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EX-31.2 - EXHIBIT 31.2 - Gramercy Property Trust Inc.v236747_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Gramercy Property Trust Inc.v236747_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - Gramercy Property Trust Inc.v236747_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Gramercy Property Trust Inc.v236747_ex32-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
           

 
FORM 10-Q
                  

       
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                              .
 
Commission File Number: 001-32248
      

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

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

420 Lexington Avenue, New York, New York 10170
(Address of principal executive offices) (Zip Code)

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

                               
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  ¨     NO  x
              
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  ¨     NO  ¨
                  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
            
Large accelerated filer  ¨
 
Accelerated filer  x
 
Non-accelerated filer  ¨
(Do not check if a smaller
reporting company)
 
Smaller reporting company  ¨
                
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ¨     NO  x
                      
The number of shares outstanding of the registrant's common stock, $0.001 par value, was 50,517,365 as of October 7, 2011.

 
 

 
 
GRAMERCY CAPITAL CORP.
INDEX

       
PAGE
PART I.
 
FINANCIAL INFORMATION
 
3
ITEM 1.
 
FINANCIAL STATEMENTS
 
3
   
Condensed Consolidated Balance Sheets as of  March 31, 2011 and December 31, 2010 (unaudited)
 
3
   
Condensed Consolidated Statements of Operations for the three months ended  March 31, 2011 and 2010 (unaudited)
 
5
   
Condensed Consolidated Statement of Stockholders’ Equity and Non-controlling Interests for the three months ended March 31, 2011 (unaudited)
 
6
   
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)
 
7
   
Notes to Condensed Consolidated Financial Statements (unaudited)
 
8
ITEM 2.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
47
         
ITEM 3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
65
ITEM 4.
 
CONTROLS AND PROCEDURES
 
67
PART II.
 
OTHER INFORMATION
 
68
ITEM 1.
 
LEGAL PROCEEDINGS
 
68
ITEM 1A.
 
RISK FACTORS
 
68
ITEM 2.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
68
ITEM 3.
 
DEFAULTS UPON SENIOR SECURITIES
 
68
ITEM 4.
 
(REMOVED AND RESERVED)
 
68
ITEM 5.
 
OTHER INFORMATION
 
68
ITEM 6.
 
EXHIBITS
 
69
SIGNATURES
 
70
 
 
2

 
 
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
 
Gramercy Capital Corp.
Condensed Consolidated Balance Sheets
(Unaudited, amounts in thousands, except share and per share data)

   
March 31,
   
December 31,
 
   
2011
   
2010
 
Assets:
           
Real estate investments, at cost:
           
Land
  $ 608,195     $ 608,455  
Building and improvements
    1,818,923       1,818,012  
Other real estate investments
    20,318       20,318  
Less: accumulated depreciation
    (179,741 )     (168,333 )
Total real estate investments, net
    2,267,695       2,278,452  
                 
Cash and cash equivalents
    212,242       220,777  
Restricted cash
    126,593       128,806  
Pledged government securities, net
    91,688       92,918  
Loans and other lending investments, net
    333       1,512  
Investment in joint ventures
    2,871       3,650  
Tenant and other receivables, net
    45,712       44,788  
Derivative instruments, at fair value
    1       4  
Acquired lease assets, net of accumulated amortization of $155,948 and $147,366
    301,623       310,207  
Deferred costs, net of accumulated amortization of $33,168 and $29,929
    8,742       8,156  
Other assets
    18,131       15,210  
Subtotal
    3,075,631       3,104,480  
                 
Assets of Consolidated Variable Interest Entities ("VIEs"):
               
Real estate investments, at cost:
               
Land
    26,486       26,486  
Building and improvements
    19,142       18,970  
Less:  accumulated depreciation
    (333 )     (208 )
Total real estate investments directly owned
    45,295       45,248  
                 
Cash and cash equivalents
    68       68  
Restricted cash
    176,852       116,591  
Loans and other lending investments, net
    1,011,737       1,122,016  
Commercial mortgage-backed securities - available for sale
    1,042,546       31,889  
Commercial mortgage-backed securities - held to maturity
    -       973,278  
Assets held for sale, net
    9,918       28,660  
Derivative instruments, at fair value
    1,603       1,632  
Accrued interest
    29,218       29,784  
Acquired lease assets, net of accumulated amortization of $428 and $153
    5,271       5,546  
Deferred costs, net of accumulated amortization of $27,216 and $25,760
    13,254       14,744  
Other assets
    18,639       18,057  
Subtotal
    2,354,401       2,387,513  
                 
Total assets
  $ 5,430,032     $ 5,491,993  
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
3

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

   
March 31,
   
December 31,
 
   
2011
   
2010
 
Liabilities and Equity:
           
Liabilities:
           
Mortgage notes payable
  $ 1,633,785     $ 1,640,671  
Mezzanine notes payable
    549,713       549,713  
Total secured and other debt
    2,183,498       2,190,384  
                 
Accounts payable and accrued expenses
    50,305       57,688  
Dividends payable
    17,905       16,114  
Accrued interest payable
    9,099       6,934  
Deferred revenue
    150,037       152,601  
Below market lease liabilities, net of accumulated amortization of $240,905 and $223,256
    673,942       691,592  
Leasehold interests, net of accumulated amortization of $8,533 and $7,770
    16,294       17,027  
Other liabilities
    244       734  
Subtotal
    3,101,324       3,133,074  
                 
Non-Recourse Liabilities of Consolidated VIEs:
               
Collateralized debt obligations
    2,631,807       2,682,321  
Total secured and other debt
    2,631,807       2,682,321  
                 
Accounts payable and accrued expenses
    3,808       1,438  
Accrued interest payable
    2,988       4,818  
Deferred revenue
    187       188  
Below market lease liabilities, net of accumulated amortization of $100 and $26
    1,482       1,556  
Liabilities related to assets held for sale
    35       531  
Derivative instruments, at fair value
    143,348       157,932  
Other Liabilities
    2,708       3,128  
Subtotal
    2,786,363       2,851,912  
                 
Total liabilities
    5,887,687       5,984,986  
                 
Commitments and contingencies
    -       -  
                 
Equity:
               
Common stock, par value $0.001, 100,000,000 shares authorized, 49,992,705 and 49,984,559 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively.
    50       50  
Series A cumulative redeemable preferred stock, par value $0.001, liquidation preference $88,146, 4,600,000 shares authorized, 3,525,822 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively.
    85,235       85,235  
Additional paid-in-capital
    1,078,479       1,078,198  
Accumulated other comprehensive loss
    (130,687 )     (160,785 )
Accumulated deficit
    (1,491,635 )     (1,496,594 )
Total Gramercy Capital Corp. stockholders' equity
    (458,558 )     (493,896 )
Non-controlling interest
    903       903  
Total equity
    (457,655 )     (492,993 )
Total liabilities and equity
  $ 5,430,032     $ 5,491,993  
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 
4

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

   
Three months ended March 31,
 
   
2011
   
2010
 
Revenues
           
Rental revenue
  $ 75,601     $ 78,039  
Investment income
    40,511       44,251  
Operating expense reimbursements
    28,281       28,888  
Other income
    4,321       1,868  
Total revenues
    148,714       153,046  
                 
Expenses
               
Property operating expenses
               
Real estate taxes
    10,358       10,528  
Utilities
    10,270       10,210  
Ground rent and leasehold obligations
    4,827       4,818  
Property and leasehold impairments
    30       -  
Direct billable expenses
    1,055       1,314  
Other property operating expenses
    24,222       19,297  
Total property operating expenses
    50,762       46,167  
Interest expense
    50,589       50,269  
Depreciation and amortization
    18,898       27,689  
Management, general and administrative
    6,417       7,486  
Impairment on commercial mortgage backed securities
    -       12,326  
Provision for loan losses
    17,500       41,160  
Total expenses
    144,166       185,097  
                 
Income (loss)  from continuing operations before equity in net loss from unconsolidated joint ventures, provisions for taxes and non-controlling interest
    4,548       (32,051 )
                 
Equity in net loss of unconsolidated joint ventures
    (687 )     (1,670 )
Income (loss) from continuing operations before provision for taxes, gain on extinguishment of debt and discontinued operations
    3,861       (33,721 )
                 
Gain on extinguishment of debt
    3,656       7,740  
Provision for taxes
    (70 )     (38 )
Net income (loss) from continuing operations
    7,447       (26,019 )
Net income (loss) from discontinued operations
    (1,635 )     2,590  
Net gains from disposals
    937       1,041  
Net income (loss) from discontinued operations
    (698 )     3,631  
Net income (loss)
    6,749       (22,388 )
Net income attributable to non-controlling interests
    -       (44 )
Net income (loss) attributable to Gramercy Capital Corp.
    6,749       (22,432 )
Accrued preferred stock dividends
    (1,790 )     (2,336 )
Net income (loss) available to common stockholders
  $ 4,959     $ (24,768 )
                 
Basic earnings per share:
               
Net income (loss) from continuing operations, net of non-controlling interest and after preferred dividends
  $ 0.11     $ (0.56 )
Net income (loss) from discontinued operations
    (0.01 )     0.06  
Net income (loss) available to common stockholders
  $ 0.10     $ (0.50 )
                 
Diluted earnings per share:
               
Net income (loss) from continuing operations, net of non-controlling interest and after preferred dividends
  $ 0.11     $ (0.56 )
Net income (loss) from discontinued operations
    (0.01 )     0.06  
Net income (loss) available to common stockholders
  $ 0.10     $ (0.50 )
Basic weighted average common shares outstanding
    49,992,132       49,896,278  
Diluted weighted average common shares and common share equivalents outstanding
    50,718,574       49,896,278  

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 
5

 
 
Gramercy Capital Corp.
Condensed Consolidated Statement of Stockholders’ Equity and Non-controlling Interests
(Unaudited, amounts in thousands, except share data)

   
Common Stock
   
Series A
   
Additional Paid-
   
Accumulated Other
Comprehensive Income
   
Accumulated
   
Total Gramercy
   
Non-controlling
         
Comprehensive
 
   
Shares
   
Par Value
   
Preferred Stock
   
In-Capital
   
(Loss)
   
Deficit
   
Capital Corp.
   
Interest
   
Total
   
Income (Loss)
 
Balance at December 31, 2010
    49,984,559     $ 50     $ 85,235     $ 1,078,198     $ (160,785 )   $ (1,496,594 )   $ (493,896 )   $ 903     $ (492,993 )      
Net income (loss)
    -       -       -       -       -       6,749       6,749       -       6,749     $ 6,749  
Change in net unrealized loss on derivative instruments
    -       -       -       -       14,842       -       14,842       -       14,842       14,842  
Reclassification adjustments of net unrealized gain on securities previously classified as held-to-maturity, net
    -       -       -       -       15,256       -       15,256       -       15,256       15,256  
Issuance of stock - stock purchase plan
    152       -       -       -       -       -       -       -       -       -  
Stock based compensation - fair value
    7,994       -       -       281       -       -       281       -       281       -  
Dividends accrued on preferred stock
    -       -       -       -       -       (1,790 )     (1,790 )     -       (1,790 )     -  
Balance at March 31, 2011
    49,992,705     $ 50     $ 85,235     $ 1,078,479     $ (130,687 )   $ (1,491,635 )   $ (458,558 )   $ 903     $ (457,655 )   $ 36,847   
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 
6

 

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

   
Three months ended March 31,
 
   
2011
   
2010
 
Operating Activities:
           
Net income (loss)
  $ 6,749     $ (22,388 )
Adjustments to net cash provided by operating activities:
         
Depreciation and amortization
    20,409       29,407  
Amortization of leasehold interests
    (763 )     (685 )
Amortization of acquired leases to rental revenue
    (15,886 )     (16,851 )
Amortization of deferred costs
    2,954       2,027  
Amortization of discount and other fees
    (8,433 )     (5,876 )
Payment of capitalized tenant leasing costs
    (648 )     (274 )
Straight-line rent adjustment
    (775 )     7,258  
Non-cash impairment charges
    364       12,583  
Net gain on sale of properties and lease terminations
    (937 )     (1,041 )
Equity in net (income) loss of joint ventures
    687       (1,116 )
Gain on extinguishment of debt
    (3,656 )     (7,740 )
Amortization of stock compensation
    281       278  
Provision for loan losses
    17,500       41,160  
Changes in operating assets and liabilities:
               
Restricted cash
    2,389       1,720  
Tenant and other receivables
    1,350       (6,372 )
Accrued interest
    167       (3,093 )
Other assets
    (3,070 )     (7,066 )
Accounts payable, accrued expenses and other liabilities
    (5,441 )     (5,570 )
Deferred revenue
    (3,676 )     4,039  
Net cash provided by operating activities
    9,565       20,400  
                 
Investing Activities:
               
Capital expenditures and leasehold costs
    (1,023 )     (5,312 )
Deferred investment costs
    1,592       -  
Proceeds from sale of real estate
    18,268       16,272  
New investment originations and funded commitments
    (24,673 )     (3,182 )
Principal collections on investments
    119,886       57,404  
Investment in commercial mortgage-backed securities
    (17,926 )     (16,764 )
Investment in joint venture
    93       14  
Change in accrued interest income
    (18 )     (41 )
Sale of marketable investments
    1,790       1,554  
Change in restricted cash from investing activities
    919       (1,912 )
Net cash provided by investing activities
    98,908       48,033  
                 
Financing Activities:
               
Repayment of unsecured credit facility
    -       (85 )
Repayment of mortgage notes
    (5,955 )     (5,880 )
Purchase of interest rate caps
    -       (2,442 )
Repayments of collateralized debt obligations
    (40,451 )     (1,793 )
Repurchase of collateralized debt obligations
    (6,721 )     (11,260 )
Deferred financing costs and other liabilities
    (3,700 )     (6,330 )
Change in restricted cash from financing activities
    (60,181 )     (51,542 )
Net cash used in financing activities
    (117,008 )     (79,332 )
Net decrease in cash and cash equivalents
    (8,535 )     (10,899 )
Cash and cash equivalents at beginning of period
    220,845       138,345  
Cash and cash equivalents at end of period
  $ 212,310     $ 127,446  
                 
Non-cash activity:                
Defered gain and other non-cash activity related to derivatives
  $ 14,842     $ -  
                 
Supplemental cash flow disclosures:
               
Interest paid
  $ 46,581     $ 58,458  
Income taxes paid
  $ 898     $ 123  

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
7

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011
 
1. Business and Organization
 
Gramercy Capital Corp. (the “Company” or “Gramercy”) is a self-managed, integrated, commercial real estate finance and property management and investment company. The Company was formed in April 2004 and commenced operations upon the completion of its initial public offering in August 2004. The Company’s commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination, acquisition and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. The Company’s property management and investment business, which operates under the name Gramercy Realty, historically focused on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. These institutions are, for the most part, deposit-taking commercial banks, thrifts and credit unions, which the Company generally refers to as “banks.” The Company’s portfolio of wholly-owned and jointly-owned bank branches and office buildings is leased to large banks such as Bank of America, N.A., or Bank of America, Wells Fargo Bank National Association (formerly Wachovia Bank, National Association), or Wells Fargo Bank, Regions Financial Corporation, or Regions Financial and Citizens Financial Group, Inc., or Citizens Financial, and to mid-sized and community banks. Neither Gramercy Finance nor Gramercy Realty is a separate legal entity but are divisions of the Company through which the Company’s commercial real estate finance and property investment businesses are conducted. At March 31, 2011 and December 31, 2010, SL Green Operating Partnership, L.P., or SL Green OP, a wholly-owned subsidiary of SL Green Realty Corp (NYSE: SLG), or SL Green, owned approximately 10.7% of the outstanding shares of the Company’s common stock.
 
