 2004, we were incompliance with all such covenants.**

** **

**Contractual Obligations**

** **

Combinedaggregate principal maturities of borrowings under our repurchase facilitiesand revolving credit facilities as of December 31, 2004 are as follows (inthousands):

 

| ** ** | ** ** | **Repurchase  Facilities** | ** ** | **Revolving  Credit  Facilities** | ** ** | **Total** | ** ** |
|------------|------------|----------------------------|------------|-----------------------------------|------------|-----------|------------|
| 2005       |       | $                          | —     |                              | $          | —    |       | $ | — |   |
| 2006       |       | —                     |       | —                            |       | —    |       |
| 2007       |       | 238,885                    |       | —                            |       | 238,885   |       |
|       |       | $                          | 238,885    |                              | $          | —    |       | $ | 238,885 |   |

 

**Off-Balance SheetArrangements**

** **

Asof December 31, 2004, we had no off-balance sheet investments.

 

**Dividends**

 

Tomaintain our qualification as a REIT, we must pay annual dividends to ourstockholders of at least 90% of our REIT taxable income, determined beforetaking into consideration the dividends paid deduction and net capitalgains.  We intend to continue to payregular quarterly dividends to our stockholders.  Before we pay any dividend, whether forFederal income tax purposes or otherwise, which would only be paid out ofavailable cash to the extent permitted under our unsecured and secured creditfacilities, and our term loans, we must first meet both our operatingrequirements and scheduled debt service on our mortgages and loans payable.

 

**RelatedParty Transactions (dollars in thousands)**

 

**ManagementAgreement**

 

In connection with ourinitial public offering, we entered into a Management Agreement with GKKManager LLC, which provides for an initial term through December 2007 withautomatic one-year extension options and is subject to certain terminationrights.  We pay the Manager an annual managementfee equal to 1.75% of our gross stockholders equity (as defined in theManagement Agreement).  For the periodfrom April 12, 2004 through December 31, 2004, we paid or had payable anaggregate of approximately $1,349 to the Manager under this agreement.

 

24

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The Manager and SL GreenOperating Partnership, L.P., hold 15 units and 85 units, respectively, of ClassB limited partner interests of the Operating Partnership, which represents 100%of all Class B limited partner interests. SL Green Operating Partnership, L.P. intends to own at least 70 units ofthe Class B limited partner interests. To provide an incentive for the Managerto enhance the value of the common stock, the Manager and SL Green OperatingPartnership, L.P. are entitled through their ownership of Class B limitedpartner interests of the Operating Partnership to an incentive return equal to25% of the amount by which funds from operations (as defined in the partnershipagreement of the Operating Partnership) plus certain accounting gains exceed theproduct of our weighted average stockholders equity (as defined in thepartnership agreement of the Operating Partnership) multiplied by 9.5% (dividedby 4 to adjust for quarterly calculations). We will record any distributions on the Class B limited partnerinterests as an incentive distribution expense in the period when earned andwhen payments of such amounts have become probable and reasonably estimable inaccordance with the partnership agreement. No amounts were earned or accrued under this agreement as of December31, 2004.

 

**AssetServicing Agreement and Outsourcing Agreement**

 

We are obligated to reimburse the Manager for its costs incurred underan Asset Servicing Agreement and a separate Outsourcing Agreement between theManager and SL Green Operating Partnership, L.P.  The Asset Servicing Agreement provides for anannual fee payable by us of 0.15% of the carrying value of our investments,excluding certain defined investments for which other servicing arrangementsare executed and further reduced by fees paid directly to outside servicers byGramercy.  The Outsourcing Agreementprovides a fee payable by us of $1,250 per year, increasing 3% annually overthe prior year.  For the period fromApril 12, 2004 through December 31, 2004, we paid or had payable an aggregateof $521 and $95 to the Manager under the Outsourcing and Asset ServicingAgreements, respectively.

 

**During that same period we reimbursed approximately $2,400 to SL GreenOperating Partnership, L.P. for organizational costs incurred in connectionwith the formation of Gramercy, the formation of its affiliates, the initialpublic offering, and to reimburse $800 in consulting fees paid by SL Green toMessrs. Hall and Foley, our Chief Operating Officer and Chief FinancialOfficer, respectively.**

** **

**Messenger Services**

** **

**Bright Star Couriers LLC, or Bright Star, provides messenger services toGramercy.  Bright Star is owned by GaryGreen, a son of Stephen L. Green.  Theaggregate amount of fees paid by us for such services was less than $1 in 2004.**

** **

**Investments**

** **

**SL Green Operating Partnership, L.P. has invested $75,000 in a preferredequity interest that is subordinate to Gramercy’s $68,879 investment (“PW/MS”).**

** **

**Fundsfrom Operations**

 

FFO is a widelyrecognized measure of REIT performance. We compute FFO in accordance with standards established by the NationalAssociation of Real Estate Investment Trusts, or NAREIT, which may not becomparable to FFO reported by other REITs that do not compute FFO in accordancewith the NAREIT definition, or that interpret the NAREIT definition differentlythan we do.  The revised White Paper onFFO approved by the Board of Governors of NAREIT in April 2002 defines FFO asnet income (loss) (computed in accordance with GAAP), excluding gains (orlosses) from debt restructuring and sales of properties, plus real estaterelated depreciation and amortization and after adjustments for unconsolidatedpartnerships and joint ventures.  Wepresent FFO because we consider it an important supplemental measure of ouroperating performance and believe that it is frequently used by securitiesanalysts, investors and other interested parties in the evaluation ofREITS.  We also use FFO as one of severalcriteria to determine performance-based bonuses for members of our senior management.  FFO is intended to exclude GAAP historicalcost depreciation and amortization of real estate and related assets, whichassumes that the value of real estate assets diminishes ratably over time.  Historically, however, real estate valueshave risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to realestate, gains and losses from property dispositions and extraordinary items, itprovides a performance measure that, when compared year over year, reflects theimpact to operations from trends in occupancy rates, rental rates, operatingcosts, interest costs, providing perspective not immediately apparent from netincome.  FFO does not represent cashgenerated from operating activities in accordance with GAAP and should not beconsidered as an alternative to net income (determined in accordance withGAAP), as an indication of our financial performance or to cash flow fromoperating activities (determined in accordance with GAAP) as a measure of ourliquidity, nor is it indicative of funds available to fund our cash needs,including our ability to make cash distributions.

 

25

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Funds from Operations forthe period from April 12, 2004 (formation) through December 31, 2004 are asfollows (in thousands):

 

| ** **                                                                                  | ** ** | **The Period from  April 12, 2004  (formation)  through  December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| Net income  available to common stockholders                                                |       | $                                                                             | 2,052      |   |
| Add:                                                                                        |       |                                                                          |       |
| Depreciation and  amortization                                                              |       | 327                                                                           |       |
| Less:                                                                                       |       |                                                                          |       |
| Amortization of  deferred financing costs and depreciation on non-rental real estate assets |       | (327                                                                          | )          |
| Funds From  Operations – basic                                                         |       | 2,052                                                                         |       |
| Dividends on  preferred shares                                                              |       | —                                                                        |       |
| Funds From  Operations – diluted                                                       |       | $                                                                             | 2,052      |   |
| Cash flows  provided by operating activities                                                |       | 1,145                                                                         |       |
| Cash flows used  in investing activities                                                    |       | (407,056                                                                      | )          |
| Cash flows  provided by financing activities                                                |       | 444,805                                                                       |       |

 

**RecentlyIssued Accounting Pronouncements**

 

FASB InterpretationNo. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others,” aninterpretation of Statement of Financial Accounting Standards No. 5 (“SFAS No. 5”),“Accounting for Contingencies,” Statement of Financial Accounting StandardsNo. 57, “Related Party Disclosures,” Statement of Financial AccountingStandards No. 107, “Disclosures about Fair Value of Financial Instruments”and rescinds FASB Interpretation No. 34, “Disclosure of IndirectGuarantees of Indebtedness of Others, an Interpretation of SFAS No. 5.” Itrequires that upon issuance of a guarantee, the guarantor must recognize aliability for the fair value of the obligation it assumes under that guaranteeregardless if the Company receives separately identifiable consideration. Thedisclosure requirements are effective December 31, 2002.

 

FASBInterpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities,”clarifies the application of existing accounting pronouncements to certainentities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties.

 

**SFAS No. 123(R), “Share-Based Payment, a revision of FASB Statement No.123, Accounting for Stock-Based Compensation,” requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair value.  The newstandard is effective for interim or annual reporting periods beginning afterJune 15, 2005.  Because the Companycurrently recognizes all restricted share and option grants using theprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation,”implementation of SFAS No. 123(R) will have no impact on the Company’sfinancial statements.**

** **

SFAS149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities,” amends and clarifies the accounting guidance on (1) derivativeinstruments (including certain derivative instruments embedded in othercontracts) and (2) hedging activities that fall within the scope of SFAS No.133, or SFAS 133, “Accounting for Derivative Instruments and HedgingActivities.”  SFAS 149 also amendscertain other existing pronouncements, which will result in more consistentreporting of contracts that are derivatives in their entirety or that containembedded derivatives that warrant separate accounting.

 

SFAS 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity,” establishes standards for the classification and measurement ofcertain financial instruments with characteristics of both liabilities andequity. SFAS 150 is effective for financial instruments entered into ormodified after May 31, 2003 and otherwise is effective at the beginning of thefirst interim period beginning after June 15, 2003. It is to beimplemented by reporting the cumulative effect of a change in an accountingprinciple for financial instruments created before the issuance date of thestatement and still existing at the beginning of the interim period ofadoption.

 

26

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**ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK**

 

##### **MarketRisk**

##### ** **

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

 

**Real Estate Risk**

 

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

 

###### **Interest Rate Risk (dollars in thousands)**

###### ** **

Interest rate risk is highly sensitive to many factors, includinggovernmental monetary and tax policies, domestic and international economic andpolitical considerations and other factors beyond our control. A hypothetical100 basis point increase in interest rates along the entire interest rate curvefor 2004 would have increased our annual interest cost by approximately $204,offset by an increase in our investment income of approximately $713.

 

Our operating resultswill depend in large part on differences between the income from our assets andour borrowing costs.  Most of our assetsand borrowings are expected to be variable-rate instruments that we willfinance with variable rate debt.  Theobjective of this strategy is to minimize the impact of interest rate changeson the spread between the yield on our assets and our cost of funds.  We enter into hedging transactions withrespect to all liabilities relating to fixed rate assets in the future.  If we were to finance fixed rate assets with variablerate debt and the benchmark for our variable rate debt increased, our netincome would decrease.  Furthermore, asmost of our available financing provides for an ability of the lender to markour assets to market and make margin calls based on a change in the value ofour assets, financing fixed rate assets with this debt creates the risk that anincrease in fixed rate benchmarks (such as “swap” yields) would decrease thevalue of our fixed rate assets.  We haveentered into certain swap transactions in anticipation of drawing upon ourmark-to-market debt to hedge against this risk. Some of our loans may be subject to various interest rate floors.  As a result, if interest rates fall below thefloor rates, the spread between the yield on our assets and our cost of fundswill increase, which will generally increase our returns.  Because of our strategies to date, our netincome will generally increase if LIBOR increases and decreases if LIBORdecreases, but this may not always be true in the future.  Our exposure to interest rates will also beaffected by our overall corporate leverage, which we anticipate will be 70% to80% of the carrying value of our assets; but our actual leverage depends on ourmix of assets.

 

In the event of a significant rising interest rate environment and/oreconomic downturn, delinquencies and defaults could increase and result incredit losses to us, which could adversely affect our liquidity and operatingresults.  Further, such delinquencies ordefaults could have an adverse effect on the spreads between interest-earningassets and interest-bearing liabilities.

 

27

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**The aggregatecarrying values, allocation by product type and weighted average coupons of ourinvestments as of December 31, 2004 were as follows:**

** **
| ** **                              | ** ** | **Investments net of  fees and discounts  ($ in thousands)** | ** ** | **Allocation by  Investment  Type** | ** ** | **Fixed Rate:  Average Yield** | ** ** | **Floating Rate :  Average  Spread over  LIBOR** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|-------------------------------------------------------|------------|
| Whole Loans                             |       | $                                                                 | 155,215    |                                | 38         | %                              | —     |                                                  | 373        | bps |
| Subordinate  Investments, Floating Rate |       | 209,286                                                           |       | 51                                  | %          | —                         |       | 640                                                   | bps        |
| Subordinate  Investments, Fixed Rate    |       | 31,216                                                            |       | 8                                   | %          | 9.57                           | %          | —                                                |       |
| Commercial  Mortgage Backed Securities  |       | 10,898                                                            |       | 3                                   | %          | 13.49                          | %          | —                                                |       |
| Total / Average                         |       | $                                                                 | 406,615    |                                | 100        | %                              | 10.58      | %                                                     | 526        | bps |

** **

As of December 31, 2004, our investment portfolio had the followingmaturity characteristics:

 
| **Year of Maturity**       | ** ** | **Number of  Investments  Maturing** | ** ** | **Current  Carrying Value  (In thousands)** | ** ** | **% of Total** | ** ** |
|----------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|----------------|------------|
| 2005                       |       | 1                                    |       | $                                           | 42,000     |           | 10.3       | % |
| 2006                       |       | 5                                    |       | 160,943                                     |       | 39.6           | %          |
| 2007                       |       | 4                                    |       | 172,457                                     |       | 42.4           | %          |
| 2008                       |       | —                               |       | —                                      |       | —         |       |
| 2009                       |       | 1                                    |       | 31,215                                      |       | 7.7            | %          |
|                       |       | 11                                   |       | $                                           | 406,615    |           | 100.00     | % |
|                       |       |                                 |       |                                        |       |           |       |
| Weighted average  maturity |       |                                 |       | 2.1 years                                   |       |           |       |

 

The following table summarizes the notional and fair value of ourderivative financial instruments at December 31, 2004.  The notional value is an indication of theextent of our involvement in this instrument at that time, but does notrepresent exposure to credit, interest rate or market risks (dollars inthousands):

 
| ** **          | ** ** | **Notional  Value** | ** ** | **Strike  Rate** | ** ** | **Effective  Date** | ** ** | **Expiration  Date** | ** ** | **Fair  Value** | ** ** |
|---------------------|------------|---------------------|------------|------------------|------------|---------------------|------------|----------------------|------------|-----------------|------------|
| Interest Rate  Swap |       | $                   | 10,729     |             | 3.36       | %                   | 8/2004     |                 | 12/2007    |            | $          | 69 |   |
| Interest Rate  Swap |       | $                   | 31,686     |             | 2.25       | %(1)                | 11/2004    | (1)                  | 4/2005     | (1)             | $          | 180 |   |

 

----

(1)    This swap has a step-up component with a strike rate of3.86%, an effective date of April 2005 and an expiration of November 2009.  The total fair value of the initial swap andthe step-up provisions are reflected in the fair value stated above.

 

28

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**ITEM 8.          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**Index to Financial Statements and Schedules**

 
| **GRAMERCY  CAPITAL CORP.**                                                                    |       |
|------------------------------------------------------------------------------------------------|------------|
|                                                                                           |       |
| Report  of Independent Registered Public Accounting Firm                                       |       |
| Consolidated Balance  Sheets as of December 31, 2004 and April 12, 2004                   |       |
| Consolidated  Statement of Income for the year ended December 31, 2004                    |       |
| Consolidated  Statement of Stockholders’ Equity for the year ended December 31, 2004 |       |
| Consolidated  Statement of Cash Flows for the year ended December 31, 2004                |       |
| **Notes to Consolidated  Financial Statements**                                                | ** ** |

 

**Schedules**

 
| Schedule IV  Mortgage Loans on Real Estate as of December 31, 2004                                                                            |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                               |   |
| All  other schedules are omitted because they are not required or the required  information is shown in the financial statements or notes thereto. |   |

 

29

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**Report of Independent Registered Public Accounting Firm**

 

The Board of Directorsand Shareholders of Gramercy Capital Corp.

 

We have audited theaccompanying consolidated balance sheets of Gramercy Capital Corp. as ofDecember 31, 2004 and April 12, 2004, and the related consolidated statement ofincome, shareholders’ equity, and cash flows for the period from April 12, 2004(formation) through December 31, 2004. Our audits also included the financial statement schedule listed in theIndex at Item 15(a).  These financialstatements and schedule are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements and schedule based on ouraudits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Gramercy Capital Corp.  at December 31, 2004 and April 12, 2004,  and the consolidated results of itsoperations and its cash flows for the period from April 12, 2004 (formation)through December 31, 2004, in conformity with U.S. generally accepted accountingprinciples.  Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

 
| /s/ Ernst & Young LLP                    |   |
|----------------------------------------------|--------|
|                                         |
| New York, New York                           |
| January 19, 2005,                            |
| except for Note 19, as  to which the date is |
| February 24, 2005                            |

 

30

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

 
| ** **                                                                                                                                                                                                       | ** ** | **December 31,  2004** | ** ** | **April 12,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| **Assets:**                                                                                                                                                                                                      |       |                   |       |                |       |
| Cash and cash  equivalents                                                                                                                                                                                       |       | $                      | 39,094     |                | $          | 200 |   |
| Restricted cash                                                                                                                                                                                                  |       | 1,901                  |       | —              |       |
| Loans and other  lending investments, net                                                                                                                                                                        |       | 395,717                |       | —              |       |
| Commercial  mortgage backed securities, net                                                                                                                                                                      |       | 10,898                 |       | —              |       |
| Stock  subscriptions receivable                                                                                                                                                                                  |       | 60,445                 |       | —              |       |
| Accrued interest                                                                                                                                                                                                 |       | 2,921                  |       | —              |       |
| Deferred  financing costs                                                                                                                                                                                        |       | 2,044                  |       | —              |       |
| Deferred costs                                                                                                                                                                                                   |       | 189                    |       | —              |       |
| Derivative  instruments, at fair value                                                                                                                                                                           |       | 249                    |       | —              |       |
| Other assets                                                                                                                                                                                                     |       | 589                    |       | —              |       |
| Total assets                                                                                                                                                                                                     |       | $                      | 514,047    |                | $          | 200 |   |
|                                                                                                                                                                                                             |       |                   |       |                |       |
| **Liabilities  and Stockholders’ Equity:**                                                                                                                                                                  |       |                   |       |                |       |
| Credit  facilities                                                                                                                                                                                               |       | $                      | 238,885    |                | $          | — |   |
| Management fees  payable                                                                                                                                                                                         |       | 416                    |       | —              |       |
| Dividends  payable                                                                                                                                                                                               |       | 1,951                  |       | —              |       |
| Accounts payable  and accrued expenses                                                                                                                                                                           |       | 1,935                  |       | —              |       |
| Other  liabilities                                                                                                                                                                                               |       | 1,901                  |       |                |       |
| Total liabilities                                                                                                                                                                                                |       | 245,088                |       | —              |       |
|                                                                                                                                                                                                             |       |                   |       |                |       |
| Commitments and  contingencies                                                                                                                                                                                   |       | —                 |       | —              |       |
|                                                                                                                                                                                                             |       |                   |       |                |       |
| **Stockholders’  Equity:**                                                                                                                                                                                  |       |                   |       |                |       |
| Preferred stock,  par value $0.001, 25,000,000 shares authorized, no shares issued or  outstanding                                                                                                               |       | —                 |       | —              |       |
| Common stock,  par value $0.001, 100,000,000 shares authorized, 18,812,500 (3,500,000 as a stock subscription) and 500,000  shares issued and outstanding at December 31, 2004 and April 12, 2004,  respectively |       | 19                     |       | 1                   |       |
| Additional  paid-in-capital                                                                                                                                                                                      |       | 268,558                |       | 199                 |       |
| Accumulated  other comprehensive income                                                                                                                                                                          |       | 282                    |       | —              |       |
| Retained  earnings                                                                                                                                                                                               |       | 100                    |       | —              |       |
| Total  stockholders’ equity                                                                                                                                                                                 |       | 268,959                |       | 200                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                 |       | $                      | 514,047    |                | $          | 200 |   |

 

The accompanying notesare an integral part of these financial statements.

 

31

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**GramercyCapital Corp.Consolidated Statement of Income(Amounts in thousands, except per share data)**

 
| ** **                                                                       | ** ** | **For the Period  April 12, 2004  (formation)  through  December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| **Revenues**                                                                     |       |                                                                         |       |
| Investment  income                                                               |       | $                                                                            | 6,841      |   |
| Other income                                                                     |       | 310                                                                          |       |
| Total revenues                                                                   |       | 7,151                                                                        |       |
|                                                                             |       |                                                                         |       |
| **Expenses**                                                                     |       |                                                                         |       |
| Interest expense                                                                 |       | 1,463                                                                        |       |
| Management fees                                                                  |       | 1,965                                                                        |       |
| Depreciation and  amortization                                                   |       | 38                                                                           |       |
| Marketing,  general and administrative                                           |       | 1,358                                                                        |       |
| Total expenses                                                                   |       | 4,824                                                                        |       |
|                                                                             |       |                                                                         |       |
| Income from  continuing operations                                               |       | 2,327                                                                        |       |
|                                                                             |       |                                                                         |       |
| GKK formation  costs                                                             |       | 275                                                                          |       |
|                                                                             |       |                                                                         |       |
| Net income  available to common stockholders                                     |       | $                                                                            | 2,052      |   |
|                                                                             |       |                                                                         |       |
| **Basic  earnings per share:**                                                   |       |                                                                         |       |
| Net income  available to common stockholders                                     |       | $                                                                            | 0.15       |   |
| **Diluted  earnings per share:**                                                 |       |                                                                         |       |
| Net income available  to common stockholders                                     |       | $                                                                            | 0.15       |   |
| Basic weighted  average common shares outstanding                                |       | 13,348                                                                       |       |
| Diluted weighted  average common shares and common share equivalents outstanding |       | 13,411                                                                       |       |

 

Theaccompanying notes are an integral part of these financial statements.

 

32

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**Gramercy Capital Corp.Consolidated Statement ofStockholders’ Equity****(Amounts in thousands, except share data)**

 
| ** **                                     | ** ** | ** **    | ** ** | **Additional  Paid-  In-Capital** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** | **Comprehensive  Income** | ** ** |
|------------------------------------------------|------------|---------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|------------------------|------------|-----------|------------|---------------------------|------------|
| **Common**                                     |
| **Stock**                                      |
| **Shares**                                     | ** ** | **Par Value** |
| **Balance  at April 12, 2004**                 |       | 500           |       | $                                 | 1          |                                          | $          | 199                    |       | $         | —     |                      | $          | — |   | $ | 200 |   | $ | — |   |
| Net income                                     |       |          |       |                              |       |                                          |       |                   |       | 2,052     |       | 2,052                     |       | 2,052 |   |
| Net unrealized  gain on derivative instruments |       |          |       |                              |       |                                          |       | 282                    |       |      |       | 282                       |       | 282 |   |
| Net proceeds  from common stock offerings      |       | 18,000        |       | 18                                |       | 267,955                                       |       |                   |       |      |       | 267,973                   |       |   |   |
| Stock-based  compensation – fair value    |       |          |       |                              |       | 404                                           |       |                   |       |      |       | 404                       |       |   |   |
| Deferred  compensation plan, net               |       | 313           |       | —                            |       |                                          |       |                   |       |      |       | —                    |       |   |   |
| Cash  distributions declared                   |       |          |       |                              |       |                                          |       |                   |       | (1,952    | )          | (1,952                    | )          |   |   |
| **Balance  at December 31, 2004**              |       | 18,813        |       | $                                 | 19         |                                          | $          | 268,558                |       | $         | 282        |                      | $          | 100 |   | $ | 268,959 |   | $ | 2,334 |   |

 

The accompanying notesare an integral part of these financial statements.