Substantially all of the Company’s operations are conducted through GKK Capital LP, a Delaware limited partnership, or the Operating Partnership. The Company, as the sole general partner, has responsibility and discretion in the management and control of the Operating Partnership. Accordingly, the Company consolidates the accounts of the Operating Partnership. The Company qualified as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, commencing with its taxable year ended December 31, 2004 and the Company expects to qualify for the current fiscal year. To maintain the Company’s qualification as a REIT, the Company plans to distribute at least 90% of taxable income, if any. The Operating Partnership conducts its finance business primarily through the use of two private REITs, Gramercy Investment Trust and Gramercy Investment Trust II and its commercial real estate investment and property management business through various wholly owned entities.

 In March 2010, the Company amended its $240,523 mortgage loan with Goldman Sachs Mortgage Company, or GSMC, Citicorp North America, Inc., or Citicorp, and SL Green, or the Goldman Mortgage Loan, and its $549,713 senior and junior mezzanine loans with KBS Real Estate Investment Trust, Inc., or KBS, GSMC, Citicorp and SL Green, or the Goldman Mezzanine Loans, to extend the maturity date to March 11, 2011. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the Company entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions fail. On May 9, 2011, the Company announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.

Notwithstanding the maturity and non-repayment of the loans, the Company maintained active communications with the lenders and in September 2011, the Company entered into a collateral transfer and settlement agreement, or the Settlement Agreement, for an orderly transition of substantially all of Gramercy Realty’s assets to Gramercy Realty’s senior mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan, and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of Gramercy Realty’s assets on behalf of such mezzanine lenders for a fixed fee plus incentive fees. In July 2011, the Company’s Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure.

 
8

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

Subsequent to the execution of the Settlement Agreement, the business of Gramercy Realty will change from being primarily an owner of commercial properties to being primarily a third party manager of commercial properties. The scale of Gramercy Realty’s revenues will substantially decline as a substantial portion of net revenues from property operations will be replaced with fee revenues of a substantially smaller scale. Additionally, as assets are transferred to the mezzanine lenders, the Company’s total assets and liabilities are expected to decline substantially. The transition of Gramercy Realty’s business and the effects of these changes on the Company’s Condensed Consolidated Financial Statements are expected to be completed by December 31, 2011.
 
As of March 31, 2011, Gramercy Finance held loans and other lending investments and CMBS of $2,054,616, net of unamortized fees, discounts, unfunded commitments, reserves for loan losses and other adjustments, with an average spread to 30-day LIBOR of 408 basis points for its floating rate investments, and an average yield of approximately 7.65% for its fixed rate investments. As of March 31, 2011, Gramercy Finance also held interests in one credit tenant net lease investment, or CTL investment, and seven interests in real estate acquired through foreclosures.
 
As of March 31, 2011, Gramercy Realty’s portfolio consisted of 621 bank branches, 321 office buildings and two land parcels, of which 52 bank branches were owned through an unconsolidated joint venture. Gramercy Realty’s consolidated properties aggregated approximately 25,289,626 rentable square feet and its unconsolidated properties aggregated approximately 237,172 rentable square feet. As of March 31, 2011, the occupancy of Gramercy Realty’s consolidated properties was 82.4% and the occupancy for its unconsolidated properties was 100.0%. As of March 31, 2011, the weighted average remaining term of Gramercy Realty’s leases was 8.3 years and approximately 70.4% of its base revenue was derived from net leases. Gramercy Realty’s two largest tenants are Bank of America, N.A., or Bank of America, and Wells Fargo Bank National Association (formerly Wachovia Bank National Association), or Wells Fargo Bank, and as of March 31, 2011, they represented approximately 40.6% and 15.4%, respectively, of the rental income of the Company’s portfolio and occupied approximately 42.7% and 16.6%, respectively, of Gramercy Realty’s total rentable square feet.
 
The Company relies on the credit and equity markets to finance and grow its business.  Despite signs of improvement in 2010 and to date in 2011, market conditions remained difficult for the Company with limited, if any, availability of new debt or equity capital. The Company’s stock price remained low and the Company currently has limited, if any,  access to the public or private equity capital markets. In this environment, the Company has sought to raise capital or maintain liquidity through other means, such as modifying debt arrangements, selling assets and aggressively managing our loan portfolio to encourage repayments as well as reducing capital and overhead expenses, and as a result, the Company has engaged in limited new investment activity, other than reinvestment of available restricted cash within our CDOs. Nevertheless, the Company remains committed to identifying and pursuing strategies and transactions that could preserve or improve cash flows to the Company from its CDOs, increase the Company’s net asset value per share of common stock, improve the Company’s future access to capital or otherwise potentially create value for the Company’s stockholders.
   
Basis of Quarterly Presentation

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, it does not include all of the information and footnotes required by accounting principles generally accepted in the United States, or GAAP, for complete financial statements.  In management’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.  The 2011 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  These financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The Condensed Consolidated Balance Sheet at December 31, 2010 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements. 

 
9

 

 Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

2. Significant Accounting Policies
 
Reclassification

For purposes of comparability, certain prior-year amounts have been reclassified to conform to the current-year presentation for assets classified as discontinued operations.

 Principles of Consolidation
 
The Condensed Consolidated Financial Statements include the Company’s accounts and those of the Company’s subsidiaries, which are wholly-owned or controlled by the Company, or entities which are variable interest entities, or VIEs, in which the Company is the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. The Company has evaluated its investments for potential classification as variable interests by evaluating the sufficiency of entity’s equity investment at risk to absorb losses, and determined that the Company is the primary beneficiary for three VIEs and has included the accounts of these entities in the Condensed Consolidated Financial Statements.  All significant intercompany balances and transactions have been eliminated.  Entities which the Company does not control and entities which are VIEs, but where the Company is not the primary beneficiary, are accounted for as investments in joint ventures or as investments in CMBS.
 
Variable Interest Entities
 
The following is a summary of the Company’s involvement with VIEs as of March 31, 2011:

   
Company
carrying
value-assets
   
Company
carrying value-
liabilities
   
Face value of
assets held by
the VIE
   
Face value of
liabilities issued
by the VIE
 
Consolidated VIEs
                       
CDOs
  $ 2,354,401     $ 2,786,363     $ 3,040,878     $ 3,024,825  
Unconsolidated VIEs
                               
CMBS-controlling class
  $ -  (1)   $ -     $ 633,654     $ 633,654  
 
(1)   CMBS are assets held by the CDOs classified on the Condensed Consolidated Balance Sheet as an Asset of Consolidated VIEs.
     
Consolidated VIEs
     
As of March 31, 2011, the Condensed Consolidated Balance Sheet includes $2,354,401 of assets and $2,786,363 of liabilities related to three consolidated VIEs. Due to the non-recourse nature of these VIEs, and other factors discussed below, the Company’s net exposure to loss from investments in these entities is limited to its beneficial interests in these VIEs.
 
 Collateralized Debt Obligations
 
The Company currently consolidates three collateralized debt obligations, or CDOs, which are VIEs.  These CDOs invest in commercial real estate debt instruments, the majority of which the Company originated within the CDOs, and are financed by the debt and equity issued. The Company is named as collateral manager of all three CDOs. As a result of consolidation, the Company’s subordinate debt and equity ownership interests in these CDOs have been eliminated, and the Condensed Consolidated Balance Sheets reflect both the assets held and debt issued by these CDOs to third parties. Similarly, the operating results and cash flows include the gross amounts related to the assets and liabilities of the CDOs, as opposed to the Company’s net economic interests in these CDOs.  Refer to Note 6 for further discussion of fees earned related to the management of the CDOs.

 
10

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

The Company’s interest in the assets held by these CDOs is restricted by the structural provisions of these entities, and the recovery of these assets will be limited by the CDOs’ distribution provisions, which are subject to change due to non-compliance with covenants, which are described further in Note 6. The liabilities of the CDO trusts are non-recourse, and can generally only be satisfied from the respective asset pool of each CDO.
 
The Company is not obligated to provide any financial support to these CDOs. As of March 31, 2011, the Company has no exposure to loss as a result of the investment in these CDOs.  Since the Company is the collateral manager of the three CDOs and can make decisions related to the collateral that would most significantly impact the economic outcome of the CDOs, the Company has concluded that it is the primary beneficiary of the CDOs.

Unconsolidated VIEs
 
Investment in CMBS

The Company has investments in CMBS, which are considered to be VIEs.  These securities were acquired through investment, and are primarily comprised of securities that were originally investment grade securities, and do not represent a securitization or other transfer of the Company’s assets. The Company is not named as the special servicer or collateral manager of these investments, except as discussed further below.

The Company is not obligated to provide, nor has it provided, any financial support to these entities. Substantially all of the Company’s securities portfolio, with an aggregate face amount of $1,246,650 is financed by the Company’s CDOs, and the Company’s exposure to loss is therefore limited to its interests in these consolidated entities described above. The Company has not consolidated the aforementioned CMBS investments due to the determination that based on the structural provisions and nature of each investment, the Company does not directly control the activities that most significantly impact the VIEs’ economic performance.
 
The Company further analyzed its investment in controlling class CMBS to determine if it was the primary beneficiary.  At March 31, 2011, the Company owned securities of one controlling non-investment grade CMBS investment, GS Mortgage Securities Trust 2007-GKK1, or the Trust, with a carrying value of $0. The total par amount of CMBS issued by the Trust was $633,654.

 The Trust is a resecuritization of $633,654 of CMBS originally rated AA through BB.  The Company purchased a portion of the below investment grade securities, totaling approximately $27,300. The Manager is the collateral administrator on the transaction and receives a total fee of 5.5 basis points on the par value of the underlying collateral. The Company has determined that it is the non-transferor sponsor of the Trust. As collateral administrator, the Manager has the right to purchase defaulted securities from the Trust at fair value if very specific triggers have been reached.  The Company has no other rights or obligations that could impact the economics of the Trust and therefore has concluded that it is not the primary beneficiary. The Manager can be removed as collateral administrator, for cause only, with the vote of 66 2/3% of the certificate holders. There are no liquidity facilities or financing agreements associated with the Trust. Neither the Company nor the Manager has any on-going financial obligations, including advancing, funding or purchasing collateral in the Trust.

At March 31, 2011, the Company’s maximum exposure to loss as a result of its investment in this Trust totaled $0, which equals the book value of this investment as of March 31, 2011.

Investments in Joint Ventures
 
The Company accounts for its investments in joint ventures under the equity method of accounting since it exercises significant influence, but does not unilaterally control the entities, and is not considered to be the primary beneficiary. In the joint ventures, the rights of the other investors are both protective and participating. Unless the Company is determined to be the primary beneficiary, these rights preclude it from consolidating the investments. The investments are recorded initially at cost as an investment in joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the investments on the Company’s balance sheet and the underlying equity in net assets is evaluated for impairment at each reporting period. None of the joint venture debt is recourse to the Company. As of March 31, 2011 and December 31, 2010, the Company had investments of $2,871 and $3,650 in joint ventures, respectively.

 
11

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011
  
Cash and Cash Equivalents
           
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

 
Restricted Cash
         
Restricted cash at March 31, 2011 consists of $173,849 on deposit with the trustee of the Company’s CDOs. The remaining balance consists of $52,117 held as collateral for letters of credit, $1,923 of interest reserves held on behalf of borrowers and $75,556 which represents amounts escrowed pursuant to mortgage agreements securing the Company’s real estate investments and CTL investments for insurance, taxes, repairs and maintenance, tenant improvements, interest, and debt service and amounts held as collateral under security and pledge agreements relating to leasehold interests.
        
Assets Held-for-Sale
         
Real Estate and CTL Investments Held- for- Sale
         
Real estate investments or CTL investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less cost to sell. Once an asset is classified as held-for-sale, depreciation expense is no longer recorded and current and prior periods are reclassified as ‘discontinued operations.’ As of March 31, 2011, and December 31, 2010, the Company had real estate investments held-for-sale of $9,918 and $28,660, respectively. The Company recorded impairment charges of $334 and $257 for the three months ended March 31, 2011 and 2010, respectively, related to real estate investments classified as held-for-sale, which are included in net income (loss) from discontinued operations.