 

33

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**Gramercy Capital Corp.****Consolidated Statement of CashFlows****(Amountsin thousands)**

 
| ** **                                                                                                           | ** ** | **For the Period  April 12, 2004  (formation)  through  December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| **Operating  Activities**                                                                                            | ** ** | ** **                                                                   | ** ** |
| Net income  available to common stockholders                                                                         |       | $                                                                            | 2,052      |   |
| Adjustments to  reconcile net income available to common stockholders to net cash provided by  operating activities: |       |                                                                         |       |
| Depreciation and  amortization                                                                                       |       | 38                                                                           |       |
| Amortization of  discount on investments                                                                             |       | 253                                                                          |       |
| Changes in  operating assets and liabilities:                                                                        |       |                                                                         |       |
| Accrued interest                                                                                                     |       | (2,921                                                                       | )          |
| Other assets                                                                                                         |       | (628                                                                         | )          |
| Management fees  payable                                                                                             |       | 416                                                                          |       |
| Accounts  payable, accrued expenses and other liabilities                                                            |       | 1,935                                                                        |       |
| Net cash  provided by operating activities                                                                           |       | 1,145                                                                        |       |
| **Investing  Activities**                                                                                            |       |                                                                         |       |
| New investment  originations                                                                                         |       | (407,603                                                                     | )          |
| Principal  collections on investments                                                                                |       | 736                                                                          |       |
| Deferred loan  costs                                                                                                 |       | (189                                                                         | )          |
| Net cash used in  investing activities                                                                               |       | (407,056                                                                     | )          |
| **Financing  Activities**                                                                                            |       |                                                                         |       |
| Proceeds from  credit facilities                                                                                     |       | 238,885                                                                      |       |
| Net proceeds  from sale of common stock                                                                              |       | 266,458                                                                      |       |
| Stock  subscription receivable                                                                                       |       | (60,445                                                                      | )          |
| Deferred  financing costs                                                                                            |       | (2,044                                                                       | )          |
| Dividends  payable                                                                                                   |       | 1,951                                                                        |       |
| Net cash  provided by financing activities                                                                           |       | 444,805                                                                      |       |
| Net increase in  cash and cash equivalents                                                                           |       | 38,894                                                                       |       |
| Cash and cash  equivalents at beginning of period                                                                    |       | 200                                                                          |       |
| Cash and cash  equivalents at end of period                                                                          |       | $                                                                            | 39,094     |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

34

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**GramercyCapital Corp.Notes To ConsolidatedFinancial StatementsDecember 31, 2004**

 

**1.     Organization**

** **

Gramercy Capital Corp. (the “Company” or “Gramercy”), was organized inMaryland on April 1, 2004, as a commercial real estate specialty financecompany focused on originating and acquiring whole loans, bridge loans,subordinate interests in whole loans, permanent loans, distressed debt,mortgage-backed securities, mezzanine loans, and preferred equity interests inentities that own commercial real estate, primarily in the United States.

 

In connection with the completion of our initial public offering onAugust 2, 2004, Gramercy contributed the proceeds of the offering in exchangefor units of limited partnership interest in GKK Capital LP, a Delaware limitedpartnership, or the “Operating Partnership.” Substantially all of Gramercy’s operations are conducted through and allassets are held by the Operating Partnership. Gramercy, as the sole general partner of, and holder of 100% of thecommon units of, the Operating Partnership, has responsibility and discretionin the management and control of the Operating Partnership, and the limitedpartners of the Operating Partnership, in such capacity, have no authority totransact business for, or participate in the management activities of, theOperating Partnership.  Accordingly, weconsolidate the accounts of the Operating Partnership.

 

We are 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, 2004, SL Green also owned anapproximately 25% interest in the outstanding shares of our common stock. Wequalified as a real estate investment trust, or “REIT,” under the InternalRevenue Code commencing with our taxable year ending December 31, 2004.  To maintain our tax status as a REIT, we planto distribute at least 90% of our taxable income.  Unless the context requires otherwise, allreferences to “we,” “our,” and “us” means Gramercy Capital Corp.

 

As of December 31, 2004, we held investments of approximately $406.6million, net of origination fees and discounts, with an average spread to LIBORof 526 basis points for our floating rate investments and an average yield of10.58% for our fixed rate investments.

 

The balance sheet atApril 12, 2004 has been derived from the audited financial statement at thatdate, but does not include all the information and footnotes required by GAAPfor complete financial statements.

 

**2.     Significant Accounting Policies**

** **

**Principles of Consolidation**

 

Theconsolidated financial statements include our accounts and those of oursubsidiaries, which are wholly-owned or controlled by us or entities which arevariable interest entities in which Gramercy is the primary beneficiary underFinancial Accounting Standards Board, or FASB Interpretation No. 46, or FIN 46,“Consolidation of Variable Interest Entities.” FIN 46 requires a variable interest entity, or VIE, to be consolidatedby its primary beneficiary.  The primarybeneficiary is the party that absorbs a majority of the VIE’s anticipatedlosses and/or a majority of the expected returns.  We have evaluated our investments forpotential variable interests by evaluating the sufficiency of the entitiesequity investment at risk to absorb losses and determined that we are not theprimary beneficiary for any of our investments. Entities which we do not control and entities which are VIE’s, but wherewe are not the primary beneficiary, are accounted for under the equitymethod.  All significant intercompanybalances and transactions have been eliminated.

 

**Cash andCash Equivalents**

 

Weconsider all highly liquid investments with maturities of three months or lesswhen purchased to be cash equivalents.

 

**Restricted Cash**

** **

**Restricted cash consists of interest reserves held on behalf ofborrowers.**

** **

**Loans and Investments**

 

Loans held for investment are intended to be held to maturity and,accordingly, are carried at cost, net of unamortized loan origination costs andfees, unless such loan or investment is deemed to be impaired.  At such time as we invest in preferred equityinterests that allow us to participate in a percentage of the underlyingproperty’s cash flows from operations and proceeds from a sale or refinancing,we must determine whether such investment should be accounted for as a loan,joint venture or as real estate at the inception of the investment.  Gramercy did not own any preferred equityinvestments at December 31, 2004.

 

35

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Specific valuation allowances are established for impaired loans basedon the fair value of collateral on an individual loan basis.  The fair value of the collateral isdetermined by an evaluation of operating cash flow from the property during theprojected holding period, and estimated sales value computed by applying anexpected capitalization rate to the stabilized net operating income of thespecific property, less selling costs, discounted at market discount rates.

 

If upon completion of the valuation, the fair value of the underlyingcollateral securing the impaired loan is less than the net carrying value ofthe loan, an allowance is created with a corresponding charge to the provisionfor loan losses.  The allowance for eachloan is maintained at a level we believe is adequate to absorb probablelosses.  There was no loan loss allowanceat December 31, 2004.

 

Our Manager evaluates our assets on a regular basis to determine ifthey continue to satisfy our investment criteria. Subject to certainrestrictions applicable to REITs, our Manager may cause us to sell ourinvestments opportunistically and use the proceeds of any such sale for debtreduction, additional acquisitions or working capital purposes.

 

#### **Classifications of Mortgage-BackedSecurities**

 

In accordance withapplicable GAAP, mortgage-backed securities are classified asavailable-for-sale securities.  As aresult, changes in fair value will be recorded as a balance sheet adjustment toaccumulated other comprehensive income, which is a component of stockholdersequity, rather than through our statement of operations.  If available-for-sale securities wereclassified as trading securities, there could be substantially greatervolatility in earnings from period-to-period as these investments would be markedto market and any reduction in the value of the securities versus the previouscarrying value would be considered an expense on our statement of operations.The Company had no investments as of December 31 2004 that were accounted foras trading securities.

 

#### **Valuations of Mortgage-Backed Securities**

 

All mortgage-backedsecurities are carried on the balance sheet at fair value.  We determine the fair value ofmortgage-backed securities based on the types of securities in which we haveinvested.  For liquid, investment-gradesecurities, we may consult with dealers of such securities to periodicallyobtain updated market pricing for the same or similar instruments.  For non-investment grade securities, weactively monitor the performance of the underlying properties and loans andupdate our pricing model to reflect changes in projected cash flows.  The value of the securities is derived byapplying discount rates to such cash flows based on current market yields.  The yields employed may be obtained from theexperience of the Manager in the market, advice from dealers and/or informationobtained in consultation with other investors in similar instruments.  Because fair value estimates may vary to somedegree, we must make certain judgments and assumptions about the appropriateprice to use to calculate the fair values for financial reportingpurposes.  Different judgments andassumptions could result in different presentations of value.

 

When the fair value of an available-for-sale security is less than theamortized cost, we consider whether there is an other-than-temporary impairmentin the value of the security (for example, whether the security will be soldprior to the recovery of fair value). If, in our judgment, an other-than-temporary impairment exists, the costbasis of the security is written down to the then-current fair value, and thisloss is realized and charged against earnings. The determination of other-than-temporary impairment is a subjectiveprocess, and different judgments and assumptions could affect the timing ofloss realization.

 

#### **Revenue Recognition**

 

Interest income on debtinvestments is recognized over the life of the investment using the effectiveinterest method and recognized on the accrual basis.  Fees received in connection with loancommitments are deferred until the loan is funded and are then recognized overthe term of the loan as an adjustment to yield. Anticipated exit fees, whose collection is expected, are also recognizedover the term of the loan as an adjustment to yield.  Fees on commitments that expire unused arerecognized at expiration.  Fees receivedin exchange for the credit enhancement of another lender, either subordinate orsenior to Gramercy, in the form of a guarantee are recognized over the term ofthat guarantee.

 

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

 

36

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**Reserve for Possible Credit Losses**

 

The expense for possible credit losses in connection with debtinvestments is the charge to earnings to increase the allowance for possiblecredit losses to the level that management estimates to be adequate consideringdelinquencies, loss experience and collateral quality.  Other factors considered relate to geographictrends and project diversification, the size of the portfolio and currenteconomic conditions.  Based upon thesefactors, we establish the provision for possible credit losses by category ofasset.  When it is probable that we willbe unable to collect all amounts contractually due, the account is consideredimpaired.

 

Where impairment is indicated, a valuation write-down or write-off ismeasured based upon the excess of the recorded investment amount over the netfair value of the collateral, as reduced by selling costs.  Any deficiency between the carrying amount ofan asset and the net sales price of repossessed collateral is charged to theallowance for credit losses.  As ofDecember 31, 2004, we did not have an allowance for credit losses.

 

**Deferred Costs**

 

Deferred costs consist of fees and direct costs incurred to originatenew investments and are amortized using the effective yield method over the relatedterm of the investment.

 

**DeferredFinancing Costs**

 

Deferred financing costsrepresent commitment fees, legal and other third party costs associated withobtaining commitments for financing which result in a closing of suchfinancing.  These costs are amortizedover the terms of the respective agreements and the amortization is reflectedin interest expense.  Unamortizeddeferred financing costs are expensed when the associated debt is refinanced orrepaid before maturity.  Costs incurredin seeking financial transactions, which do not close, are expensed in theperiod in which it is determined that the financing will not close.

 

**Stock-BasedEmployee Compensation Plans**

 

We have a stock-basedemployee compensation plan, described more fully in Note 10.  We account for this plan using the fair valuerecognition provisions of FASB Statement No. 123, or SFAS 123, “Accounting forStock-Based Compensation.”

 

TheBlack-Scholes option-pricing model was developed for use in estimating the fairvalue of traded options, which have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility. Because Gramercy’s plan has characteristics significantly different fromthose of traded options and because changes in the subjective input assumptionscan materially affect the fair value estimate, in our opinion, the existingmodels do not necessarily provide a reliable single measure of the fair value ofour employee stock options.

 

Compensation cost forstock options, if any, is recognized ratably over the vesting period of theaward.  Gramercy’s policy is to grantoptions with an exercise price equal to the quoted closing market price of ourstock on the business day preceding the grant date.  Awards of stock or restricted stock areexpensed as compensation on a current basis over the benefit period.

 

The fair value of eachstock option granted is estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted average assumptions for grants in2004.

 

| ** **                       | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|
| Dividend yield                   |       | 10.0     | %          |
| Expected life of  option         |       | 7 years  |       |
| Risk-free  interest rate         |       | 4.10     | %          |
| Expected stock  price volatility |       | 18.0     | %          |

 

**Incentive Distribution (Class B Limited PartnerInterest)**

 

TheClass B limited partner interest will be entitled to receive quarterly profitdistributions based on our financial performance.  We will record any distributions on the ClassB limited partner interests as an incentive distribution expense in the periodwhen earned and

 

**37**

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whenpayment of such amounts has become probable and reasonably estimable inaccordance with the partnership agreement. These cash distributions will reduce the amount of cash available fordistribution to our common unitholders in our Operating Partnership and tocommon stockholders.  No amounts wereearned or accrued under this agreement as of December 31, 2004.

 

#### **Derivative Instruments**

** **

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

** **

**Todetermine the fair value of derivative instruments, we use a variety of methodsand assumptions that are based on market conditions and risks existing at eachbalance sheet date.  For the majority offinancial instruments including most derivatives, long-term investments andlong-term debt, standard market conventions and techniques such as discountedcash flow analysis, option-pricing models, replacement cost, and terminationcost are used to determine fair value. All methods of assessing fair value result in a general approximation ofvalue, and such value may never actually be realized.**

** **

In the normal course of business, we are exposed to the effect ofinterest rate changes and limit these risks by following established riskmanagement policies and procedures including the use of derivatives.  To address exposure to interest rates, we usederivatives primarily to hedge the mark-to-market risk of our liabilities withrespect to certain of our assets.

 

We use a variety ofcommonly used derivative products that are considered plain vanilladerivatives.  These derivatives typicallyinclude interest rate swaps, caps, collars and floors.  We expressly prohibit the use ofunconventional derivative instruments and using derivative instruments fortrading or speculative purposes. Further, we have a policy of only entering into contracts with majorfinancial institutions based upon their credit ratings and other factors.

 

**FASB No. 133, or SFAS 133, “Accounting for Derivative Instruments andHedging Activities,” which became effective January 1, 2001, requires Gramercyto recognize all derivatives on the balance sheet at fair value.  Derivatives that are not hedges must beadjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge,changes in the fair value of the derivative will either be offset against thechange in fair value of the hedged asset, liability, or firm commitment throughearnings, or recognized in other comprehensive income until the hedged item isrecognized in earnings.  The ineffectiveportion of a derivative’s change in fair value will be immediately recognizedin earnings.  SFAS 133 may increase ordecrease reported net income and stockholders’ equity prospectively, dependingon future levels of LIBOR interest rates and other variables affecting the fairvalues of derivative instruments and hedged items, but will have no effect oncash flows, provided the contract is carried through to full term.**

** **

We may employ swaps, forwards or purchased options to hedge qualifyingforecasted transactions.  Gains andlosses related to these transactions are deferred and recognized in net incomeas interest expense in the same period or periods that the underlyingtransaction occurs, expires or is otherwise terminated.

 

All hedges held by us are deemed to be fully effective in meeting thehedging objectives established by our corporate policy governing interest raterisk management. The effect of our derivative instruments on our financialstatements is discussed more fully in Note 14.

 

**Income Taxes**

 

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

 

38

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**Underwriting Commissions and Costs**

** **

**Underwriting commissions andcosts incurred in connection with our stock offerings are reflected as areduction of additional paid-in-capital.**

** **

**Organization Costs**

 

Costs incurred toorganize Gramercy in 2004 have been expensed as incurred.

 

**EarningsPer Share**

 

Gramercy presents bothbasic and diluted earnings per share, or EPS. Basic EPS excludes dilution and is computed by dividing net incomeavailable to common stockholders by the weighted average number of common sharesoutstanding during the period.  DilutedEPS reflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised or converted into common stock,where such exercise or conversion would result in a lower EPS amount.  Diluted EPS at December 31, 2004 reflects thedilutive effect of stock options.

 

**Use ofEstimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States, or GAAP, requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.

 

**Concentrationsof Credit Risk**

** **

**Financial instruments that potentially subject us to concentrations ofcredit risk consist primarily of cash investments, debt investments andaccounts receivable.  Gramercy places itscash investments in excess of insured amounts with high quality financialinstitutions.  Gramercy performs ongoinganalysis of credit risk concentrations in our debt investment portfolio byevaluating exposure to various markets, underlying property types, investmentstructure, term, sponsors, tenant mix and other credit metrics.  Two investments accounted for more than 37%of the total investments of the Company as of December 31, 2004. Twoinvestments accounted for more than 58% of the revenue earned on ourinvestments for the period from April 12, 2004 through December 31, 2004.**

** **

**Recently Issued AccountingPronouncements**

 

FASB InterpretationNo. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others,” aninterpretation of Statement of Financial Accounting Standards No. 5 (“SFAS No. 5”),“Accounting for Contingencies,” Statement of Financial Accounting StandardsNo. 57, “Related Party Disclosures,” Statement of Financial AccountingStandards No. 107, “Disclosures about Fair Value of Financial Instruments”and rescinds FASB Interpretation No. 34, “Disclosure of IndirectGuarantees of Indebtedness of Others, an Interpretation of SFAS No. 5.” Itrequires that upon issuance of a guarantee, the guarantor must recognize aliability for the fair value of the obligation it assumes under that guaranteeregardless if the Company receives separately identifiable consideration. Thedisclosure requirements are effective December 31, 2002.

 

FASBInterpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities,”clarifies the application of existing accounting pronouncements to certainentities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties.

 

**SFAS No. 123(R), “Share-Based Payment, a revision of FASB Statement No.123, Accounting for Stock-Based Compensation,” requires all share-basedpayments to employees, including grants of employee stock options, to be recognizedin the income statement based on their fair value.  The new standard iseffective for interim or annual reporting periods beginning after June 15,2005.  Because the Company currentlyrecognizes all restricted share and option grants using the provisions of SFASNo. 123, “Accounting for Stock-Based Compensation,” implementation of SFAS No.123(R) will have no impact on the Company’s financial statements.**

** **

SFAS149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities,” amends and clarifies the accounting guidance on (1) derivativeinstruments (including certain derivative instruments embedded in othercontracts) and (2) hedging activities that fall within the scope of SFAS No.133, or SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”.  SFAS 149 also amends certain other existingpronouncements, which will result in more consistent reporting of contractsthat are derivatives in their entirety or that contain embedded derivativesthat warrant separate accounting.

 

39

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SFAS 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity,” establishes standards for the classification and measurement ofcertain financial instruments with characteristics of both liabilities andequity. SFAS 150 is effective for financial instruments entered into ormodified after May 31, 2003 and otherwise is effective at the beginning of thefirst interim period beginning after June 15, 2003. It is to beimplemented by reporting the cumulative effect of a change in an accountingprinciple for financial instruments created before the issuance date of thestatement and still existing at the beginning of the interim period ofadoption.

 

**3.     Loans and Other Lending Investments(dollars in thousands)**

 

As of December 31, 2004we held the following investments.  Allinvestments and loans were performing in accordance with the terms of the loanagreements:

 
| **Investment  Type**           | ** ** | **Underlying  Property  Type** | ** ** | **Carrying  Value** | ** ** | **Principal  Outstanding** | ** ** | **Senior  Financing** | ** ** | **Effective  Maturity Date (1)** | ** ** | **Interest Payment  Rate (2)** | ** **    |
|--------------------------------|------------|--------------------------------|------------|---------------------|------------|----------------------------|------------|-----------------------|------------|----------------------------------|------------|--------------------------------|---------------|
| CMBS                           |       | Office                         |       | $                   | 10,898     |                       | $          | 11,847                |       | $                                | 109,996    |                           | December 2007 |   | 8.544% - 10.736% |   |
| Subordinate  mortgage interest |       |                           |       |                |       |                       |       |                  |       |                             |       |                           |          |
| C Note                         |       | Office                         |       | 24,728              |       | 25,000                     |       | 190,000               |       | July 2006                        |       | LIBOR + 3.00%                  |          |
| D Note                         |       | Office                         |       | 19,782              |       | 20,000                     |       | 215,000               |       | July 2006                        |       | LIBOR + 7.50%                  |          |
|                           |       |                           |       | 44,510              |       | 45,000                     |       | 405,000               |       |                             |       |                           |          |
| Subordinate  mortgage interest |       |                           |       |                |       |                       |       |                  |       |                             |       |                           |          |
| C Note                         |       | Office                         |       | 34,286              |       | 34,440                     |       | 275,405               |       | July 2007                        |       | LIBOR + 5.00%                  |          |
| D Note                         |       | Office                         |       | 32,875              |       | 34,439                     |       | 309,900               |       | July 2007                        |       | LIBOR + 12.50%                 |          |
|                           |       |                           |       | 67,161              |       | 68,879                     |       | 585,305               |       |                             |       |                           |          |
| Subordinate  mortgage interest |       | Office                         |       | 31,215              |       | 36,500                     |       | 255,500               |       | November 2009                    |       | 5.41% (4)                      |          |
| Subordinate  mortgage interest |       | Multifamily                    |       | 9,906               |       | 10,000                     |       | 50,300                |       | February 2007                    |       | LIBOR + 6.30%                  |          |
| Whole loan                     |       | Hotel                          |       | 42,000              |       | 42,000                     |       | —                |       | April 2005                       |       | LIBOR + 5.25%                  |          |
| Subordinate  mortgage interest |       | Golf Courses                   |       | 47,954              |       | 47,954                     |       | 467,000               |       | February 2006                    |       | LIBOR + 5.50%                  |          |
| Whole loan (3)                 |       | Other                          |       | 28,723              |       | 29,094                     |       | —                |       | November 2006                    |       | LIBOR + 3.50%                  |          |
| Subordinate  mortgage interest |       | Office                         |       | 4,952               |       | 5,000                      |       | 68,000                |       | August 2006                      |       | LIBOR + 7.00%                  |          |
| Subordinate  mortgage interest |       |                           |       |                |       |                       |       |                  |       |                             |       |                           |          |
| C Note                         |       | Office                         |       | 17,402              |       | 17,500                     |       | 85,000                |       | November 2006                    |       | LIBOR + 2.75%                  |          |
| D Note                         |       | Office                         |       | 17,402              |       | 17,500                     |       | 102,500               |       | November 2006                    |       | LIBOR + 7.25%                  |          |
|                           |       |                           |       | 34,804              |       | 35,000                     |       | 187,500               |       |                             |       |                           |          |
| Whole loan                     |       | Office/ Industrial             |       | 84,492              |       | 84,704                     |       | —                |       | September 2007                   |       | LIBOR + 3.05%                  |          |
|                           |       |                           |       | $                   | 406,615    |                       | $          | 415,978               |       | $                                | 2,128,601  |                           |          |   |   |   |

 

----

(1) Reflects theinitial maturity of the investment and does not consider any options to extendthat are at the discretion of the borrower.

 

(2) Allvariable-rate loans are based on 30-day LIBOR and reprice monthly.

 

(3) There is anobligation to fund an additional $11 million to the borrower. This obligationis contingent upon the borrower’s ability to obtain the appropriate approvalsto continue their acquisition of parcels of land for development which wouldserve as additional collateral on the loan. Should the borrower not be grantedthese approvals, there is no future obligation to fund.

 

(4) The effectiveyield of the investment is 8.29% taking into consideration our purchasediscount.

 

40

----

 

For the period fromApril 12, 2004 through December 31, 2004 the Company’s investment income wasgenerated by the following investment types:

 

| **Investment Type**             | ** ** | **Investment  Income** | ** ** | **% of Total** | ** ** |
|---------------------------------|------------|------------------------|------------|----------------|------------|
| Subordinate  mortgage interests |       | $                      | 5,499      |           | 80         | % |
| Whole loans                     |       | 782                    |       | 11             | %          |
| CMBS                            |       | 560                    |       | 9              | %          |
|                            |       | $                      | 6,841      |           | 100        | % |

 

For the period fromApril 12, 2004 through December 31, 2004, the $44.5 million and $67.2 millioninvestments generated more than 58% of our total investment revenue.  This is primarily attributable to theorigination of these investments soon after the completion of the Company’sinitial public offering.

 

At December 31, 2004,our investment portfolio had the following geographic diversification:

 

| **Region** | ** ** | **Carrying  Value** | ** ** | **% of Total** | ** ** |
|------------|------------|---------------------|------------|----------------|------------|
| Northeast  |       | 185,081             |       | 46             | %          |
| South      |       | 126,493             |       | 31             | %          |
| Midwest    |       | 26,284              |       | 6              | %          |
| West       |       | 20,804              |       | 5              | %          |
| Various    |       | 47,953              |       | 12             | %          |
|       |       | $                   | 406,615    |           | 100        | % |
|            |            |                     |            |                |            |  |

 

Three investmentsoriginated during 2004, two of which were made in conjunction with each other,represented more than 10% of the asset value presented on our consolidatedbalance sheet as of December 31, 2004. These investments are described more fully below.