None of the properties that serve as collateral for the Goldman Mortgage and Goldman Mezzanine Loans met the criteria to be classified as held-for-sale as of March 31, 2011 and December 31, 2010. These properties do not meet the criteria to be classified as held-for-sale as they are expected to be disposed of other than by sale. Accordingly, the assets and liabilities of these properties are included in the Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 and their results of operations are presented as part of continuing operations in the Condensed Consolidated Statements of Operations for all periods presented. The assets and liabilities of these properties will be removed from the Condensed Consolidated Balance Sheet and the results of operations will be reclassified to discontinued operations in the Condensed Consolidated Statements of Operations upon the ultimate disposition of each property.
 
Loans and Other Lending Investments Held- For-Sale
    
Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination fees, discounts, repayments, sales of partial interests in loans, and unfunded commitments unless such loan or investment is deemed to be impaired. Loans held-for-sale are carried at the lower of cost or market value using available market information obtained through consultation with dealers or other originators of such investments. As of March 31, 2011 and December 31, 2010, the Company had no loans and other lending investments designated as held-for-sale.

 Commercial Mortgage-Backed Securities
   
The Company designates its CMBS investments on the date of acquisition of the investment. Held to maturity investments are stated at cost plus any premiums or discounts which are amortized through the Condensed Consolidated Statements of Operations using the level yield method.  CMBS securities that the Company may dispose of prior to maturity, are designated as available-for-sale and are carried at estimated fair value with the net unrealized gains or losses recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity.  Unrealized losses that are, in the judgment of management, an other-than-temporary impairment are bifurcated into (i) the amount related to credit losses and (ii) the amount related to all other factors.  The portion of the other-than-temporary impairment related to credit losses is computed by comparing the amortized cost of the investment to the present value of cash flows expected to be collected, discounted at the investment’s current yield, and is charged against earnings on the Condensed Consolidated Statements of Operations.  This evaluation includes a review of the credit status and the performance of the collateral supporting those securities, including key terms of the securities and the effect of local, industry and broader economic trends. The portion of the other-than-temporary impairment related to all other factors is recognized as a component of other comprehensive loss on the Condensed Consolidated Balance Sheet.  The determination of an other-than-temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization.

 
12

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

On a quarterly basis, when significant changes in estimated cash flows from the cash flow previously estimated occur due to actual prepayment and credit loss experience, and the present value of the revised cash flow is less than the present value previously estimated, an other-than-temporary impairment is deemed to have occurred. The security is written down to fair value with the resulting charge against earnings and a new cost basis is established. The Company calculates a revised yield based on the current amortized cost of the investment (including any other-than-temporary impairments recognized to date) and the revised yield is then applied prospectively to recognize interest income. No other-than-temporary impairments were recognized during the three months ended March 31, 2011. During the three months ended March 31, 2010, the Company recognized an other-than-temporary impairment of $12,326 due to an adverse change in expected cash flows related to credit losses for six CMBS investments which are recorded in impairment on loans held-for-sale and CMBS in the Company’s Condensed Consolidated Statement of Operations.
 
The Company determines the fair value of CMBS based on the types of securities in which the Company has invested. For liquid, investment-grade securities, the Company consults with dealers of such securities to periodically obtain updated market pricing for the same or similar instruments. For non-investment grade securities, the Company actively monitors the performance of the underlying properties and loans and updates the Company’s pricing model to reflect changes in projected cash flows. The value of the securities is derived by applying discount rates to such cash flows based on current market yields. The yields employed are obtained from the Company’s own experience in the market, advice from dealers when available, and/or information obtained in consultation with other investors in similar instruments. Because fair value estimates, when available, may vary to some degree, the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values for financial reporting purposes. Different judgments and assumptions could result in materially different presentations of value.
 
Pledged Government Securities
 
The Company maintains a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt previously collateralized by properties in its real estate portfolio. The Company does not intend to sell the securities and believes it is more likely than not that it will realize the full amortized cost basis of the securities over their remaining life. These securities had a carrying value of $91,688 and $92,918, a fair value of $94,879 and $96,729 and unrealized gains of $3,191 and $3,811 at March 31, 2011 and December 31, 2010, respectively, and have maturities that extend through November 2013.
 
Tenant and Other Receivables
 
Tenant and other receivables are primarily derived from the rental income that each tenant pays in accordance with the terms of its lease, which is recorded on a straight-line basis over the initial term of the lease. Since many leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that will only be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Tenant and other receivables also include receivables related to tenant reimbursements for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred.
 
Tenant and other receivables are recorded net of the allowances for doubtful accounts, which as of March 31, 2011 and December 31, 2010, were $5,351 and $5,440, respectively. The Company continually reviews receivables related to rent, tenant reimbursements and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company increases the allowance for doubtful accounts or records a direct write-off of the receivable in the Condensed Consolidated Statements of Operations.

 
13

 

   Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

Intangible Assets

As of March 31, 2011 and December 31, 2010, the Company’s intangible assets and acquired lease obligations were comprised of the following:

   
March 31,
2011
   
December 31,
2010
 
Intangible assets:
           
In-place leases, net of accumulated amortization of $121,405 and $114,383
  $ 240,998     $ 248,021  
Above-market leases, net of accumulated amortization of $34,972 and $33,136
    65,896       67,732  
Total intangible assets
  $ 306,894     $ 315,753  
                 
Intangible liabilities:
               
Below-market leases, net of accumulated amortization of $241,005 and $223,282
  $ 675,424     $ 693,148  
Total intangible liabilities
  $ 675,424     $ 693,148  

Valuation of Financial Instruments
 
ASC 820-10, “Fair Value Measurements and Disclosures,” among other things, establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and will require a lesser degree of judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and will require a higher degree of judgment to be utilized in measuring fair value. Pricing observability is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The level of pricing observability generally correlates to the degree of judgment utilized in measuring the fair value of financial instruments. The less judgment utilized in measuring fair value of financial instruments, such as with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation models that require more judgment. Impacted by a number of factors, pricing observability is generally affected by such items as the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions.

The three broad levels defined are as follows: 
 
Level I  — This level is comprised of financial instruments that have quoted prices that are available in active markets for identical assets or liabilities. The types of financial instruments included in this category are highly liquid instruments with quoted prices.

 
14

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

Level II  — This level is comprised of financial instruments that have pricing inputs other than quoted prices in active markets that are either directly or indirectly observable. The nature of these financial instruments includes instruments for which quoted prices are available but traded less frequently and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III  — This level is comprised of financial instruments that have little to no pricing observability as of the reported date. These financial instruments do not have active markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment and assumptions. Instruments that are generally included in this category are derivatives, whole loans, subordinate interests in whole loans and mezzanine loans.
 
For a further discussion regarding the measurement of financial instruments see Note 9, “Fair Value of Financial Instruments.”
 
 Revenue Recognition
 
Real Estate and CTL Investments
 
Rental income from leases is recognized on a straight-line basis regardless of when payments are contractually due. Certain lease agreements also contain provisions that require tenants to reimburse the Company for real estate taxes, common area maintenance costs, use of parking facilities and the amortized cost of capital expenditures with interest. Such amounts are included in both revenues and operating expenses when the Company is the primary obligor for these expenses and assumes the risks and rewards of a principal under these arrangements. Under leases where the tenant pays these expenses directly, such amounts are not included in revenues or expenses.
 
Deferred revenue represents rental revenue and management fees received prior to the date earned. Deferred revenue also includes rental payments received in excess of rental revenues recognized as a result of straight-line basis accounting.
 
Other income includes fees paid by tenants to terminate their leases, which are recognized when fees due are determinable, no further actions or services are required to be performed by the Company, and collectability is reasonably assured. In the event of early termination, the unrecoverable net book values of the assets or liabilities related to the terminated lease are recognized as depreciation and amortization expense in the period of termination.
 
The Company recognizes sales of real estate properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sale price is reasonably assured and the Company is not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate.
 
Finance Investments
 
Interest income on debt investments, which includes loan and CMBS investments, are recognized over the life of the investments using the effective interest method and recognized on the accrual basis. Fees received in connection with loan commitments are deferred until the loan is funded and are then recognized over the term of the loan using the effective interest method. Anticipated exit fees, whose collection is expected, are also recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration. Fees received in exchange for the credit enhancement of another lender, either subordinate or senior to the Company, in the form of a guarantee are recognized over the term of that guarantee using the straight-line method.
 
Income recognition is generally suspended for debt investments at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.

 
15

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

The Company designates loans as non-performing at such time as: (1) the loan becomes 90 days delinquent or (2) the loan has a maturity default. All non-performing loans are placed on non-accrual status and subsequent cash receipts are applied to principal or recognized as income when received. At March 31, 2011, the Company had one second lien loan with a carrying value of $0 and one third lien loan with a carrying value of $0, which were classified as non-performing loans. At December 31, 2010, the Company had one second lien loan with a carrying value of $0 and one third lien loan with a carrying value of $0, which were classified as non-performing loans.
 
The Company classifies loans as sub-performing if they are not performing in material accordance with their terms, but they do not qualify as non-performing loans and the specific facts and circumstances of these loans may cause them to develop into non-performing loans should certain events occur in the normal passage of time, which the Company considers to be 90 days from the measurement date. At March 31, 2011, the Company had four first mortgage loans with an aggregate carrying value of $117,609, three mezzanine loans with an aggregate carrying value of $24,914, and one second mortgage loan with a carrying value of $5,263 classified as sub-performing.  At December 31, 2010, one first mortgage loan with a carrying value of $13,222 and two mezzanine loans with an aggregate carrying value of $9,826 were classified as sub-performing.
 
Reserve for Loan Losses
 
Specific valuation allowances are established for loan losses on loans in instances where it is deemed probable that the Company may be unable to collect all amounts of principal and interest due according to the contractual terms of the loan. The reserve is increased through the provision for loan losses on the Condensed Consolidated Statements of Operations and is decreased by charge-offs when losses are realized through sale, foreclosure, or when significant collection efforts have ceased.
 
The Company considers the present value of payments expected to be received, observable market prices or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment), and compares it to the carrying value of the loan. The determination of the estimated fair value is based on the key characteristics of the collateral type, collateral location, quality and prospects of the sponsor, the amount and status of any senior debt, and other factors. The Company also includes the evaluation of operating cash flow from the property during the projected holding period, and the estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, all of which are discounted at market discount rates. The Company also considers if the loan’s terms have been modified in a troubled debt restructuring. Because the determination of estimated value is based upon projections of future economic events, which are inherently subjective, amounts ultimately realized from loans and investments may differ materially from the carrying value at the balance sheet date.
 
If, upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan is maintained at a level the Company believes is adequate to absorb losses. During the three months ended March 31, 2011, the Company incurred charge-offs totaling $403 relating to realized losses on one loan. During the year ended December 31, 2010, the Company incurred charge-offs totaling $239,078 relating to realized losses on ten loans. The Company maintained a reserve for loan losses of $280,613 against 21 separate investments with an aggregate carrying value of $460,658 as of March 31, 2011 and a reserve for loan losses of $263,516 against 19 separate investments with an aggregate carrying value of $438,541 as of December 31, 2010.

Stock-Based Compensation Plans
 
The Company has a stock-based compensation plan, described more fully in Note 10. The Company accounts for this plan using the fair value recognition provisions.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of a stock option award.  This model requires inputs such as expected term, expected volatility, and risk-free interest rate.   Further, the forfeiture rate also impacts the amount of aggregate compensation cost.  These inputs are highly subjective and generally require significant analysis and judgment to develop.

 
16

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

Compensation cost for stock options, if any, is recognized ratably over the vesting period of the award. The Company’s policy is to grant options with an exercise price equal to the quoted closing market price of its stock on the business day preceding the grant date. Awards of stock or restricted stock are expensed as compensation over the benefit period.
 
The fair value of each stock option granted is estimated on the date of grant for options issued to employees, and quarterly awards to non-employees, using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2011 and 2010:

   
2011
   
2010
 
Dividend yield
    5.9 %     5.7 %
Expected life of option
 
5.0 years
   
5.0 years
 
Risk free interest rate
    2.02 %     2.65 %
Expected stock price volatility
    105.0 %     75.0 %

 Derivative Instruments
 
In the normal course of business, the Company uses a variety of derivative instruments to manage, or hedge, interest rate risk. The Company requires that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company uses a variety of commonly used derivative products that are considered “plain vanilla” derivatives. These derivatives typically include interest rate swaps, caps, collars and floors. The Company expressly prohibits the use of unconventional derivative instruments and using derivative instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.
 
To determine the fair value of derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
 
In the normal course of business, the Company is exposed to the effect of interest rate changes and limits these risks by following established risk management policies and procedures including the use of derivatives. To address exposure to interest rates, the Company uses derivatives primarily to hedge the cash flow variability caused by interest rate fluctuations of its liabilities. Each of the Company’s CDOs maintains a maximum amount of allowable unhedged interest rate risk. The 2005 CDO permits 20% of the net outstanding principal balance and the 2006 CDO and the 2007 CDO permit 5% of the net outstanding principal balance to be unhedged.

The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.
 
All hedges held by the Company are deemed effective based upon the hedging objectives established by the Company’s corporate policy governing interest rate risk management. The effect of the Company’s derivative instruments on its financial statements is discussed more fully in Note 12.

 
17

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011
 
Income Taxes
 
The Company elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code, beginning with its taxable year ended December 31, 2004. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income, if any, to stockholders. As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that the Company distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to U.S. federal income taxes on taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distributions to stockholders. However, the Company believes that it will be organized and operate in such a manner as to qualify for treatment as a REIT and the Company intends to operate in the foreseeable future in such a manner so that it will qualify as a REIT for U.S. federal income tax purposes. The Company is subject to certain state and local taxes. The Company’s taxable REIT subsidiaries, or TRSs, are subject to U.S. federal, state and local income taxes.
 
 For the three months ended March 31, 2011 and 2010, the Company recorded $70 and $38 of income tax expense, respectively. Tax expense for the three months ended March 31, 2011 and 2010 is comprised entirely of state and local taxes.

Earnings Per Share
 
The Company presents both basic and diluted earnings per share, or EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, as long as their inclusion would not be anti-dilutive.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
Concentrations of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, debt investments and accounts receivable. The Company places its cash investments in excess of insured amounts with high quality financial institutions. The Company performs ongoing analysis of credit risk concentrations in its loan and other lending investment portfolio by evaluating exposure to various markets, underlying property types, investment structure, term, sponsors, tenants and other credit metrics.
 
Three investments accounted for approximately 20.2% of the total carrying value of the Company’s loan and other lending investments as of March 31, 2011 compared to four investments which accounted for approximately 24.2% of the total carrying value of the Company’s loan and other lending investments as of December 31, 2010. Six investments accounted for approximately 17.0% of the revenue earned on the Company’s loan and other lending investments for the three months ended March 31, 2011, compared to six investments which accounted for approximately 17.3% of the revenue earned on the Company’s loan and other lending investments for the three months ended March 31, 2010. The largest sponsor accounted for approximately 10.5% and 10.7% of the total carrying value of the Company’s loan and other lending investments as of March 31, 2011 and December 31, 2010, respectively. The largest sponsor accounted for approximately 6.3% of the revenue earned on the Company’s loan and other lending investments for the quarter ended March 31, 2011, compared to approximately 5.0% of the revenue earned on the Company’s loan and other lending investments for the quarter ended March 31, 2010.
 
Additionally, two tenants, Bank of America and Wells Fargo Bank, accounted for approximately 40.6% and 15.4% of the Company’s rental revenue for the three months ended March 31, 2011, respectively.

 
18

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

Recently Issued Accounting Pronouncements
 
In July 2010, FASB issued guidance which outlines specific disclosures that will be required for the allowance for credit losses and all finance receivables. Finance receivables includes loans, lease receivables and other arrangements with a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset on an entity's statement of financial position. This guidance will require companies to provide disaggregated levels of disclosure by portfolio segment and class to enable users of the financial statement to understand the nature of credit risk, how the risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period. Required disclosures under this guidance as of the end of a reporting period are effective for the Company's December 31, 2010 reporting period and disclosures regarding activities during a reporting period are effective for the Company's March 31, 2011 interim reporting period. In January 2011, the FASB delayed the effective date of the new disclosures about troubled debt restructurings to allow the FASB the time needed to complete its deliberations about on what constitutes a troubled debt restructuring. The effective date of the new disclosures about and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.  The guidance is anticipated to be effective for the Company’s September 30, 2011 reporting period.  The Company has applied this update to its financial statements for the period ended December 31, 2010.

In December 2010, the FASB issued guidance on the disclosure of supplementary pro forma information for business combinations.  The guidance specifies that if a public entity enters into business combinations that are material on an individual or aggregate basis and presents comparative financial statements, the entity must present pro forma revenue and earnings of the combined entity as though the business combination that occurred during the current period had occurred as of the beginning of the comparable annual period only. The adoption of this guidance for the Company’s annual reporting period ending December 31, 2011 will not have a material impact on the Company’s financial statements.

3. Loans and Other Lending Investments
 
The aggregate carrying values, allocated by product type and weighted-average coupons, of the Company’s loans, other lending investments and CMBS investments as of March 31, 2011 and December 31, 2010, were as follows:

    
Carrying Value (1)
   
Allocation by
Investment Type
   
Fixed Rate Average
Yield
   
Floating Rate Average
Spread over LIBOR (2)
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
Whole loans, floating rate
  $ 633,010     $ 659,095       62.5 %     58.7 %     -       -    
352 bps
   
330 bps
 
Whole loans, fixed rate
    132,325       132,268       13.1 %     11.8 %     7.16 %     7.16 %     -       -  
Subordinate interests in whole loans, floating rate
 
30,522
      75,066       3.0 %     6.7 %     -       -    
614 bps
   
297 bps
 
Subordinate interests in whole loans, fixed rate
 
46,465
      46,468       4.6 %     4.1 %     6.01 %     6.01 %     -       -  
Mezzanine loans, floating rate
    112,594       152,349       11.1 %     13.5 %     -       -    
730 bps
   
754 bps
 
Mezzanine loans, fixed rate
    49,645       48,828       4.9 %     4.3 %     12.74 %     12.69 %     -       -  
Preferred equity, floating rate
    5,224       5,224       0.5 %     0.5 %     -       -    
350 bps
   
350 bps
 
Preferred equity, fixed rate
    2,285       4,230       0.2 %     0.4 %     7.22 %     7.25 %     -       -  
Subtotal/ Weighted average
    1,012,070       1,123,528       100.0 %     100.0 %     8.13 %     8.09 %  
417 bps
   
400 bps
 
CMBS, floating rate
    48,940       50,798       4.7 %     5.1 %     -       -    
399 bps
   
394 bps
 
CMBS, fixed rate
    993,606       954,369       95.3 %     94.9 %     7.54 %     8.37 %     -       -  
Subtotal/ Weighted average
    1,042,546       1,005,167       100.0 %     100.0 %     7.54 %     8.37 %  
399 bps
   
394 bps
 
Total
  $ 2,054,616     $ 2,128,695       100.0 %     100.0 %     7.65 %     8.32 %  
408 bps
   
400 bps
 

(1)
Loans and other lending investments and CMBS investments are presented net of unamortized fees, discounts, unfunded commitments, reserves for loan losses, impairments and other adjustments.
 
 
(2)
Spreads over an index other than 30 day-LIBOR have been adjusted to a LIBOR based equivalent. In some cases, LIBOR is floored, giving rise to higher current effective spreads.

 
19

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011
 
Whole loans are permanent first mortgage loans with initial terms of up to 15 years. Whole loans are first mortgage liens and senior in interest to subordinate mortgage interest in whole loans, mezzanine loan and preferred equity interest.
 
Subordinate mortgage interests in whole loans are participation interests in mortgage notes or loans secured by a lien subordinated to a senior interest in the same loan.  Subordinate interests in whole loans are subject to greater credit risk with respect to the underlying mortgage collateral than the corresponding senior interest.
 
Mezzanine loans are senior to the borrower’s equity in, and subordinate to a whole loan and subordinate mortgage interest, on a property. These loans are secured by pledges of ownership interests in entities that directly or indirectly own the real property.
 
Preferred Equity are investments in entities that directly or indirectly own commercial real estate. Preferred equity is not secured, but holders have priority relative to common equity holders.
 
Quarterly, the Company evaluates its loans for instances where specific valuation allowances are necessary, as described in Note 2. As a component of the Company's quarterly policies and procedures for loan valuation and risk assessment, each loan is assigned a risk rating. Individual ratings range from one to six, with one being the lowest risk and six being the highest risk. Each credit risk rating has benchmark guidelines which pertain to debt-service coverage ratios, loan-to-value ("LTV") ratio, borrower strength, asset quality, and funded cash reserves. Other factors such as guarantees, market strength, remaining loan term, and borrower equity are also reviewed and factored into determining the credit risk rating assigned to each loan. Loans with a risk rating of one to three have characteristics of a lower risk loan and such loans are generally expected to perform through maturity.  Loans with a risk rating of four to five generally have characteristics of a higher risk loan and may indicate instances of a higher likelihood of a contractual default or expectation of a principal loss. Loans with a risk rating of six are non-performing and often times have been fully reserved.

 
20

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

A summary of the Company’s loans by loan class as of March 31, 2011 and December 31, 2010 are as follows:

   
Risk Ratings as of March 31, 2011
 
   
One to Three
   
Four to Six
 
   
Number of
Loans
   
Unpaid
Principal
Balance
   
Carrying
Value
   
Number of
Loans
   
Unpaid
Principal
Balance
   
Carrying
Value
 
Whole Loans
    9     $ 364,844     $ 354,315       20     $ 541,878     $ 411,021  
Subordinate Mortgage Interests (1)
    4       46,537       46,465       4       90,757       30,522  
Mezzanine Loans
    1       39,700       37,700       9       175,277       124,539  
Preferred Equity
    -       -       -       2       60,716       7,508  
                                                 
Total
    14     $ 451,081     $ 438,480       35     $ 868,628     $ 573,590  

(1) Includes one Interest-Only Strip.

   
Risk Ratings as of December 31, 2010
 
   
One to Three
   
Four to Six
 
   
Number of
Loans
   
Unpaid
Principal
Balance
   
Carrying
Value
   
Number of
Loans
   
Unpaid
Principal
Balance
   
Carrying
Value
 
Whole Loans
    11     $ 412,837     $ 403,265       18     $ 504,229     $ 388,098  
Subordinate Mortgage Interests (1)
    6       96,145       96,073       3       85,494       25,461  
Mezzanine Loans
    2       39,979       40,342       10       214,151       160,835  
Preferred Equity
    -       -       -       2       60,668       9,454  
                                                 
Total
    19     $ 548,961     $ 539,680       33     $ 864,542     $ 583,848  

(1) Includes one Interest-Only Strip.

As of March 31, 2011, the Company’s loans and other lending investments, excluding CMBS investments, had the following maturity characteristics:
 
Year of Maturity
 
Number of
Investments
Maturing
   
Current
Carrying Value
(In thousands)
   
% of Total
 
2011 (April 1 - December 31)
    23 (1)      $ 255,214          25.3 %
2012
    11       337,748       33.4 %
2013
    5       184,650       18.2 %
2014
    3       53,605       5.3 %
2015
    3       50,889       5.0 %
Thereafter
    4       129,964       12.8 %
Total
    49     $ 1,012,070       100.0 %
                         
Weighted average maturity
         
2.1 years
(2)
       

 
21

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

(1)
Of the loans maturing in 2011, five investments with a carrying value of $60,968 have extension options, which may be subject to performance criteria.

(2)
The calculation of weighted-average maturity is based upon the remaining initial term of the investment and does not include option or extension periods or the ability to prepay the investment after a negotiated lock-out period, which may be available to the borrower.

For the three months ended March 31, 2011 and 2010, the Company’s investment income from loans, other lending investments and CMBS investments, was generated by the following investment types:

   
Three months ended
March 31, 2011
   
Three months ended
March 31, 2010
 
   
Investment
Income
   
% of
Total
   
Investment
Income
   
% of
Total
 
Whole loans
  $ 11,774       29.1 %   $ 16,856       38.1 %
Subordinate interests in whole loans
    1,529       3.8 %     693       1.6 %
Mezzanine loans
    5,662       14.0 %     7,061       16.0 %
Preferred equity
    720       1.8 %     671       1.5 %
CMBS
    20,826       51.3 %     18,970       42.8 %
   Total
  $ 40,511       100.0 %   $ 44,251       100.0 %
 
   At March 31, 2011 and December 31, 2010, the Company’s loans and other lending investments, excluding CMBS investments, had the following geographic diversification:

   
March 31, 2011
   
December 31, 2010
 
Region
 
Carrying
Value
   
% of Total
   
Carrying
Value
   
% of Total
 
Northeast
  $ 396,770       39.2 %   $ 497,030       44.2 %
West
    262,713       26.0 %     277,478       24.7 %
South
    112,467       11.1 %     119,841       10.7 %
Mid-Atlantic
    102,659       10.1 %     116,495       10.4 %
Various (1)
    57,163       5.6 %     32,365       2.9 %
Midwest
    50,261       5.0 %     50,298       4.4 %
Southwest
    30,037       3.0 %     30,021       2.7 %
Total
  $ 1,012,070       100.0 %   $ 1,123,528       100.0 %
                                 
(1) Includes interest-only strips.
 
 
22

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011
 
At March 31, 2011 and December 31, 2010, the Company’s loans and other lending investments, excluding CMBS investments, by property type were as follows:
 
   
March 31, 2011
   
December 31, 2010
 
Property Type
 
Carrying
Value
   
% of Total
   
Carrying
Value
   
% of Total
 
Office
  $ 413,293       40.8 %   $ 425,773       37.9 %
Hotel
    180,710       17.9 %     184,306       16.4 %
Retail
    130,105       12.9 %     202,090       18.0 %
Land - Commercial
    118,306       11.7 %     143,589       12.8 %
Multifamily
    52,507       5.2 %     54,488       4.8 %
Industrial
    40,446       4.0 %     47,784       4.3 %
Other (1)
    30,522       3.0 %     5,953       0.5 %
Mixed-Use
    28,628       2.8 %     28,622       2.5 %
Condominium
    17,553       1.7 %     30,923       2.8 %
Total
  $ 1,012,070       100.0 %   $ 1,123,528       100.0 %
   
(1) Includes interest-only strips.
 

The Company recorded provisions for loan losses of $17,500 and $41,160 for the three months ended March 31, 2011 and 2010, respectively.  These provisions represent increases in loan loss reserves based on management’s estimates considering delinquencies, loss experience, collateral quality by individual asset or category of asset and modifications that resulted in troubled debt restructurings.
 
For the three months ended March 31, 2011, the Company incurred charge-offs of $403 related to realized losses on one loan investment. During the year ended December 31, 2010, the Company incurred charge-offs totaling $239,078 related to ten loan investments.
 
The interest income recognized from impaired loans during the time within the financial statement period that they were impaired or reserved for was $8,435 and $11,956 for the three months ended March 31, 2011 and 2010, respectively.