 

OnAugust 27, 2004 Gramercy originated a total investment of $68,879 (“PW/MS”)made up of two subordinate participation interests (the “C Note” and “D Note”),each of equal face value, in a first mortgage loan.  The loan is secured by a first mortgageagainst 29 office properties located in New Jersey, Illinois and Michigan.  The C Note bears interest at a rate of LIBORplus 5.00% while the D Note, which is subordinate in right of interest andrepayment of principal to the C Note, bears interest at a rate of LIBOR plus12.50%.  The total investment has aninitial term of three years.

 

On December 29, 2004,the Company invested in a $84,704 million loan (“CRT-SFV”)secured by a blanket first mortgage on 32 separate office andwarehouse/distribution properties comprising 1.9 million rentable square feet,and one 22-acre land parcel. The properties are located in urban centers inFlorida, Tennessee, North Carolina, and Georgia. The investment matures in 33months and bears interest at a rate of LIBOR plus 305 basis points.

 

Summary unauditedfinancial information as of and for the period ended December 31, 2004 has beenprovided below for the properties securing each of these investments:

 

41

----

 

Summary consolidatedfinancial information for PW/MS:

 

**Balance Sheet:**

** **
| ** **                                       | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **(Unaudited)**        | ** ** |
| **Assets:**                                      | ** ** | ** **             | ** ** |
| Cash and cash  equivalents                       |       | ($3,028                | )          |
| Restricted cash                                  |       | 11,597                 |       |
| Fixed assets,  net                               |       | 363,935                |       |
| Other assets                                     |       | 71,382                 |       |
| Total assets                                     |       | $                      | 443,886    |   |
|                                             |       |                   |       |
| **Liabilities  and Stockholders’ Equity:**  |       |                   |       |
| Mortgage payable                                 |       | $                      | 324,344    |   |
| Accounts payable  and accrued expenses           |       | 13,334                 |       |
| Other  liabilities                               |       | 22,467                 |       |
| Equity                                           |       | 83,741                 |       |
| Total  liabilities and stockholders’ equity |       | $                      | 443,886    |   |

** **

**Statement of Operations:**

 
| ** **                                                                             | ** ** | **For the year  ended December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                             | ** ** | **(Unaudited)**                           | ** ** |
| **Revenues**                                                                           | ** ** | ** **                                | ** ** |
| Rental income                                                                          |       | $                                         | 55,199     |   |
| Reimbursement  income                                                                  |       | 6,852                                     |       |
| Other income                                                                           |       | 689                                       |       |
| Total revenues                                                                         |       | 62,740                                    |       |
|                                                                                   |       |                                      |       |
| **Expenses**                                                                           |       |                                      |       |
| Operating  expenses                                                                    |       | 26,632                                    |       |
| Interest expense                                                                       |       | 16,947                                    |       |
| Depreciation and  amortization                                                         |       | 17,779                                    |       |
| Other expenses                                                                         |       | 454                                       |       |
| Total expenses                                                                         |       | 61,812                                    |       |
| Net income from  continuing operations before gain on sale and discontinued operations |       | 928                                       |       |
| Gain on sale of  properties                                                            |       | 271                                       |       |
| Net income from  discontinued operations                                               |       | 346                                       |       |
| Net income                                                                             |       | $                                         | 1,545      |   |

 

42

----

 

Summary consolidatedfinancial information for CRT-SFV:

 

**Balance Sheet:**

 
| ** **                                       | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **(Unaudited)**        | ** ** |
| **Assets:**                                      | ** ** | ** **             | ** ** |
| Cash and cash  equivalents                       |       | $                      | 959        |   |
| Restricted cash                                  |       | 3,738                  |       |
| Fixed assets,  net                               |       | 95,016                 |       |
| Other assets                                     |       | 7,483                  |       |
| Total assets                                     |       | $                      | 107,196    |   |
|                                             |       |                   |       |
| **Liabilities  and Stockholders’ Equity:**  |       |                   |       |
| Mortgage payable                                 |       | $                      | 84,704     |   |
| Accounts payable  and accrued expenses           |       | 2,945                  |       |
| Other  liabilities                               |       | 1,149                  |       |
| Equity                                           |       | 18,398                 |       |
| Total  liabilities and stockholders’ equity |       | $                      | 107,196    |   |

 

**Statement of Operations:**

** **
| ** **                                                                             | ** ** | **For the year  ended December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                             | ** ** | **(Unaudited)**                           | ** ** |
| **Revenues**                                                                           | ** ** | ** **                                | ** ** |
| Rental income                                                                          |       | $                                         | 16,297     |   |
| Reimbursement  income                                                                  |       | 3,084                                     |       |
| Other income                                                                           |       | 28                                        |       |
| Total revenues                                                                         |       | 19,409                                    |       |
|                                                                                   |       |                                      |       |
| **Expenses**                                                                           |       |                                      |       |
| Operating  expenses                                                                    |       | 10,193                                    |       |
| Interest expense                                                                       |       | 3,661                                     |       |
| Depreciation and  amortization                                                         |       | 5,580                                     |       |
| Other expenses                                                                         |       | 181                                       |       |
| Total expenses                                                                         |       | 19,615                                    |       |
| Net income from  continuing operations before gain on sale and discontinued operations |       | (206                                      | )          |
| Gain on sale of  properties                                                            |       | 3,188                                     |       |
| Net income from  discontinued operations                                               |       |                                      |       |
| Net income                                                                             |       | $                                         | 2,982      |   |

 

**4.**              Unaudited Pro Forma Consolidated FinancialInformation (dollars in thousands)

** **

Gramercy has originatedten investments which, at the time of their closing were, individually oraggregated with an investment made with the same seller and borrower,significant to the Company’s business. On December 3, 2004 we sold 5,500,000 shares of common stock under aprivate placement exemption from the registration requirements of Section 5 ofthe Securities Act of 1933, as amended, for net proceeds of approximately $95.0million.  The pro forma condensedconsolidated interim financial information presented herein is limited toadjustments that are directly attributable to these ten investments and theprivate placement, are expected to have a continuing impact on Gramercy, andare factually supportable.  Theseadjustments assume that each of the ten investments were originated or acquiredby the Company at the time of its formation on April 12, 2004, and wereoutstanding for the period through and including December 31, 2004.  These adjustments also include the assumptionthat our initial public offering occurred at the time of our formation andcertain management, general and administrative expenses would have beenincurred as a result of these investments. Fees payable to GKK Manager LLC pursuant to our Management, Outsourcingand Asset Servicing agreements are also adjusted under the assumption thatthese arrangements would have been executed at the time of our formation.

 

43

----

 

On August 27, 2004,Gramercy originated four investments totaling $113,879.  The first two investments of $45,000 were twosubordinate participation interests (the “C Participation” and the “DParticipation”) in a loan secured by a first leasehold mortgage against twomidtown Manhattan office buildings comprising approximately 1.2 million squarefeet.  The C Participation of $25,000bears interest at a rate of LIBOR plus 3.00%, while the D Participation of$20,000, which is subordinate in right of interest and repayment of principalto the C Participation, bears interest at a rate of LIBOR plus 7.50%.   The total investment has an initial term oftwo years.

 

The remaining twoinvestments Gramercy closed on August 27, 2004 of $68,879 were two subordinateparticipation interests (the “C Note” and “D Note”), each of equal face value,in a first mortgage loan.  The loan issecured by first mortgage against 29 office properties located in New Jersey,Illinois and Michigan.  The C Note bearsinterest at a rate of LIBOR plus 5.00% while the D Note, which is subordinatein right of interest and repayment of principal to the C Note, bears interestat a rate of LIBOR plus 12.50%.  Thetotal investment has an initial term of three years.

 

OnNovember 4, 2004, Gramercy originated two investments totaling approximately$89,954.  The first investment of $47,954 represents the intermediatetranche of a subordinate participation interest in a loan secured by a firstmortgage against a portfolio of 100 owned golf courses and a security interestin the common stock of an affiliated company whose subsidiaries operate 99 ofthe aforementioned golf courses pursuant to leases as well as operate anadditional 136 golf courses pursuant to leases or management contracts withunrelated owners.  The investment has an initial maturity of 15 months andbears interest at a rate of LIBOR plus 550 basis points with a LIBOR floor of1.55%.

 

Also on November 4,2004, Gramercy closed on a $42,000 investment representing a loan secured by afirst mortgage against a 760-room, full service hotel in Atlanta, GA. This loan has an initial maturity of eight months and bears interest at a rateof LIBOR plus 525 basis points per annum with an aggregate floor interest rateof 7.50% per annum.

 

On December 29, 2004, weacquired the A and B participations in an $84,704 loan secured by a blanketfirst mortgage on 32 separate office and warehouse/distribution propertiescomprising 1.9 million rentable square feet, and one 22-acre land parcel. Theproperties are located in urban centers in Florida, Tennessee, North Carolina,and Georgia. The total investment matures in 33 months and bears interest at arate of LIBOR plus 305 basis points.

 

OnFebruary 18, 2005 Gramercy Capital Corp. closed on a $36,511 mezzanine loan inconnection with a planned conversion of a commercial property in New York Cityto residential condominiums and certain other uses.  The Company’s investment is secured by apledge of the borrower’s equity ownership interest in the to-be-convertedcommercial property.  Gramercy CapitalCorp.’s investment has in initial term of 20 months and bears interest at rateof LIBOR plus 1192 basis points.

 

OnFebruary 24, 2005, Gramercy Capital Corp. originated a $58,645 loan secured bya first mortgage on a portfolio of three office buildings located in San Jose,California. The properties comprise approximately 454,000 rentable square feet.The investment matures in 24 months, with three one-year extension options, andbears interest at a rate of LIBOR plus 300 basis points. Gramercy’s investmentis secured by a cross-collateralized and cross-defaulted lien on the threeproperties.  The initial amount fundedunder the loan commitment was approximately $27,439.

 

44

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

 
| ** **                                                                       | ** ** | **For the Period  April 12, 2004  (formation)  through  December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| **Revenues**                                                                     |       |                                                                         |       |
| Investment  income                                                               |       | $                                                                            | 22,250     |   |
| Other income                                                                     |       | 21                                                                           |       |
| Total revenues                                                                   |       | 22,271                                                                       |       |
|                                                                             |       |                                                                         |       |
| **Expenses**                                                                     |       |                                                                         |       |
| Interest expense                                                                 |       | 3,639                                                                        |       |
| Management fees                                                                  |       | 4,782                                                                        |       |
| Depreciation and  amortization                                                   |       | 284                                                                          |       |
| Marketing,  general and administrative                                           |       | 2,536                                                                        |       |
| Total expenses                                                                   |       | 11,241                                                                       |       |
|                                                                             |       |                                                                         |       |
| Income from  continuing operations                                               |       | 11,030                                                                       |       |
|                                                                             |       |                                                                         |       |
| GKK formation  costs                                                             |       | 275                                                                          |       |
|                                                                             |       |                                                                         |       |
| Net income  available to common stockholders                                     |       | $                                                                            | 10,755     |   |
|                                                                             |       |                                                                         |       |
| **Basic  earnings per share:**                                                   |       |                                                                         |       |
| Net income  available to common stockholders                                     |       | $                                                                            | 0.57       |   |
| **Diluted  earnings per share:**                                                 |       |                                                                         |       |
| Net income  available to common stockholders                                     |       | $                                                                            | 0.57       |   |
| Basic weighted  average common shares outstanding                                |       | 18,813                                                                       |       |
| Diluted weighted  average common shares and common share equivalents outstanding |       | 18,876                                                                       |       |

** **

**5.**              Debt Obligations

** **

We have three facilities with Wachovia Capital Markets, LLC or one ormore of its affiliates.  The firstfacility is a $350 million repurchase facility. This facility, which was increased to $350 million from $250 millioneffective January 3, 2005, has a term of three years with one 12-monthextension option.  The facility providesfor a pricing rate of a spread of 1.25% to 3.50% over a 30-day LIBOR and, basedon our expected investment activities, would provide for an advance rate thatvaries from 50% to 95% based upon the collateral provided under a borrowingbase calculation.  The lender will have aconsent right to the inclusion of investments in this facility, will determineperiodically the market value of the investments, and will have the right to requireadditional collateral if the estimated market value of the included investmentsdeclines.  We can utilize the $25 millionrevolving credit facility described below to fund requirements for additionalcollateral pursuant to the warehouse financing or to fund the acquisition ofassets, which could otherwise be funded under the $50 million credit facilitydescribed below.  At December 31, 2004 wehad borrowings of $238.9 million under this facility.

 

The second facility is a$50 million credit facility with a term of two years and also has one 12-monthextension option.  This facility bearsinterest at a spread over LIBOR of 225 basis points.  The advance rate on this facility varies withthe collateral being acquired.  Amountsdrawn under this facility must be repaid within 210 days.  At December 31, 2004 we had no borrowingsunder this facility.

 

The third facility is a$25 million revolving credit facility with a term of two years.  Amounts drawn under this facility forliquidity purposes bear interest at a rate equal to a spread over LIBOR of 525basis points.  Amounts drawn under thisfacility for acquisition

 

**45**

----

 

purposes bear interest ata spread over LIBOR of 225 basis points. Amounts drawn under this facility for liquidity purposes must be repaidwithin 90-days.  Amounts drawn under thisfacility generally will be secured by assets established under a borrowing basecalculation unless certain financial covenants are satisfied.  These covenants are generally morerestrictive that those set forth below. At December 31, 2004 we had no borrowings under this facility.

 

**On January 3, 2005 we closed an additional repurchase facility of $200million with Goldman Sachs Mortgage Company, an affiliate of Goldman Sachs& Co.  This facility has an initialterm of three years with one six-month extension option.  This facility provides for a pricing rate ofa spread of 1.125% to 2.75% over a 30-day LIBOR and, based on our expectedinvestment activities, provides for an advance rate that varies from 75% to 90%based upon the collateral provided under a borrowing base calculation.  As with the Wachovia facility, the lenderwill have a consent right to the inclusion of investments in this facility,will determine periodically the market value of the investments, and will havethe right to require additional collateral if the estimated market value of theincluded investments declines**.

** **

The terms of both of our repurchase facilities and our two creditfacilities include covenants that****(a)our maximum total liabilities ratio will not exceed 85%, (b) require us tomaintain minimum liquidity of at least $10 million for the first two years and$15 million thereafter, (c) our fixed charge coverage ratio shall at no time beless than 1.50 to 1.00, (d) our minimum interest coverage ratio shall at notime be less than 1.75 to 1.00, (e) require us to maintain minimum tangible networth of not less than the greater of (i) $129.75 million, or (i) plus (ii) 75%of the proceeds of our subsequent equity issuances and (f) restrict the maximumamount of our total indebtedness.  Thecovenants also restrict us from making distributions in excess of a maximum of103% of our funds from operations (as defined by the National Association ofReal Estate Investment Trusts) through July 2005 and 100% thereafter, exceptthat we may in any case pay distributions necessary to maintain REITstatus.  Under our facilities withWachovia Capital Markets LP, an event of default will be triggered if GKKManager LLC ceases to be the Manager.

 

The revolving credit facilities and the warehouse financing requirethat we pay down borrowings under these facilities as principal payments on ourloans and investments are received.

 

At December 31, 2004 $238.9 million was outstanding under the Wachoviarepurchase facility.  There were nooutstanding balances under any other revolving credit facility.  Borrowings under the Wachovia repurchase facilitywere secured by the following investments (in thousands):

 

| **Investment Type**             | ** ** | **Carrying Value** | ** ** |
|---------------------------------|------------|--------------------|------------|
| Whole loans                     |       | $                  | 113,216    |   |
| Subordinate  mortgage interests |       | 200,745            |       |
| CMBS                            |       | 10,898             |       |
|                            |       | $                  | 324,859    |   |

 

**6.    **Operating PartnershipAgreement

** **

Afterthe closing of our initial public offering, we owned all of the Class A limitedpartner interests in our Operating Partnership. The Class B limited partner interests are owned 85% by SL GreenOperating Partnership, L.P. and 15% by the Manager.  SL Green Operating Partnership, L.P.intends to own at least 70% of the Class B limited partner interests.

 

**7.     Related Party Transactions (dollars in thousands)**

** **

**ManagementAgreement**

 

In connection with ourinitial public offering, we entered into a Management Agreement with GKKManager LLC, which provides for an initial term through December 2007 with automaticone-year extension options and is subject to certain termination rights.  We pay the Manager an annual management feeequal to 1.75% of our gross stockholders equity (as defined in the ManagementAgreement).  For the period from April12, 2004 through December 31, 2004, we paid or had payable an aggregate ofapproximately $1,349 to the Manager under this agreement.

 

The Manager and SL GreenOperating Partnership, L.P., hold 15 units and 85 units, respectively, Class Blimited partner interests of

 

46

----

 

the OperatingPartnership, which represents 100% of all Class B limited partnerinterests.  SL Green OperatingPartnership, L.P. intends to own at least 70 units of the Class B limitedpartner interests. To provide an incentive for the Manager to enhance the valueof the common stock, the Manager and SL Green Operating Partnership, L.P. areentitled through their ownership of Class B limited partner interests of theOperating Partnership to an incentive return equal to 25% of the amount bywhich funds from operations (as defined in the partnership agreement of theOperating Partnership) plus certain accounting gains exceed the product of ourweighted average stockholders equity (as defined in the partnership agreementof the Operating Partnership) multiplied by 9.5% (divided by 4 to adjust forquarterly calculations).  We will recordany distributions on the Class B limited partner interests as an incentivedistribution expense in the period when earned and when payments of suchamounts have become probable and reasonably estimable in accordance with thepartnership agreement.  No amounts wereearned or accrued under this agreement as of December 31, 2004.

 

**AssetServicing Agreement and Outsourcing Agreement**

 

We are obligated to reimburse the Manager for its costs incurred underan Asset Servicing Agreement and a separate Outsourcing Agreement between theManager and SL Green Operating Partnership, L.P.  The Asset Servicing Agreement provides for anannual fee payable by us of 0.15% of the carrying value of our investments,excluding certain defined investments for which other servicing arrangementsare executed and further reduced by fees paid directly to outside servicers byGramercy.  The Outsourcing Agreement providesa fee payable by us of $1,250 per year, increasing 3% annually over the prioryear.  For the period from April 12, 2004through December 31, 2004, we paid or had payable an aggregate of $521 and $95to the Manager under the Outsourcing and Asset Servicing Agreements,respectively.

 

**During that same period we reimbursed approximately $2.4 million to SLGreen Operating Partnership, L.P. for organizational costs incurred inconnection with the formation of Gramercy, the formation of its affiliates, theinitial public offering, and to reimburse $800 in consulting fees paid by SLGreen to Messrs. Hall and Foley, our Chief Operating Officer and ChiefFinancial Officer, respectively.**

** **

**Messenger Services**

** **

**Bright Star Couriers LLC, or Bright Star, provides messenger services toGramercy.  Bright Star is owned by GaryGreen, a son of Stephen L. Green.  Theaggregate amount of fees paid by us for such services was less than $1 in 2004.**

** **

**Investments**

** **

**SL Green Operating Partnership, L.P. has invested $75,000 in a preferredequity interest that is subordinate to Gramercy’s $68,879 PW/MS investment.**

** **

**8.     Deferred Costs**

** **

Deferredcosts at December 31, 2004 consisted of the following (in thousands):

 

| ** **                     | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|
| Deferred  financing costs      |       | $        | 2,334      |   |
| Deferred  acquisition costs    |       | 215      |       |
|                           |       | 2,549    |       |
| Less accumulated  amortization |       | (316     | )          |
|                           |       | $        | 2,233      |   |

 

Deferred financing costsrelate to our three existing credit facilities with Wachovia and are amortizedon a straight-line basis to interest expense based on the remaining term of therelated facility.

 

Deferred acquisition costsconsist of fees and direct costs incurred to originate our investments.

 

**9.**              Fair Value of Financial Instruments

** **

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

 

47

----

 

Cash equivalents, accruedinterest, and accounts payable balances reasonably approximate their fairvalues due to the short maturities of these items.  Loans and commercial backed securities arecarried at amounts which reasonably approximate their fair value as determinedby our Manager.

 

Disclosure about fairvalue of financial instruments is based on pertinent information available tous at December 31, 2004.  Although we arenot aware of any factors that would significantly affect the reasonable fairvalue amounts, such amounts have not been comprehensively revalued for purposesof these financial statements since that date and current estimates of fairvalue may differ significantly from the amounts presented herein.

 

**10.**       Stockholders’ Equity

** **

**Common Stock**

 

Ourauthorized capital stock consists of 125,000,000 shares, $0.001 par value, ofwhich we have authorized the issuance of up to 100,000,000 shares of commonstock, $0.001 par value per share, and 25,000,000 shares of preferred stock,par value $0.001 per share.

 

Asof the date of our formation, April 12, 2004, we had 500,000 shares of commonstock outstanding valued at approximately $200,000.  On August 2, 2004 we completed our initialpublic offering of 12,500,000 shares of common stock resulting in net proceedsof approximately $177.6 million, which was used to fund investments andcommence our operations.  As of December31, 2004, 312,500 restricted shares had also been issued under our EquityIncentive Plan.  These shares have avesting period of three to four years and are not entitled to receivedistributions declared by the Company on its common stock until such time asthe shares have vested.

 

OnDecember 3, 2004 we sold 5,500,000 shares of common stock under a privateplacement exemption from the registration requirements of Section 5 of theSecurities Act of 1933.  A total of4,225,000 shares were sold to various institutional investors and an additional1,275,000 were sold to SL Green Operating Partnership, L.P., an affiliate of SLGreen Realty Corp., pursuant to its contractual right to choose to maintain a25% ownership interest in the outstanding shares of common stock.  After the private placement, SL GreenOperating Partnership, L.P. owned 4,710,000 shares of our common stock.  2,000,000 shares sold in the offering wereissued on December 31, 2004 and are reflected in total common sharesoutstanding at December 31, 2004.  Theremaining 3,500,000 shares were issued on January 3, 2005 and are not reflectedin total common shares outstanding at December 31, 2004.  The value of the shares settled on January 3,2005 is reflected as a stock subscription receivable for financial statementpurposes as of December 31, 2004.

 

Asof December 31, 2004, 18,812,500 shares of common stock, of which 3,500,000represented a stock subscription receivable, and no shares of preferred stockwere issued and outstanding.

 

**EquityIncentive Plan (dollars in thousands except per share data)**

 

As part of our initial public offering we institutedthe 2004 Equity Incentive Plan, or the Equity Incentive Plan.  The Equity Incentive Plan, as amended,authorizes (i) the grant of stock options that qualify as incentive stockoptions under Section 422 of the Code, or ISOs, (ii) the grant of stock optionsthat do not qualify, or NQSOs, (iii) the grant of stock options in lieu of cashdirectors’ fees and (iv) grants of shares of restricted and unrestricted commonstock.  The exercise price of stockoptions will be determined by the compensation committee, but may not be lessthan 100% of the fair market value of the shares of common stock on the date ofgrant.  At December 31, 2004,approximately 1,881,250 shares of common stock were available for issuanceunder the Equity Incentive Plan.

 

Options granted under theEquity Incentive Plan are exercisable at the fair market value on the date ofgrant and, subject to termination of employment, expire ten years from the dateof grant, are not transferable other than on death, and are exercisable inthree to four annual installments commencing one year from the date of grant.

 

48

----

 

A summary of the statusof our stock options as of December 31, 2004 are presented below:

 

| ** **                                                      | ** ** | **2004**                | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                      | ** ** | **Options Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Balance at April  12, 2004                                      |       | —                  |       | $ | — |   |
| Granted                                                         |       | 640,500                 |       | $ | 15.05 |   |
| Exercised                                                       |       | —                  |       | $ | — |   |
| Lapsed or  cancelled                                            |       | —                  |       | $ | — |   |
| Balance at end  of period                                       |       | 640,500                 |       | $ | 15.05 |   |
| Options  exercisable at end of year                             |       | —                  |       | $ | — |   |
| Weighted average  fair value of options granted during the year |       | $                       | 194        |   |   |   |
|                                                                 |            |                         |            |  |  |  |  |

 

Alloptions were granted within a price range of $15.00 to $16.30.  The remaining weighted average contractuallife of the options was 9.6 years. Compensation expense of $23 was recorded during the year ended December31, 2004 related to the issuance of stock options.