Changes in the reserve for loan losses were as follows:
 
   
Whole
loans
   
Subordinate
interest in
whole loans
   
Mezzanine
loans
   
Preferred
equity
   
Total
 
Reserve for loan losses, December 31, 2010
  $ 126,823     $ 45,585     $ 39,708     $ 51,400     $ 263,516  
Additional provision for loan losses
    15,500       -       -       2,000       17,500  
Charge-offs
    (403 )     -       -       -       (403 )
Reserve for loan losses, March 31, 2011
  $ 141,920     $ 45,585     $ 39,708     $ 53,400     $ 280,613  
 
 
23

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011
 
As of March 31, 2011 and 2010, the Company’s recorded investments in impaired loans were as follows:

   
For the three months ended
March 31, 2011
   
For the three months ended
March 31, 2011
 
   
Unpaid
Principal
Balance
   
Carrying
Value
   
Allowance
for Loan
Losses
   
Average Unpaid
Recorded
Investment (1)
   
Investment
Income
Recognized
 
Whole loans
  $ 491,590     $ 352,583     $ 141,920     $ 374,726     $ 4,845  
Subordinate interests in whole loans
    50,704       5,119       45,585       5,090       57  
Mezzanine loans
    157,067       95,448       39,708       95,034       2,813  
Preferred equity
    60,716       7,508       53,400       8,993       720  
                                         
    $ 760,077     $ 460,658     $ 280,613     $ 483,843     $ 8,435  
                                         
(1) Represents the average of the month end balances for the three months ended March 31, 2011.
 

   
For the twelve months ended
December 31, 2010
   
For the three months ended
March 31, 2010
 
   
Unpaid
Principal
Balance
   
Carrying
Value
   
Allowance
for Loan
Losses
   
Average Unpaid
Recorded
Investment (1)
   
Investment
Income
Recognized
 
Whole loans
  $ 506,211     $ 382,272     $ 126,823     $ 535,056     $ 9,513  
Subordinate interests in whole loans
    50,647       5,062       45,585       -       -  
Mezzanine loans
    156,161       94,312       39,708       61,129       1,742  
Preferred equity
    60,668       9,454       51,400       32,648       701  
                                         
    $ 773,687     $ 491,100     $ 263,516     $ 628,833     $ 11,956  
                                         
(1) Represents the average of the month end balances for the three months ended March 31, 2010.
 
 
As of March 31, 2011 and December 31, 2010, the Company’s non-performing loans by class were as follows:

   
As of March 31, 2011
 
   
Number of
Investments
   
Carrying
value
   
Less Than 90 Days
Past Due
   
Greater Than 90 Days
Past Due
 
Whole loans
    -     $ -     $ -     $ -  
Subordinate interests in whole loans
    2       -       -       -  
Mezzanine loans
    -       -       -       -  
Preferred equity
    -       -       -       -  
                                 
Total
    2     $ -     $ -     $ -  
 
 
24

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

   
As of December 31, 2010
 
   
Number of
Investments
   
Carrying
value
   
Less Than 90 Days
Past Due
   
Greater Than 90 Days
Past Due
 
Whole loans
    -     $ -     $ -     $ -  
Subordinate interests in whole loans
    2       -       -       -  
Mezzanine loans
    -       -       -       -  
Preferred equity
    -       -       -       -  
                                 
Total
    2     $ -     $ -     $ -  
 
At March 31, 2011, the Company did not have any loans contractually past due 90 days or more that are still accruing interest.  Also, the Company had no unfunded commitments on modified loans which were considered “troubled debt restructurings.” As of March 31, 2011 and December 31, 2010, there were no loans for which the collateral securing the loan was less than the carrying value of the loan for which the Company did not record a provision for loan loss.

In order to maintain flexibility and liquidity, and to improve risk adjusted returns in the Company’s three CDOs, the Company has concluded that as of March 31, 2011, it no longer can express the intent and ability to hold its CMBS investments through maturity.  As a result, as of March 31, 2011, the Company has designated all of its CMBS investments as available-for-sale and accordingly such CMBS are carried on the Condensed Consolidated Balance Sheet at fair value as of March 31, 2011. Changes in fair value are not necessarily indicative of current or future changes in cash flow, which are based on actual delinquencies, defaults and sales of the underlying collateral, and therefore are not recognized in earnings. Changes in fair value are reflected in the Statement of Stockholders’ Equity and Non-controlling Interests. The Company continues to monitor all of its CMBS investments for other-than-temporary impairments.

The following is a summary of the Company’s CMBS investments at March 31, 2011:

Description
 
Number of 
Securities
   
Face Value
   
Amortized 
Cost
   
Fair Value
   
Gross
Unrealized
Gain
   
Gross 
Unrealized 
Loss
 
Available for sale:
                                   
Floating rate CMBS
    3     $ 53,500     $ 51,226     $ 48,940     $ 189     $ (2,476 )
Fixed rate CMBS
    107       1,193,150       974,081       993,606       119,664       (100,139 )
Total
    110     $ 1,246,650     $ 1,025,307     $ 1,042,546     $ 119,853     $ (102,615 )
   
The following is a summary of the Company’s CMBS investments at December 31, 2010:
 
Description
 
Number of
Securities
   
Face Value
   
Amortized
Cost
   
Fair Value
   
Gross
Unrealized
Gain
   
Gross
Unrealized
Loss
 
Held to maturity:
                                   
Floating rate CMBS
    2     $ 48,500     $ 47,698     $ 43,650     $ -     $ (4,048 )
Fixed rate CMBS
    97       1,133,574       925,580       825,275       96,428       (196,733 )
Available for Sale:
                                               
Floating rate CMBS
    1       5,000       3,100       3,100       -       -  
Fixed rate CMBS
    8       43,444       26,806       28,789       1,983 (1)     -  
Total
    108     $ 1,230,518     $ 1,003,184     $ 900,814     $ 98,411     $ (200,781 )

(1) Included in Other Comprehensive Income.

 
25

 

 Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

 The following table shows the Company’s fair value unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2011.
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
Description
 
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
   
Estimated
Fair Value
   
Gross
Unrealized
Loss
 
Floating rate CMBS
  $ -     $ -     $ 45,590     $ (2,476 )   $ 45,590     $ (2,476 )
Fixed rate CMBS
    19,449       (553 )     638,634       (99,586 )     658,083       (100,139 )
Total temporarily impaired securities
  $ 19,449     $ (553 )   $ 684,224     $ (102,062 )   $ 703,673     $ (102,615 )

As of March 31, 2011, the Company’s CMBS investments had the following maturity characteristics:

Year of Maturity
 
Number of
Investments
Maturing
   
Amortized Cost
   
Percent of
Total Carrying
Value
   
Fair Value
   
Percent of
Total Fair
Value
 
Available for Sale:
                         
Less than 1 year
    2     $ 48,066       4.7 %   $ 45,590       4.4 %
1 - 5 years
    28       155,558       15.2 %     187,273       18.0 %
5 - 10 years
    80       821,684       80.1 %     809,683       77.7 %
Total
    110     $ 1,025,308       100.0 %   $ 1,042,546       100.0 %

The following is a summary of the underlying credit ratings of the Company’s CMBS investments at March 31, 2011 and December 31, 2010 (for split-rated securities, the higher rating was used):

   
March 31, 2011
   
December 31, 2010
 
   
Carrying Value
   
Percentage
   
Carrying
Value
   
Percentage
 
Investment grade:
                       
AAA
  $ 62,596       6.0 %   $ 51,590       5.1 %
AA
    52,322       5.0 %     76,484       7.6 %
AA-
    78,642       7.5 %     67,717       6.7 %
A+
    3,870       0.4 %     2,103       0.2 %
A
    45,575       4.4 %     57,314       5.7 %
A-
    7,973       0.8 %     -       -  
BBB+
    47,164       4.5 %     29,775       3.0 %
BBB
    78,729       7.6 %     57,663       5.7 %
BBB-
    167,159       16.0 %     166,843       16.6 %
Total investment grade
    544,030       52.2 %     509,489       50.6 %
Non-investment grade:
                               
BB+ 
    43,517       4.2 %     69,733       6.9 %
BB
    91,018       8.7 %     97,261       9.7 %
BB-
    159,209       15.3 %     138,680       13.8 %
B+
    161,992       15.5 %     153,970       15.3 %
B
    16,431       1.6 %     5,160       0.6 %
B-
    3,689       0.4 %     30,613       3.1 %
CCC+
    22,660       2.2 %     261       -  
Total non-investment grade
    498,516       47.8 %     495,678       49.4 %
                                 
Total
  $ 1,042,546       100.0 %   $ 1,005,167       100.0 %

 
26

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

The Company evaluates CMBS investments to determine if there has been an other-than-temporary impairment. The Company’s unrealized losses are primarily the result of market factors other than credit impairment, which is generally indicated by significant change in estimated cash flows from the cash flows previously estimated based on actual prepayments and credit loss experience. Unrealized losses can be caused by changes in interest rates, changes in credit spreads, realized losses in the underlying collateral, or general market conditions. The Company evaluates CMBS investments on a quarterly basis and has determined that there has not been an adverse change in expected cash flows related to credit losses for CMBS investments. No other-than-temporary impairments were recognized during the three months ended March 31, 2011 and 2010, respectively. To determine the component of the other-than-temporary impairment related to expected credit losses, the Company compares the amortized cost basis of each other-than-temporarily impaired security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. Significant judgment of management is required in this analysis that includes, but is not limited to, (i) assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans, (ii) current subordination levels for individual loans which serve as collateral under the Company’s securities, and (iii) current subordination levels for the securities themselves. The Company’s assessment of cash flows, which is supplemented by third-party research reports and dialogue with market participants, combined with the Company’s expectation to recover book value, is the basis for its conclusion the remainder of these investments are not other-than-temporarily impaired, despite the difference between the carrying value and the fair value. The Company has considered rating downgrades in its evaluation, it believes that the book value of its CMBS investments is recoverable at March 31, 2011. The Company attributes the current difference between carrying value and market value to current market conditions including a decrease in demand for structured financial products and commercial real estate. The Company has concluded that it is not likely that it will be required to sell the securities before recovering the amortized cost basis; however the Company may choose to sell selected CMBS investments, which are held as available for sale as of March 31, 2011, in order to maximize risk adjusted returns in its CDOs.

In connection with a preferred equity investment which was repaid in October 2006, the Company has guaranteed a portion of the outstanding principal balance of the first mortgage loan that is a financial obligation of the entity in which the Company was previously a preferred equity investor, in the event of a borrower default under such loan. The loan matures in 2012. This guarantee in the event of a borrower default under such loan is considered to be an off-balance-sheet arrangement and will survive until the repayment of the first mortgage loan. As compensation, the Company received a credit enhancement fee of $125 from the borrower, which is recognized as the fair value of the guarantee and has been recorded on the Condensed Consolidated Balance Sheet as a liability. The liability is amortized over the life of the guarantee using the straight-line method and corresponding fee income is recorded. The Company’s maximum exposure under this guarantee is approximately $1,360 and $1,366 as of March 31, 2011 and December 31, 2010, respectively. Under the terms of the guarantee, the investment sponsor is required to reimburse the Company for the entire amount paid under the guarantee until the guarantee expires.
  
4. Dispositions and Assets Held-for-Sale
 
During the three months ended March 31, 2011 and 2010, the Company sold three and seven properties and one sub-parcel for net sales proceeds of $18,268 and $16,272, respectively. The sales transactions resulted in gains totaling $937 and $1,041 for the three months ended March 31, 2011 and 2010, respectively.
 
The Company separately classifies properties held-for-sale in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations. In the normal course of business, the Company identifies non-strategic assets for sale. Changes in the market may compel the Company to decide to classify a property held-for-sale or classify a property that was designated as held-for-sale back to held for investment. As of March 31, 2011 and December 31, 2010, the Company did not reclassify any properties previously identified as held-for-sale to held for investment.

The Company classified one and two properties as held-for-sale as of March 31, 2011 and December 31, 2010.  The following table summarizes information for these properties: 

 
27

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

   
March 31,
2011
   
December 31,
2010
 
Assets held for sale:
           
Real estate investments, at cost:
           
Land
  $ 9,911     $ 15,142  
Building and improvement
    -       11,612  
Total real estate investments, at cost
    9,911       26,754  
Less:  accumulated depreciation
    -       (202 )
Real estate investments held for sale, net
    9,911       26,552  
Accrued interest and receivables
    -       398  
Other Assets
    7       1,710  
Total assets held for sale
  $ 9,918     $ 28,660  
                 
Liabilities related to assets held for sale:
               
Accrued expenses
  $ 35     $ 474  
Deferred revenue
    -       57  
Total liabilities related to assets held for sale:
    35       531  
Net assets held for sale
  $ 9,883     $ 28,129  
   
The following operating results of the assets held-for-sale as of March 31, 2011, and the assets sold during the three months ended March 31, 2011, and 2010 are included in discontinued operations for all periods presented:
 
   
Three months ended
March 31,
 
   
2011
   
2010
 
Operating Results:
           
Revenues
  $ 295     $ 2,075  
Operating expenses
    (1,651 )     (1,188 )
Marketing, general and administrative
    (227 )     -  
Interest expense
    (49 )     (953 )
Depreciation and amortization
    (3 )     (130 )
Equity in net income from unconsolidated joint venture
    -       2,786  
Net income (loss) from operations
    (1,635 )     2,590  
Income (loss) on sale of unconsolidated joint venture interests
    -       -  
Net gains from disposals
    937       1,041  
Net income (loss) from discontinued operations
  $ (698 )   $ 3,631  

Subsequent to March 31, 2011, the Company entered into an agreement of sale on three properties for approximately $3,467 with a total carrying value of $1,786 as of March 31, 2011, and net loss of $27 for the three months ended March 31, 2011.
 
Discontinued operations have not been segregated in the Condensed Consolidated Statements of Cash Flows.