 

Asof December 31, 2004, 312,500 restricted shares had been issued under theEquity Incentive Plan.  These shares havea vesting period of three to four years and are not entitled to receivedistributions declared by Gramercy on its common stock until such time as theshares have vested.  Unvested shares maybe entitled to receive dividends at the discretion of the CompensationCommittee of Gramercy’s Board of Directors. Holders of restricted shares are prohibited from selling such sharesuntil they vest.  Compensation expense of$381 was recorded during the year ended December 31, 2004 related to theissuance of restricted shares.

 

**Earnings Per Share**

 

Earningsper share for the period from April 12, 2004 (formation) through December 31,2004 is computed as follows (in thousands):

 

| **Numerator (Income)**                       | ** ** | **For the Period  April 12, 2004  (formation)  through  December 31,  2004** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| Basic Earnings:                              |       |                                                                         |       |
| Net income  available to common stockholders |       | $                                                                            | 2,052      |   |
| Effect of  Dilutive Securities:              |       |                                                                         |       |
| Stock options                                |       | (10                                                                          | )          |
| Diluted  Earnings:                           |       |                                                                         |       |
| Net income  available to common stockholders |       | $                                                                            | 2,042      |   |
|                                         |       |                                                                         |       |
| **Denominator  (Weighted Average Shares)**   |       |                                                                         |       |
| Basic                                        |       |                                                                         |       |
| Shares available  to common stockholders     |       | 13,348                                                                       |       |
| Effect of  Diluted Securities:               |       |                                                                         |       |
| Stock options                                |       | 63                                                                           |       |
| Diluted Shares                               |       | 13,411                                                                       |       |

 

**11.  Minority Interest**

** **

**After the closing of our initial public offering, we ownedall of the Class A limited partner interests in our Operating Partnership.  The Class B limited partner interests areowned 85% by SL Green Operating Partnership, L.P. and 15% by the Manager. SLGreen Operating Partnership, L.P. intends to own at least 70% of the Class Blimited partner interests.**

 

49

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** **

**12.**       Benefit Plans

** **

**We do not maintain a defined benefit pension plan,post-retirement health and welfare plan, 401(K) plan or other benefits plans aswe do not have any employees.  Thesebenefits are provided by the Manager, a majority-owned subsidiary of SL GreenRealty Corp.**

** **

**13.**       Commitments andContingencies (dollars in thousands)

** **

Gramercy andthe Operating Partnership are not presently involved in any material litigationnor, to our knowledge, is any material litigation threatened against us or ourinvestments, other than routine litigation arising in the ordinary course ofbusiness.  Management believes the costs,if any, incurred by Gramercy and the Operating Partnership related tolitigation will not materially affect our financial position, operating resultsor liquidity.

 

As of December31, 2004, we did not have any operating leases or capital leases for whichfuture minimum lease payments would be required.

 

**14.**       Financial Instruments: Derivatives andHedging (dollars in thousands)

** **

FASB No. 133, or SFAS 133, “Accounting for Derivative Instruments andHedging Activities,” which became effective January 1, 2001, requires Gramercyto recognize all derivatives on the balance sheet at fair value.  Derivatives that are not hedges must beadjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge,changes in the fair value of the derivative will either be offset against thechange in fair value of the hedged asset, liability, or firm commitment throughearnings, or recognized in other comprehensive income until the hedged item isrecognized in earnings.  The ineffectiveportion of a derivative’s change in fair value will be immediately recognizedin earnings.  SFAS 133 may increase ordecrease reported net income and stockholders’ equity prospectively, dependingon future levels of LIBOR interest rates and other variables affecting the fairvalues of derivative instruments and hedged items, but will have no effect oncash flows, provided the contract is carried through to full term.

 

The following table summarizes the notional and fair value of ourderivative financial instrument at December 31, 2004.  All derivative instruments have beendesignated as cash flow hedges.  For theperiod from April 12, 2004 through December 31, 2004 $2 was attributable to theineffective portion of our derivative’s change in fair value and was recognizedin interest expense.  The notional valueis an indication of the extent of our involvement in this instrument at thattime, but does not represent exposure to credit, interest rate or market risks(in thousands):

 
| ** **          | ** ** | **Notional  Value** | ** ** | **Strike  Rate** | ** ** | **Effective  Date** | ** ** | **Expiration  Date** | ** ** | **Fair  Value** | ** ** |
|---------------------|------------|---------------------|------------|------------------|------------|---------------------|------------|----------------------|------------|-----------------|------------|
| Interest Rate  Swap |       | $                   | 10,729     |             | 3.36       | %                   | 8/2004     |                 | 12/2007    |            | $          | 69 |   |
| Interest Rate  Swap |       | $                   | 31,686     |             | 2.25       | %(1)                | 11/2004    | (1)                  | 4/2005     | (1)             | $          | 180 |   |

 

----

(1)          This swap has a step-upcomponent with a strike rate of 3.86%, an effective date of April 2005 and anexpiration of November 2009.  The totalfair value of the initial swap and the step-up provisions are reflected in thefair value.

 

OnDecember 31, 2004, the derivative instruments were reported as an asset attheir fair value of $249.  Offsettingadjustments are represented as deferred gains and are a component ofAccumulated Other Comprehensive Income of $282. Currently, all derivative instruments are designated as effectivehedging instruments.  Over time, therealized and unrealized gains and losses held in Accumulated OtherComprehensive Loss will be reclassified into earnings as interest expense inthe same periods in which the hedged interest payments affect earnings.

 

Gramercy ishedging exposure to variability in future interest payments on its debtfacilities.

 

50

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**15.**       Environmental Matters

** **

**Management of the Company believes it is incompliance in all material respects with applicable Federal, state and localordinances and regulations regarding environmental issues.  Management is not aware of any environmentalliability that it believes would have a materially adverse impact on theGramercy’s financial position, results of operations or cash flows.**

** **

**16.**       Segment Reporting

** **

**Statement of Financial Accounting Standard No. 131, or “SFASNo. 131,” establishes standards for the way that public entities reportinformation about operating segments in their annual financial statements.  Gramercy is a REIT focused on originating andacquiring loans and securities related to real estate and currently operate inonly one segment.**

** **

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

** **

Thefollowing table represents non-cash investing and financing activities (inthousands):

 

| ** **                            | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|
| Derivative  instruments at fair value |       | $        | 249        |   |
|                                       |            |          |            |  |

 

**18.**       Quarterly Financial Data (unaudited)

** **

Quarterly data for thequarters since our initial public offering are presented below (dollars inthousands except for per share data).

 

| **2004 Quarter Ended**                   | ** ** | **December 31** | ** ** | **September 30** | ** ** |
|------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| Total revenues                           |       | $                    | 5,679      |                  | $          | 1,472 |   |
| Income available  to common stockholders |       | $                    | 2,041      |                  | $          | 11 |   |
| Net income per  common share-Basic       |       | $                    | 0.15       |                  | $          | 0.00 |   |
| Net income per common  share-Diluted     |       | $                    | 0.15       |                  | $          | 0.00 |   |

 

**19.**       Subsequent Events (dollars in thousands)

** **

**On December 3, 2004 we sold 5,500,000 shares ofcommon stock, at a price of $17.27 per share, through a private placementexempt from registration pursuant to Section 4(2) of the Securities Act of1933.  A total of 4,225,000 shares weresold to various institutional investors and an additional 1,275,000 were soldto SL Green Operating Partnership, L.P., an affiliate of SL Green Realty Corp.,pursuant to its contractual right to choose to maintain a 25% ownershipinterest in the outstanding shares of our common stock.  After the private placement, SL GreenOperating Partnership, L.P. owned 4,710,000 shares of our common stock.  2,000,000 shares sold in the offering were issuedon December 31, 2004.  The remaining3,500,000 shares were issued on January 3, 2005.  The value of the shares settled on January 3,2005 is reflected as a stock subscription receivable for financial statementpurposes as of December 31, 2004.**

** **

**On January 3, 2005 our repurchase facility withWachovia Capital Markets LLC or one or more of its affiliates was increasedfrom $250,000 to $350,000.  All otherterms of the facility remained the same.**

** **

**Also on January 3, 2005 we closed on a repurchasefacility of $200,000 with Goldman Sachs Mortgage Company, an affiliate ofGoldman Sachs & Co.  This facilityhas an initial term of three years with one six-month extension option.  This facility provides for a pricing rate ofa spread of 1.125% to 2.75% over a 30-day LIBOR and, based on our expectedinvestment activities, provides for an advance rate that varies from 75% to 90%based upon the collateral provided under a borrowing base calculation.  As with the Wachovia facility, the lenderwill have a consent right to the inclusion of investments in this facility,will determine periodically the market value of the investments, and will havethe right to require additional collateral if the estimated market value of theincluded investments declines.**

** **

**51**

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**On February 18, 2005 Gramercy Capital Corp. closedon a $36,511 mezzanine loan in connection with a planned conversion of acommercial property in New York City to residential condominiums and certainother uses.  Gramercy’s investment issecured by a pledge of the borrower’s equity ownership interest in theto-be-converted commercial property. Gramercy’s investment has in initial term of 20 months and bearsinterest at rate of LIBOR plus 1192 basis points.**

** **

**On February 24, 2005, Gramercy Capital Corp.originated a $58,645 loan secured by a first mortgage on a portfolio of threeoffice buildings located in San Jose, California. The properties compriseapproximately 454,000 rentable square feet. The investment matures in 24months, with three one-year extension options, and bears interest at a rate ofLIBOR plus 300 basis points. Gramercy’s investment is secured by across-collateralized and cross-defaulted lien on the three properties.  The initial amount funded under the loancommitment was approximately $27,439.**

 

52

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**Gramercy Capital Corp.Schedule IV – Mortgage Loanson Real Estate****December 31, 2004**

(Dollars in thousands)

** **
| **Description**                         | ** ** | **Location**   | ** ** | **Interest  Rate****(1)** | ** ** | **Final Maturity  Date****(2)**   | ** ** | **Periodic  Payment  Terms** | ** ** | **Prior  Liens** | ** ** | **Carrying  Amount of  Loans** | ** ** | **Principal  Amount  Subject to  Delinquent  Principal or  Interest****(3)** | ** ** |
|-----------------------------------------|------------|----------------|------------|---------------------------|------------|-----------------------------------|------------|------------------------------|------------|------------------|------------|--------------------------------|------------|------------------------------------------------------------------------------|------------|
| Whole Loans:                            |       |           |       |                      |       |                              |       |                         |       |             |       |                           |       |                                                                         |       |
| Hotel                                   |       | Atlanta, GA    |       | LIBOR + 5.25%             |       | April 2005                        |       | Interest only                |       | $ —    |       | $ 42,000                  |       |                                                                         |       |
| Multi-family                            |       | New York, NY   |       | LIBOR + 3.50%             |       | November 2006                     |       | Interest only                |       | —           |       | 28,723                         |       |                                                                         |       |
| Office, warehouse  / distribution       |       | Various states |       | LIBOR + 3.05%             |       | September 2007                    |       | Interest only                |       | —           |       | 84,492                         |       |                                                                         |       |
|                                    |       |           |       |                      |       |                              |       |                         |       | —           |       | 155,215                        |       |                                                                         |       |
| Subordinate  Mortgage Interests:        |       |           |       |                      |       |                              |       |                         |       |             |       |                           |       |                                                                         |       |
| Office:                                 |       |           |       |                      |       |                              |       |                         |       |             |       |                           |       |                                                                         |       |
| C Note                                  |       | Various states |       | LIBOR + 5.00%             |       | July 2007                         |       | Interest only                |       | 275,405          |       | 34,286                         |       |                                                                         |       |
| D Note                                  |       | Various states |       | LIBOR + 12.50%            |       | July 2007                         |       | Interest only                |       | 309,900          |       | 32,875                         |       |                                                                         |       |
|                                    |       |           |       |                      |       |                              |       |                         |       | 585,305          |       | 67,161                         |       |                                                                         |       |
| Office:                                 |       |           |       |                      |       |                              |       |                         |       |             |       |                           |       |                                                                         |       |
| C Note                                  |       | New York, NY   |       | LIBOR + 3.00%             |       | July 2006                         |       | Interest only                |       | 190,000          |       | 24,728                         |       |                                                                         |       |
| D Note                                  |       | New York, NY   |       | LIBOR + 7.50%             |       | July 2006                         |       | Interest only                |       | 215,000          |       | 19,782                         |       |                                                                         |       |
|                                    |       |           |       |                      |       |                              |       |                         |       | 405,000          |       | 44,510                         |       |                                                                         |       |
| Office:                                 |       |           |       |                      |       |                              |       |                         |       |             |       |                           |       |                                                                         |       |
| C Note                                  |       | Washington, DC |       | LIBOR + 2.75%             |       | November 2006                     |       | Interest only                |       | 85,000           |       | 17,402                         |       |                                                                         |       |
| D Note                                  |       | Washington, DC |       | LIBOR + 7.25%             |       | November 2006                     |       | Interest only                |       | 102,500          |       | 17,402                         |       |                                                                         |       |
|                                    |       |           |       |                      |       |                              |       |                         |       | 187,500          |       | 34,804                         |       |                                                                         |       |
| Office:                                 |       |           |       |                      |       |                              |       |                         |       |             |       |                           |       |                                                                         |       |
| C Note                                  |       | New York, NY   |       | 5.41% (4)                 |       | November 2009                     |       | Interest only                |       | 255,500          |       | 31,215                         |       |                                                                         |       |
|                                    |       |           |       |                      |       |                              |       |                         |       |             |       |                           |       |                                                                         |       |
| Leisure  Interests:                     |       |           |       |                      |       |                              |       |                         |       |             |       |                           |       |                                                                         |       |
| B-2 tranche of  B-Note                  |       | Various states |       | LIBOR + 5.50%             |       | February 2006                     |       | Interest only                |       | 467,000          |       | 47,954                         |       |                                                                         |       |
|                                    |       |           |       |                      |       |                              |       |                         |       |             |       |                           |       |                                                                         |       |
| Subordinate  mortgage interests < 3% |       | Various states |       | LIBOR + 6.30-7.00%        |       | August 2006 – February  2007 |       | Interest only                |       | 118,300          |       | 14,858                         |       |                                                                         |       |
|                                    |       |           |       |                      |       |                              |       |                         |       | 2,018,605        |       | 240,502                        |       |                                                                         |       |
|                                    |       |           |       |                      |       |                              |       |                         |       |             |       |                           |       |                                                                         |       |
|                                    |       |           |       |                      |       |                              |       |                         |       | $ 2,018,605 |       | $ 395,717                 |       |                                                                         |       |

 

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(1) All variable-rate loans are basedon 30-day LIBOR and reprice monthly.

(2)Reflects the initial maturity of the investment and does not consider anyoptions to extend that are at the discretion of the borrower.

(3)No mortgage loans are delinquent with respect to principal or interest.

(4)The effective yield of the investment is 8.29% taking into consideration ourpurchase discount.

 

53

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**ITEM      9.     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM      9A.  CONTROLSAND PROCEDURES**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure basedclosely on the definition of “disclosure controls and procedures” in Rule13a-15(e).  In designing and evaluatingthe disclosure controls and procedures, management recognized that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.  Also, we have investments in certainunconsolidated entities.  As we do notcontrol these entities, our disclosure controls and procedures with respect tosuch entities are necessarily substantially more limited than those we maintainwith respect to our consolidated subsidiaries.

 

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

 

There have been nosignificant changes in our internal controls that could significantly affectthe internal controls subsequent to the date we completed our evaluation.

 

54

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#### **PARTIII**

#### ** **

**ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information set forthunder the captions “Election of Directors” and “Principal and ManagementStockholders – Compliance with Section 16(a) of the Securities ExchangeAct of 1934” and the information regarding a code of ethics in our DefinitiveProxy Statement for our 2005 Annual Meeting of Stockholders, to be filedpursuant to Regulation 14A under the Securities and Exchange Act of 1934, asamended, prior to April 30, 2005 (the “2005 Proxy Statement”), isincorporated herein by reference.

 

**ITEM 11.       EXECUTIVE AND DIRECTOR COMPENSATION**

 

Theinformation set forth under the captions “Election of Directors – DirectorCompensation” and “Executive Compensation” in the 2005 Proxy Statement isincorporated herein by reference.

 

**ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The information set forthunder the captions “Principal and Management Stockholders” and “EquityCompensation Plan Information” in the 2005 Proxy Statement is incorporatedherein by reference.

 

**ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information set forthunder the caption “Certain Relationships and Related Transactions” in the 2005Proxy Statement is incorporated herein by reference.

 

**ITEM 14.       PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

The information regardingprincipal accounting fees and services and the audit committee’s pre-approvalpolicies and procedures required by this Item 14 is incorporated herein byreference to the 2005 Proxy Statement.

 

55

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## **PART IV**

 

**ITEM 15.       EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ONFORM 8-K**

 

(a)(1) ConsolidatedFinancial Statements

 
| **GRAMERCY  CAPITAL CORP.**                                                                                                                                                           |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                  |   |
| Report  of Independent Registered Public Accounting Firm                                                                                                                              |   |
| Condensed Consolidated  Balance Sheet as of December 31, 2004 and April 12, 2004                                                                                                 |   |
| Condensed  Consolidated Statement of Income for the year ended December 31, 2004                                                                                                 |   |
| Condensed  Consolidated Statement of Stockholders’ Equity for the year ended  December 31, 2004                                                                             |   |
| Condensed  Consolidated Statement of Cash Flows for the year ended December 31,  2004                                                                                            |   |
| Notes to  Consolidated Financial Statements                                                                                                                                           |   |
|                                                                                                                                                                                  |   |
| (a)(2) Financial  Statement Schedules                                                                                                                                                 |   |
|                                                                                                                                                                                  |   |
| Schedule IV-Mortgage  Loans on Real Estate as of December 31, 2004                                                                                                          |   |
|                                                                                                                                                                                  |   |
| 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 onfollowing page

 

56

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**INDEX TOEXHIBITS**

 

3.1  Articles of Incorporation of the Companyincorporated by reference to the Company’s Registration Statement on Form S-11(No. 333-114673), declared effective by the Commission on July 27, 2004.

 

3.2  Bylaws of the Companyincorporated by reference to the Company’s Registration Statement on Form S-11(No. 333-114673), declared effective by the Commission on July 27, 2004.

 

4.1  Specimen Common StockCertificate incorporated by reference to the Company’s Registration Statementon Form S-11 (No. 333-114673), declared effective by the Commission on July 27,2004.

 

10.1  Form of ManagementAgreement by and between the Company. and GKK Manager LLC, incorporated byreference to the Company’s Registration Statement on Form S-11 (No.333-114673), declared effective by the Commission on July 27, 2004.

 

10.2  Form of OriginationAgreement by and between the Company and SL Green Realty Corp., incorporated byreference to the Company’s Registration Statement on Form S-11 (No.333-114673), declared effective by the Commission on July 27, 2004.

 

10.3  Form of Agreement ofLimited Partnership of GKK Capital LP, incorporated by reference to the Company’sRegistration Statement on Form S-11 (No. 333-114673), declared effective by theCommission on July 27, 2004.

 

10.4  Form of Asset ServicingAgreement by and between GKK Manager LLC and SLG Gramercy Services LLC,incorporated by reference to the Company’s Registration Statement on Form S-11(No. 333-114673), declared effective by the Commission on July 27, 2004.

 

10.5  Form of Outsource Agreementby and between GKK Manager LLC and SLG Operating Partnership, L.P. incorporatedby reference to the Company’s Registration Statement on Form S-11 (No.333-114673), declared effective by the Commission on July 27, 2004.

 

10.6  Form of 2004 EquityIncentive Plan, incorporated by reference to the Company’s RegistrationStatement on Form S-11 (No. 333-114673), declared effective by the Commissionon July 27, 2004.

 

10.7  Form of Master RepurchaseAgreement, incorporated by reference to the Company’s Registration Statement onForm S-11 (No. 333-114673), declared effective by the Commission on July 27,2004.

 

10.8  Form of Acquisition RepurchaseAgreement, incorporated by reference to the Company’s Registration Statement onForm S-11 (No. 333-114673), declared effective by the Commission on July 27,2004.

 

10.9  Form of Credit Agreement,incorporated by reference to the Company’s Registration Statement on Form S-11(No. 333-114673), declared effective by the Commission on July 27, 2004.

 

10.10         Form of Master RepurchaseAgreement dated as of January 3, 2005

 

10.11         Annex to the Form ofMaster Repurchase Agreement dated as of January 3, 2005

 

10.12  Form of EmploymentAgreement by and between Hugh Hall and GKK Manager LLC.

 

10.13  Form of EmploymentAgreement by and between Robert R. Foley and GKK Manager LLC.

 

10.14  Form of Registration Rights Agreement, by andbetween 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 Commission on December 9, 2004.

 

**10.15  Form of Amendedand Restated Registration Rights Agreement, by and between SL Green RealtyCorp. and the Company.**

** **

10.16  Form of PurchaseAgreement, by and among the Company and various investors in the Company’scommon stock, incorporated by reference to the Company’s Form 8-K, datedDecember 3, 2004 filed with the Commission on December 3, 2004.

 

57

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21.1  Subsidiaries of theRegistrant.

 

23.1.         Consent of Ernst &Young

 

24.                  Power ofAttorney (included on signature page)

 

31.1  Certification by the ChiefExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002filed herewith.

 

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

 

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

 

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

 

58

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                        | GRAMERCY CAPITAL CORP.   |
|-----------------------------|--------------------------|
|                        |                     |
| Dated: March 17,  2005 | By:                      | /s/ Robert R. Foley |   |
|                        | Robert  R. Foley         |
|                        | Chief  Financial Officer |

 

KNOWALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors ofGramercy Capital Corp. hereby severally constitute Marc Holliday and Robert R.Foley, and each of them singly, our true and lawful attorneys and with fullpower to them, and each of them singly, to sign for us and in our names in thecapacities indicated below, the Annual Report on Form 10-K filed herewith andany and all amendments to said Annual Report on Form 10-K, and generally to doall such things in our names and in our capacities as officers and directors toenable SL Green Realty Corp. to comply with the provisions of the SecuritiesExchange Act of 1934, and all requirements of the Securities and ExchangeCommission, hereby ratifying and confirming our signatures as they may besigned by our said attorneys, or any of them, to said Annual Report on Form10-K and any and all amendments thereto.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated:

 
| **Signatures**         | ** **    | **Title**                             | ** **     | **Date** | ** ** |
|------------------------|---------------|---------------------------------------|----------------|----------|------------|
|                   |          |                                  |
| /s/ Stephen L. Green   |          | Chairman of the Board  of Directors   | March 17, 2005 |
| Stephen L. Green       |          |                                  |
|                   |          |                                  |
| /s/ Marc Holliday      |          | Chief Executive  Officer, President   | March 17, 2005 |
| Marc Holliday          | and  Director |                                  |
|                   |          |                                  |
| /s/ Robert R. Foley    |          | Chief Financial Officer               | March 17, 2005 |
| Robert R. Foley        |          |                                  |
|                   |          |                                  |
| /s/ Hugh F. Hall       |          | Chief Operating Officer  and Director | March 17, 2005 |
| Hugh Hall              |          |                                  |
|                   |          |                                  |
| /s/ Allan J. Baum      |          | Director                              | March 17, 2005 |
| Allan J. Baum          |          |                                  |
|                   |          |                                  |
| /s/ Jeffrey E. Kelter  |          | Director                              | March 17, 2005 |
| Jeffrey E. Kelter      |          |                                  |
|                   |          |                                  |
| /s/ Paul J. Konigsberg |          | Director                              | March 17, 2005 |
| Paul J. Konigsberg     |          |                                  |
|                   |          |                                  |
| /s/ Charles S. Laven   |          | Director                              | March 17, 2005 |
| Charles S. Laven       |          |                                  |
|                        |               |                                       |                |          |            |  |  |  |

 

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