 
28

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

 5. Investments in Joint Ventures

At March 31, 2011 and December 31, 2010, the carrying values of the Company’s joint venture investments were as follows:

         
Carrying Value
 
   
Ownership
Interest
   
March 31,
2011
   
December 31,
2010
 
Unconsolidated Joint Ventures:
                 
200 Franklin Square Drive, Somerset, New Jersey
    25.0 %   $ 684     $ 746  
Citizens Portfolio
 
various
(1)
    2,187       2,904  
Total
          $ 2,871     $ 3,650  
   
(1) The Company has a 99% ownership interest in 52 properties and sold its 1% ownership interest in two properties in January 2011.
 
 
For the three months ended March 31, 2011 and 2010, the Company’s pro rata share of net income (loss) of the joint ventures were as follows:

   
Three Months Ended
 
Joint Ventures
 
March 31, 2011
   
March 31, 2010
 
200 Franklin Square Drive, Somerset, New Jersey
  $ 30     $ 30  
2 Herald Square, New York, New York (1)
    -       1,263  
885 Third Avenue, New York, New York (2)
    -       1,523  
Citizens Portfolio
    (717 )     (657 )
Whiteface, Lake Placid, New York (3)
    -       (1,043 )
Total before discontinued operations
    (687 )     1,116  
Less discontinued operations
    -       (2,786 )
Total
  $ (687 )   $ (1,670 )

(1) In December 2010, the Company sold its 45% interest for a loss of $11,885 which is included in discontinued operations.
(2) In December 2010, the Company sold its 45% interest for a loss of $15,407 which is included in discontinued operations.
(3) In July 2010, the Company purchased the remaining 60% interest from the joint venture partner. In connection with the acquisition, the Company controls 100% of the joint venture's interest and has consolidated its accounts.

 
29

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

6. Collateralized Debt Obligations

The Company’s loans and other investments serve as collateral for the Company’s CDO securities, and the income generated from these investments is used to fund interest obligations of the Company’s CDO securities and the remaining income, if any, is retained by the Company. The CDO indentures contain minimum interest coverage and asset overcollateralization covenants that must be satisfied in order for the Company to receive cash flow on the interests retained in its CDOs and to receive the subordinate collateral management fee earned. If some or all of the Company’s CDOs fail these covenants, all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO securities, and the Company may not receive some or all residual payments or the subordinate collateral management fee until the applicable CDO regained compliance with such tests. As of July 2011, the most recent distribution date, the Company’s 2005 and 2006 CDOs were in compliance with their interest coverage and asset overcollateralization covenants; however the compliance margin was narrow and relatively small declines in collateral performance and credit metrics could cause the CDOs to fall out of compliance. The Company expects that the overcollateralization test for the 2005 CDO will fail at the October 2011 distribution date. The Company’s 2005 CDO failed its overcollateralization test at the April 2011 and January 2011 distribution dates and its 2007 CDO failed its overcollateralization test at the August 2011, May 2011 and February 2011 distribution dates.
  
During the three months ended March 31, 2011 and 2010, the Company repurchased, at a discount, $10,400 and $19,000, respectively, of notes previously issued by one of the Company’s three CDOs. The Company recorded a net gain on the early extinguishment of debt of $3,656 and $7,740, for the three months ended March 31, 2011 and 2010, respectively.
   
7. Debt Obligations
  
Mortgage and Mezzanine Loans
 
Certain real estate assets are subject to mortgage and mezzanine liens. As of March 31, 2011, 944 (including 52 properties held by an unconsolidated joint venture) of the Company’s real estate investments were encumbered with mortgage and mezzanine loans with a cumulative outstanding balance of $2,183,498.  In September 2011, pursuant to the Settlement Agreement with respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the mortgage notes payable and the related collateral will be transitioned to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of the assets on behalf of the mezzanine lenders for a fixed fee plus incentive fees.

The Company’s mortgage notes payable typically require that specified loan-to-value and debt service coverage ratios be maintained with respect to the financed properties before the Company can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not satisfied, in addition to other conditions that the Company may have to observe, the Company’s ability to release properties from the financing may be restricted and the lender may be able to “trap” portfolio cash flow until the required ratios are met on an ongoing basis. As of March 31, 2011 and December 31, 2010, the Company was in covenant compliance on all of its mortgage and mezzanine loans, except that, as of March 31, 2011 and December 31, 2010, the Company was out of debt service coverage compliance under two of its mortgage note financings. Such non-compliance does not constitute an event of default under the applicable loan agreements. Under one of the loans, the lender has the ability to restrict distributions which are limited to budgeted property operating expenses; under the other loan, the lender has the right to replace the management of the property. The Company also was not in compliance with the tangible net worth covenant under its loan agreement with PB Capital Corporation, or the PB Loan Agreement, and such non-compliance may permit the lender to exercise remedies against the mortgage collateral on a non-recourse basis. In September 2011, pursuant to the Settlement Agreement, the PB Loan Agreement and the related collateral will be transitioned to the mezzanine lenders. Accordingly, as a result of the execution of the Settlement Agreement, any acceleration of the PB Loan Agreement loan is not expected to have an adverse effect on the Company.  

 
30

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011
  
Goldman Mortgage Loan

On April 1, 2008, certain subsidiaries of the Company, collectively, the Goldman Loan Borrowers, entered into a mortgage loan agreement with GSMC, Citicorp and SL Green in connection with a mortgage loan in the amount of $250,000, which is secured by certain properties owned or ground leased by the Goldman Loan Borrowers. The Goldman Mortgage Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mortgage Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mortgage Loan. The Goldman Mortgage Loan allows for prepayment under the terms of the agreement as long as simultaneously therewith a proportionate prepayment of the Goldman Mezzanine Loan (discussed below) shall also be made on such date. In August 2008, an amendment to the loan agreement described below was entered into for the Goldman Mortgage Loan in conjunction with the bifurcation of the Goldman Mezzanine Loan into two separate mezzanine loans.
 
Under this loan agreement amendment, the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The Company has accrued interest of $711 and $256 and borrowings of $240,523 and $240,523 as of March 31, 2011 and December 31, 2010, respectively.
 
In March 2010, the Company extended the maturity date of the Goldman Mortgage Loan to March 2011, and amended certain terms of the loan agreement, including, among others, (i) a prohibition on distributions from the Goldman Loan Borrowers to the Company, other than to cover  direct costs related to executing the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Realty, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Goldman Mortgage Loan extension term, and (iii) within 90 days after the first day of the Goldman Mortgage Loan extension term, delivery by the Goldman Loan Borrowers to GSMC, Citicorp and SL Green of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Goldman Mortgage Loan.  Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the Company entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions fail.  On May 9, 2011, the Company announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.

Notwithstanding the maturity and non-repayment of the loans, the Company maintained active communications with the lenders and in September 2011, the Company entered into the Settlement Agreement for an orderly transition of substantially all of Gramercy Realty’s assets to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of Gramercy Realty’s assets on behalf of such mezzanine lenders for a fixed fee plus incentive fees. In July 2011, the Company’s Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. Subsequent to the execution of the Settlement Agreement, the business of Gramercy Realty will change from being primarily an owner of commercial properties to being primarily a third party manager of commercial properties. The scale of Gramercy Realty’s revenues will substantially decline as a substantial portion of net revenues from property operations will be replaced with fee revenues of a substantially smaller scale. Additionally, as assets are transferred, its total assets and liabilities are expected to decline substantially. The transition of Gramercy Realty’s business and the effects of these changes on the Company’s Consolidated Financial Statements are expected to be completed by December 31, 2011.
 
Goldman Senior and Junior Mezzanine Loans
 
On April 1, 2008, certain subsidiaries of the Company, collectively, the Mezzanine Borrowers, entered into a mezzanine loan agreement with GSMC, Citicorp and SL Green in connection with a mezzanine loan in the amount of $600,000, or the Goldman Mezzanine Loan, which is secured by pledges of certain equity interests owned by the Mezzanine Borrowers and any amounts receivable by the Mezzanine Borrowers whether by way of distributions or other sources. The Goldman Mezzanine Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mezzanine Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mezzanine Loan. The Goldman Mezzanine Loan allows for prepayment under the terms of the agreement as long as simultaneously therewith a proportionate prepayment of the Goldman Mortgage Loan shall also be made on such date. In addition, under certain circumstances the Goldman Mezzanine Loan is cross defaulted with events of default under the Goldman Mortgage Loan and with other mortgage loans pursuant to which, an indirect wholly-owned subsidiary of the Company, is the mortgagor. In August 2008, the Goldman Mezzanine Loan was bifurcated into two separate mezzanine loans (the Junior Mezzanine Loan and the Senior Mezzanine Loan) by the lenders, and the Senior Mezzanine Loan was assigned to KBS.  Additional loan agreement amendments were entered into for the Goldman Mezzanine Loan and Goldman Mortgage Loan.

 
31

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

Under these loan agreement amendments, the Junior Mezzanine Loan bears interest at 6.00% over LIBOR, the Senior Mezzanine Loan bears interest at 5.20% over LIBOR and the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The weighted average of these interest rate spreads is equal to the combined weighted average of the interest rates spreads on the initial loan. The Goldman Mezzanine Loans encumber all properties held by Gramercy Realty. The Company has accrued interest of $2,493 and $1,454 and borrowings of $549,713 and $549,713 as of March 31, 2011 and December 31, 2010, respectively.
 
In March 2010, the Company extended the maturity date of the Goldman Mezzanine Loans to March 2011, and amended certain terms of the Senior Mezzanine Loan agreement and the Junior Mezzanine Loan agreement, including, among others, with respect to the Senior Mezzanine Loan agreement, (i) a prohibition on distributions from the Senior Mezzanine Loan borrowers to the Company, other than to cover direct costs related to executing the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Realty, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Senior Mezzanine Loan extension term and agreement, upon request, to grant a security interest in that account to KBS, and (iii) within 90 days after the first day of the Senior Mezzanine Loan extension term, delivery by the Senior Mezzanine Loan borrowers  to KBS of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Senior Mezzanine Loan, and with respect to the Junior Mezzanine Loan agreement, (i) a prohibition on distributions from the Junior Mezzanine Loan borrower to the Company, other than to cover direct costs related to executing the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Realty, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Junior Mezzanine Loan extension term and agreement, upon request, to grant a security interest in that account to GSMC, Citicorp and SL Green, and (iii) within 90 days after the first day of the Junior Mezzanine Loan extension term, delivery by the Junior Mezzanine Loan borrower to GSMC, Citicorp and SL Green of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Junior Mezzanine Loan. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the Company entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions fail.  On May 9, 2011, the Company announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.
 
Notwithstanding the maturity and non-repayment of the loans, the Company maintained active communications with the lenders and in September 2011, the Company entered into the Settlement Agreement for an orderly transition of substantially all of Gramercy Realty’s assets to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of Gramercy Realty’s assets on behalf of such mezzanine lenders for a fixed fee plus incentive fees. In July 2011, the Company’s Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. Subsequent to the execution of the Settlement Agreement, the business of Gramercy Realty will change from being primarily an owner of commercial properties to being primarily a third party manager of commercial properties. The scale of Gramercy Realty’s revenues will substantially decline as a substantial portion of net revenues from property operations will be replaced with fee revenues of a substantially smaller scale. Additionally, as assets are transferred, its total assets and liabilities are expected to decline substantially. The transition of Gramercy Realty’s business and the effects of these changes on the Company’s Consolidated Financial Statements are expected to be completed by December 31, 2011.

 
32

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011
 
The following is a summary of first mortgage loans as of March 31, 2011:

   
Encumbered
Properties (1)
   
Balance
 
Interest Rate
 
Maturity Date
Fixed-rate mortgages
    473     $ 1,162,923 (2)   
5.06% to 10.29%
 
January 2012 to August 2030
Variable-rate mortgages
    236       460,036  
1.91% to 6.25%
 
May 2011 to April 2013
Total mortgage notes payable
    709       1,622,959        
Above- / below-market interest
    -       10,826        
Balance, March 31, 2011
    709     $ 1,633,785        

(1)
In September 2011, pursuant to the Settlement Agreement with respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the mortgage notes payable and the related collateral will be transitioned to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of the assets on behalf of the mezzanine lenders for a fixed fee plus incentive fees. In July 2011, our Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure.

(2)
Includes $85,494 of debt that is collateralized by $91,688 of pledged treasury securities, net of discounts and premiums.
 
Combined aggregate principal maturities of the Company’s consolidated CDOs and mortgage loans (including the Goldman Mortgage Loan and the Goldman Mezzanine Loans) as of March 31, 2011 are as follows:

   
CDOs
   
Mortgage and
Mezzanine
Loans (1)
   
Interest
Payments
   
Total
 
2011 (April 1 - December 31)
  $ -     $ 809,738     $ 118,331     $ 928,069  
2012
    -       80,727       147,323       228,050  
2013
    -       602,906       132,013       734,919  
2014
    -       12,884       109,105       121,989  
2015
    -       47,650       104,712       152,362  
Thereafter
    2,631,807       618,767       214,463       3,465,037  
Above- / below-market interest
    -       10,826       -       10,826  
Total
  $ 2,631,807     $ 2,183,498     $ 825,947     $ 5,641,252  

 
(1)
In September 2011, pursuant to the Settlement Agreement with respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the mortgage notes payable and the related collateral will be transitioned to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of the assets on behalf of the mezzanine lenders for a fixed fee plus incentive fees. In July 2011, our Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet was transferred to its mortgage lender through a deed in lieu of foreclosure.
 
 
33

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

8. Related Party Transactions
 
An affiliate of SL Green provides special servicing services with respect to a limited number of loans owned by the Company that are secured by properties in New York City, or in which the Company and SL Green are co-investors. For the three months ended March 31, 2011 and 2010, the Company incurred expenses of $41 and $25, pursuant to the special servicing arrangement.

Commencing in May 2005, the Company is party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for its corporate offices at 420 Lexington Avenue, New York, New York. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in year ten. In May and June 2009, the Company amended its lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises is leased on a co-terminus basis with the remainder of its leased premises and carries rents of approximately $103 per annum during the initial year and $123 per annum during the final lease year. For the three months ended March 31, 2011 and 2010, the Company paid $77 and $76 under this lease, respectively.
 
In March 2006, the Company closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green was an equity holder. The mezzanine loan was repaid in full on May 9, 2006, when the Company originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint venture. The whole loan is secured by office and industrial properties in northern New Jersey and has a book value of $24,821 as of March 31, 2011 and December 31, 2010, respectively.
 
In January 2007, the Company originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a portfolio of multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an office property. On March 8, 2007, the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event the Company’s loan became secured by a first mortgage lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and one-month LIBOR plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from the Company and held a 15.15% pari-passu interest in the mezzanine loan and the whole loan. The investment in the mezzanine loan was repaid in full in September 2007. In September 2010, the whole loan was repaid at a discount. The Company received $56,093 and forgave the remaining balance outstanding.

In April 2007, the Company purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34th Street in New York, New York. The acquisition was financed with $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. The Company sold its 45% interest in December 2010 to a wholly-owned subsidiary of SL Green for net proceeds of $25,350, resulting in a loss of $11,885. The Company recorded its pro rata share of net income of $1,263 for the three months ended March 31, 2010.
 
In July 2007, the Company purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. The Company sold its 45% interest in December 2010 to a wholly-owned subsidiary of SL Green for net proceeds of $38,911 for a loss of $15,407. The Company recorded its pro rata share of net income of $1,523 for the three months ended March 31, 2010.

 
34

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, dollar amounts in thousands, except per share data)
March 31, 2011

In September 2007, the Company acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter, the Company, along with SL Green, sold all of its interests in the loan to an unaffiliated third party. Additionally, the Company acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same properties as the preceding senior mezzanine loan. Immediately thereafter, the Company participated 50% of its interest in the loan back to SL Green. As of March 31, 2011 and December 31, 2010, the loan has a book value of $0. In October 2007, the Company acquired a 50% pari-passu interest in $57,795 of two additional tranches in the senior mezzanine loan from an unaffiliated third party. At closing, an affiliate of SL Green simultaneously acquired the other 50% pari-passu interest in the two tranches. As of March 31, 2011 and December 31, 2010, the loan has a book value of $0. The Company held a contingent interest in the property which was sold to SL Green in December 2010 for $2,016.
 
In December 2007, the Company acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter, the Company participated 50% of the Company’s interest in the loan to an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%. In December 2010, the Company subsequently purchased an affiliate of SL Green’s full participation in the senior mezzanine loan at a discount. As of March 31, 2011 and December 31, 2010, the original loan has a book value of $5,224 and $5,224 and the subsequently purchased loan has a book value of $13,939 and $13,586, respectively.
 
In August 2008, the Company closed on the purchase from an SL Green affiliate of a $9,375 pari-passu participation interest in a $18,750 first mortgage. The loan is secured by a retail shopping center located in Staten Island, New York. The investment bears interest at a fixed rate of 6.50%. In December 2010, the Company purchased, at a discount, the remaining 50% interest in the loan from an SL Green affiliate for $9,420. As of March 31, 2011 and December 31, 2010, the loan has a book value of $19,424 and $19,367, respectively.
 
In September 2008, the Company closed on the purchase from an SL Green affiliate of a $30,000 interest in a $135,000 mezzanine loan. The loan is secured by the borrower’s interests in a retail condominium located New York, New York. The investment bears interest at an effective spread to one-month LIBOR of 10.00%. As of December 31, 2010, the loan had a book value of $27,778. In December 2010, the Company sold its contingent interest to SL Green for $300. In March 2011, the loan was paid in full by the borrower.

In December 2010, the Company sold its interest in a parcel of land located at 292 Madison Avenue in New York, New York to a wholly-owned subsidiary of SL Green.  The Company received proceeds of $16,765 and recorded an impairment charge of $9,759.

9. Fair Value of Financial Instruments
 
The Company discloses fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows based upon market yields or by using other valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.
 
The following table presents the carrying value in the financial statements and approximate fair value of other financial instruments at March 31, 2011 and December 31, 2010:

 
35

 
 
 Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

   
March 31, 2011
   
December 31, 2010
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
Financial assets:
                       
Government securities
  $ 91,688     $ 95,551     $ 92,918     $ 97,247  
Lending investments
  $ 1,012,070     $ 1,013,525     $ 1,123,528     $ 1,113,972  
CMBS (1)
  $ 1,042,546     $ 1,042,546     $ 1,005,167     $ 900,815  
Derivative instruments
  $ 1,604     $ 1,604     $ 1,636     $ 1,636  
Financial liabilities:
                               
Mortgage note payable and senior and junior mezzanine loans
  $ 2,183,498     $ 1,591,724     $ 2,190,384     $ 1,863,347  
Collateralized debt obligations
  $ 2,631,807     $ 1,768,678     $ 2,682,321     $ 1,704,338  
Derivative instruments
  $ 143,348     $ 143,348     $ 157,932     $ 157,932  

(1) As of March 31, 2011, the Company has changed its intent and may sell its CMBS investments prior to maturity.  As a result, at March 31, 2011, the CMBS investments were reclassified to available-for-sale from held-to-maturity.  As a result, on the Condensed Consolidated Balance Sheet, the CMBS investments are recorded at fair value.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value:
 
Cash and cash equivalents, accrued interest, and accounts payable:   These balances in the Condensed Consolidated Financial Statements reasonably approximate their fair values due to the short maturities of these items.
 
Government Securities:   The Company maintains a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt previously collateralized by properties in the Company’s real estate portfolio. These securities are presented in the Condensed Consolidated Financial Statements on a held-to-maturity basis and not at fair value. The fair values were based upon valuations obtained from dealers of those securities.
 
Lending investments:   These instruments are presented in the Condensed Consolidated Financial Statements at the lower of cost or market value and not at fair value. The fair values were estimated by using market floating rate and fixed rate yields (as appropriate) for loans with similar credit characteristics.

CMBS held-to-maturity:   These investments are presented in the Condensed Consolidated Financial Statements on a held-to-maturity basis and not at fair value. The fair values were based upon valuations obtained from dealers of those securities, and internal models.
    
CMBS available-for-sale:   These investments are presented in the Condensed Consolidated Financial Statements at fair value, not held-to-maturity basis. The fair values were based upon valuations obtained from dealers of those securities, and internal models.
 
Mortgage note payable and senior and junior mezzanine loans:   These obligations are presented in the Condensed Consolidated Financial Statements based on the actual balance outstanding and not at fair value. The fair value was estimated using discounted cash flows methodology, using discount rates that best reflect current market interest rates for financing with similar characteristics and credit quality.

Collateralized debt obligations:   These obligations are presented in the Condensed Consolidated Financial Statements on the basis of proceeds received at issuance and not at fair value. The fair value was estimated based upon the amount at which similarly placed financial instruments would be valued today.
 
Derivative instruments:   The Company’s derivative instruments, which are primarily comprised of interest rate swap agreements, are carried at fair value in the Condensed Consolidated Financial Statements based upon third party valuations.

 
36

 

 Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

Disclosure about fair value of financial instruments is based on pertinent information available to the Company at March 31, 2011 and December 31, 2010. Although the Company is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since March 31, 2011 and December 31, 2010 and current estimates of fair value may differ significantly from the amounts presented herein.

The following discussion of fair value was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.
 
Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter.

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

 
37

 

 Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

At March 31, 2011
 
Total
   
Level I
   
Level II
   
Level III
 
Financial Assets:
                       
Derivative instruments:
                       
Interest rate caps
  $ 1,604     $ -     $ -     $ 1,604  
Interest rate swaps
    -       -       -       -  
    $ 1,604     $ -     $ -     $ 1,604  
                                 
CMBS available for sale
                               
Investment grade
  $ 544,030     $ -     $ -     $ 544,030  
Non-investment grade
    498,516       -       -       498,516  
    $ 1,042,546     $ -     $ -     $ 1,042,546  
                                 
Financial Liabilities:
                               
Derivative instruments:
                               
Interest rate caps
  $ -     $ -     $ -     $ -  
Interest rate swaps
    143,348       -       -       143,348  
    $ 143,348     $ -     $ -     $ 143,348  
                                 
At December 31, 2010
 
Total
   
Level I
   
Level II
   
Level III
 
Financial Assets:
                               
Derivative instruments:
                               
Interest rate caps
  $ 1,636     $ -     $ -     $ 1,636  
Interest rate swaps
    -       -       -       -  
    $ 1,636     $ -     $ -     $ 1,636  
                                 
CMBS available for sale
                               
Investment grade
  $ 20,607     $ -     $ -     $ 20,607  
Non-investment grade
    11,282       -       -       11,282  
    $ 31,889     $ -     $ -     $ 31,889  
                                 
Financial Liabilities:
                               
Derivative instruments:
                               
Interest rate caps
  $ -     $ -     $ -     $ -  
Interest rate swaps
    157,932       -       -       157,932  
    $ 157,932     $ -     $ -     $ 157,932  
 
Derivative instruments:  Interest rate caps and swaps were valued using advice from a third party derivative specialist, based on a combination of observable market-based inputs, such as interest rate curves, and unobservable inputs such as credit valuation adjustments due to the risk of non-performance by both the Company and its counterparties. See Note 12 for additional details on the Company’s interest rate caps and swaps.

Derivatives were classified as Level III due to the significance of the credit valuation allowance which is based upon less observable inputs.
 
Total gains and losses from derivatives for the three months ended March 31, 2011 is $14,842 and is included in Accumulated Other Comprehensive Loss. During the three months ended March 31, 2011, the Company did not enter into any derivative instruments.

CMBS available-for-sale:  CMBS securities are generally valued by a combination of (i) obtaining assessments from third-party dealers and, (ii) in limited cases where such assessments are unavailable or, in the opinion of management, deemed not to be indicative of fair value, discounting expected cash flows using internal cash flow models and estimated market discount rates. In the case of internal models, expected cash flows of each security are based on management’s assumptions regarding the collection of principal and interest on the underlying loans and securities.

 
38

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

The following roll forward table reconciles the beginning and ending balances of financial assets measured at fair value on a recurring basis using Level III inputs:

   
CMBS available for
sale - investment
grade
   
CMBS available for
sale -non- investment
grade
   
Derivative
instruments
 
                   
Balance as of December 31, 2010
  $ 20,607     $ 11,282     $ 1,636  
Transfers from securites held to maturity
    461,602       515,763       -  
Sale of CMBS Investments
    -       -       -  
Purchases of CMBS investments
    17,942       -       -  
Purchases of derivative instruments
    -       -       -  
Amortization of discount for securities available-for-sale in prior quarter
    106       (12 )     -  
Adjustments to fair value:
                       
Included in other comprehensive income
    43,773       (28,517 )     (32 )
Other-than-temporary impairments
    -       -       -  
                         
Balance as of March 31, 2011
  $ 544,030     $ 498,516     $ 1,604  

The following roll forward table reconciles the beginning and ending balances of financial liabilities measured at fair value on a recurring basis using Level III inputs:

   
Derivative
instruments -
interest rate swaps
 
       
Balance as of December 31, 2010
  $ 157,932  
Purchases of derivative instruments
    -  
Adjustments to fair value:
       
Included in other comprehensive income
    (14,584 )
         
Balance as of March 31, 2011
  $ 143,348  

Fair Value on a Non-Recurring Basis
 
The Company uses fair value measurements on a non-recurring basis in its assessment of assets classified as loans and other lending investments, which are reported at cost and have been written down to fair value as a result of valuation allowances established for loan losses, and real estate, which are reported at cost and has been impaired to the lower of cost or fair value as a result of an analysis of the properties that serve as collateral for the Goldman Mezzanine Loans. The following table shows the fair value hierarchy for those assets measured at fair value on a non-recurring basis based upon the lowest level of significant input to the valuations for which a non-recurring change in fair value has been recorded during the three months ended March 31, 2011:
 
 
39

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

At March 31, 2011
 
Total
   
Level I
   
Level II
   
Level III
 
Assets:
                       
Lending investments:
                       
Whole loans
  $ 103,870     $ -     $ -     $ 103,870  
Subordinate interests in whole loans
    -       -       -       -  
Mezzanine loans
    -       -       -       -  
Preferred equity
    2,285       -       -       2,285  
    $ 106,155     $ -     $ -     $ 106,155  
                                 
At December 31, 2010
 
Total
   
Level I
   
Level II
   
Level III
 
Assets:
                               
Real estate investments:
                               
Office
  $ 1,097,535     $ -     $ -     $ 1,097,535  
Branch
    484,629       -       -       484,629  
Land
    -       -       -       -  
    $ 1,582,164     $ -     $ -     $ 1,582,164  
                                 
Lending investments:
                               
Whole loans
  $ 212,633     $ -     $ -     $ 212,633  
Subordinate interests in whole loans
    -       -       -       -  
Mezzanine loans
    22,337       -       -       22,337  
Preferred equity
    -       -       -       -  
    $ 234,970     $ -     $ -     $ 234,970  
 
The total change in fair value of assets for which a fair value adjustment has been included in the Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 were $17,500 and $41,160, respectively.

Real estate investments:  The properties identified for impairment are collateral under the Goldman Mezzanine Loans.  The impairment is calculated by comparing the Company’s internally-developed discounted cash flow methodology to the carrying value of the respective property. The discounted cash flows require significant judgmental inputs on each property, which include assumptions regarding capitalization rates, lease-up periods, future occupancy rates, market rental rates, holding periods, capital improvements and other factors deemed necessary by management.

Loans subject to impairments or reserves for loan loss:   The loans identified for impairment or reserves for loan loss are collateral dependent loans. Impairment or reserves for loan loss on these loans are measured by comparing management’s estimated fair value of the underlying collateral to the carrying value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management.

10. Stockholders’ Equity
 
The Company’s authorized capital stock consists of 125.0 million shares, $0.001 par value, of which the Company has authorized the issuance of up to 100.0 million shares of common stock, $0.001 par value per share, and 25.0 million shares of preferred stock, par value $0.001 per share. As of March 31, 2011, 49,992,705 shares of common stock and 3,525,822 shares of preferred stock were issued and outstanding.

Beginning with the fourth quarter of 2008, the Company’s board of directors elected not to pay the quarterly Series A preferred stock dividends of $0.50781 per share. As of March 31, 2011 and December 31, 2010, the Company accrued Series A preferred stock dividends of $17,905 and $16,114, respectively. As a result, the Company has accrued dividends for over six quarters which pursuant to the terms of its charter, permits the Series A preferred stockholders to elect an additional director to the board of directors.
 
 
40

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

The Company may, or upon a properly submitted request of the holders of the Series A preferred stock representing 20% or more of the liquidation value of the Series A preferred stock, call a special meeting of our stockholders to elect such additional director in accordance with the provisions of the bylaws and other procedures established by the Company’s board of directors relating to election of directors.

Earnings per Share
 
Earnings per share for the three months ended March 31, 2011 and 2010 are computed as follows:
 
   
Three months ended March 31
 
   
2011
   
2010
 
Numerator - Income (loss)
           
Net income (loss) from continuing operations (1)
  $ 7,447     $ (26,063 )
Net income (loss) from discontinued operations (1)
    (698 )     3,631  
Net Income (loss)
    6,749       (22,432 )
Preferred stock dividends
    (1,790 )     (2,336 )
Numerator for basic income per share - Net income (loss) available to common stockholders:
    4,959       (24,768 )
Effect of dilutive securities
    -       -  
Diluted Earnings:
               
Net income (loss) available to common stockholders
  $ 4,959     $ (24,768 )
Denominator-Weighted Average shares:
               
Denominator for basic income per share - weighted average shares
    49,992,132       49,896,278  
Effect of dilutive securities
               
Stock based compensation plans
    280,360       -  
Phantom stock units
    446,082       -  
Diluted shares
    50,718,574       49,896,278  

 
(1)
Net income (loss) adjusted for non-controlling interests

Diluted income (loss) per share assumes the conversion of all common share equivalents into an equivalent number of common shares if the effect is not anti-dilutive. For the three months ended March 31, 2010, approximately 264,013 share options and 301,818 phantom share units, respectively, were computed using the treasury share method, which due to the net loss were anti-dilutive.
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated other comprehensive income (loss) for the three months ended March 31, 2011 and 2010 are comprised of the following:
 
   
As of March 31,
 
   
2011
   
2010
 
Net realized and unrealized losses on held-to-maturity securities
  $ -     $ (3,167 )
Net realized and unrealized losses on interest rate swap and cap agreements accounted for as cash flow hedges
    (147,925 )     (119,267 )
Net unrealized loss on FV adjustment of available-for-sale securities
    17,238       -  
Total accumulated other comprehensive loss
  $ (130,687 )   $ (122,434 )
 
 
41

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

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

The Company’s corporate office at 420 Lexington Avenue, New York, New York is subject to an operating lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, effective May 1, 2005. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in year ten. In May and June 2009, the Company amended its lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises is leased on a co-terminus basis with the remainder of the Company’s leased premises and carries rents of approximately $103 per annum during the initial lease year and $123 per annum during the final lease year.

As of March 31, 2011, the Company leased certain of its commercial properties from third parties with expiration dates extending to the year 2085 and has various ground leases with expiration dates extending through 2101. These lease obligations generally contain rent increases and renewal options.

Future minimum lease payments under non-cancelable operating leases as of March 31, 2011 are as follows:

   
Operating Leases
 
2011 (April 1 - December 31)
  $ 16,036  
2012
    21,132  
2013
    20,647  
2014
    20,064  
2015
    19,243  
Thereafter
    159,107  
Total minimum lease payments
  $ 256,229  

The Company, through certain of its subsidiaries, may be required in its role in connection with its CDOs, to repurchase loans that it contributed to its CDOs in the event of breaches of certain representations or warranties provided at the time the CDOs were formed and the loans contributed. These obligations do not relate to the credit performance of the loans or other collateral contributed to the CDOs, but only to breaches of specific representations and warranties. Since inception, the Company has not been required to make any repurchases.
 
Certain real estate assets are pledged as collateral for two mortgage loans held by two of its CDOs. One borrowing of $62,379 is also guaranteed by the Company. In connection with the Settlement Agreement, the Company was released under the guarantee in September 2011.  
 
12. Financial Instruments: Derivatives and Hedging
 
The Company recognizes all derivatives on the Condensed Consolidated Balance Sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of LIBOR interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

 
42

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011
 
The following table summarizes the notional and fair value of the Company’s derivative financial instruments at March 31, 2011. The notional value is an indication of the extent of the Company’s involvement in this instrument at that time, but does not represent exposure to credit, interest rate or market risks:

   
Benchmark Rate
 
Notional
Value
   
Strike
Rate
   
Effective
Date
   
Expiration
Date
 
Fair
Value
 
Assets of Non-VIEs:
                               
Interest Rate Cap
 
3 month LIBOR
  $ 38,500       6.00 %  
Jul-10
   
Jul-12
  $ 1  
                                       
Assets of Consolidated VIEs:
                                     
Interest Rate Cap
 
3 month LIBOR
    10,773       4.73 %  
Dec-10
   
Feb-15
    66  
Interest Rate Cap
 
3 month LIBOR
    8,877       5.04 %  
Oct-10
   
Feb-16
    109  
Interest Rate Cap
 
3 month LIBOR
    23,000       4.96 %  
Jun-10
   
Apr-17
    342  
Interest Rate Cap
 
3 month LIBOR
    48,945       4.80 %  
Mar-10
   
Jul-17
    1,086  
          91,595                         1,603  
Liabilities of Consolidated VIEs:
                                     
Interest Rate Swap
 
3 month LIBOR
    12,000       9.85 %  
Aug-06
   
Aug-11
    (215 )
Interest Rate Swap
 
3 month LIBOR
    4,700       3.17 %  
Apr-08
   
Apr-12
    (134 )
Interest Rate Swap
 
3 month LIBOR
    10,000       3.92 %  
Oct-08
   
Oct-13
    (662 )
Interest Rate Swap
 
3 month LIBOR
    17,500       3.92 %  
Oct-08
   
Oct-13
    (1,158 )
Interest Rate Swap
 
1 month LIBOR
    8,948       4.26 %  
Aug-08
   
Jan-15
    (766 )
Interest Rate Swap
 
3 month LIBOR
    14,650       4.43 %  
Nov-07
   
Jul-15
    (1,372 )
Interest Rate Swap
 
3 month LIBOR
    24,143       5.11 %  
Feb-08
   
Jan-17
    (3,122 )
Interest Rate Swap
 
3 month LIBOR
    280,914       5.41 %  
Aug-07
   
May-17
    (34,549 )
Interest Rate Swap
 
3 month LIBOR
    16,412       5.20 %  
Feb-08
   
May-17
    (2,221 )
Interest Rate Swap
 
3 month LIBOR
    699,442       5.33 %  
Aug-07
   
Jan-18
    (99,149 )
          1,088,709                         (143,348 )
Total
      $ 1,218,804                       $ (141,744 )
 
 The Company is hedging exposure to variability in future interest payments on its debt facilities. At March 31, 2011, derivative instruments were reported at their fair value as a net liability of $141,744  Offsetting adjustments are represented as deferred gains in Accumulated Other Comprehensive Loss of $14,842, which includes the amortization of gain or (loss) on terminated hedges of $99 for the three months ended March 31, 2011. The Company anticipates recognizing approximately $401 in amortization over the next 12 months.  For the three months ended March 31, 2010, the Company recognized a decrease to interest expense of $51 attributable to any ineffective component of its derivative instruments designated as cash flow hedges. Currently, all derivative instruments are designated as cash flow hedging instruments. Over time, the realized and unrealized gains and losses held in Accumulated Other Comprehensive Income will be reclassified into earnings in the same periods in which the hedged interest payments affect earnings.  

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

 
43

 
 
Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

 Beginning with the third quarter of 2008, the Company’s board of directors elected to not pay dividend to common stockholders. The Company may elect to pay dividends on its common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. The board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividend has been accrued. In accordance with the provisions of the Company’s charter, the Company may not pay any dividends on its common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full.
 
For the three months ended March 31, 2011 and 2010, the Company recorded $70 and $38 of income tax expense, respectively.  Tax expense for the three months ended March 31, 2011 and 2010 is comprised entirely of state and local taxes. 
 
14. Segment Reporting
 
The Company has determined that it has two reportable operating segments: Realty and Finance. The reportable segments were determined based on the management approach, which looks to the Company’s internal organizational structure. These two lines of business require different support infrastructures.

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

   
Realty (1)
   
Finance
   
Corporate/
Other (2)
   
Total Company
 
Three months ended March 31, 2011
                       
Total revenues (3)
  $ 103,087     $ 45,627     $ -     $ 148,714  
Earnings (loss) from unconsolidated joint ventures
    (717 )     30       -       (687 )
Total operating and interest expense (4)
    (96,856 )     (37,308 )     (6,416 )     (140,580 )
Net income (loss) from continuing operations (5)
  $ 5,514     $ 8,349     $ (6,416 )   $ 7,447  
                                 
Three months ended March 31, 2010
                               
Total revenues (3)
  $ 108,059     $ 44,987     $ -     $ 153,046  
Earnings (loss) from unconsolidated joint ventures
    (657 )     (1,013 )     -       (1,670 )
Total operating and interest expense (4)
    (102,969 )     (66,707 )     (7,486 )     (177,162 )
Net income (loss) from continuing operations (5)
  $ 4,433     $ (22,733 )   $ (7,486 )   $ (25,786 )
                                 
Total Assets:
                               
March 31, 2011
  $ 2,812,282     $ 3,517,795     $ (900,045 )   $ 5,430,032  
December 31, 2010
  $ 2,834,035     $ 3,558,472     $ (900,514 )   $ 5,491,993  
 
 
(1)
As a result of the Settlement Agreement that the Company entered into in September 2011, for an orderly transition of substantially all of Gramercy Realty’s assets to Gramercy Realty’s senior mezzanine lenders, the segment will significantly change in future periods.  For more information about the Settlement Agreement see Note 16.

 
(2)
Corporate / Other represents all corporate level items, including general and administrative expenses and any intercompany elimination necessary to reconcile to the consolidated Company totals.

 
(3)
Total revenue represents all revenue earned during the period from the assets in each segment. Revenue from the Finance business primarily represents interest income and revenue from the Realty business primarily represents operating lease income.
 
 
44

 
 
 Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011

 
(4)
Total operating and interest expense includes provision for loan losses for the Finance business and operating costs on commercial property assets for the Realty business, and interest expense and loss on early extinguishment of debt, specifically related to each segment. General and administrative expense is included in Corporate/Other for all periods. Depreciation and amortization of $18,898 and $27,689 for the three months ended March 31, 2011 and 2010, respectively, is included in the amounts presented above.

 
(5)
Net income (loss) represents income before provision for taxes, minority interest and discontinued operations.

15. Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
The following table represents non-cash activities recognized in other comprehensive income for the three months ended March 31, 2011 and 2010:

   
2011
   
2010
 
Deferred losses and other non-cash activity related to derivatives
  $ 14,842     $ (27,136 )
                 
Deferred gains related to securities available-for -sale
  $ 15,256     $ 740  

16. Subsequent Events
 
In April 2011, the Company originated a floating rate, first mortgage loan in the amount of $18,500 secured by a full service hotel, located in Bloomington, Minnesota. The loan is held by the Company’s 2006 CDO. The loan matures in May 2014 and can be extended at the borrower’s option for two twelve month periods, subject to performance hurdles.
 
In June 2011, the Company sold eight CMBS securities classified as available for sale from the Company’s 2007 CDO. The total face amount of these securities was $78,247. The proceeds from the sale was $65,584 and resulted in a gain of $15,126.
 
In June 2011, the Company purchased, at a discount, two fixed-rate pari-passu interests in a whole loan and a fixed rate subordinate interest in the same whole loan in the amount of $85,000 and $100,000, respectively, all secured by a first mortgage against a landmark office building located in Chicago, Illinois. The acquired interests are held by the Company’s 2005, 2006 and 2007 CDOs. The loans mature in February 2017, with no options for extension.
 
In July 2011, Gramercy Realty’s Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. In connection with the deed in lieu, the Company was relieved of its obligation to repay the $171,938 mortgage loan secured by the Dana portfolio as well as contractual and default interest.
 
On September 1, 2011, the Company entered into the Settlement Agreement, for an orderly transition of substantially all of Gramercy Realty’s assets to KBS, the senior mezzanine lender, of the Goldman Mortgage Loan and the Goldman Mezzanine Loans. The Settlement Agreement provides, among other things, for (i) the transfer of beneficial ownership of the entities owning substantially all of the properties comprising the Company’s Gramercy Realty division to KBS or another entity as directed by KBS by December 15, 2011 (unless a stay or other injunctive action prevents the transfer of the equity interests on that date), (ii) certain releases, terminations and satisfactions of obligations of the Company and its affiliates in connection with the Loans, including releases of any guaranties delivered to the Lenders by the Company with respect to the Loans, and (iii) certain releases of the Lenders and their affiliates in connection with the Loans. The Company will retain 58 properties comprising 758,231 square feet encumbered by $31,873 in first lien mortgage debt held by a Company-affiliated CDO. The initial transfer of the entities owning approximately 317 properties to KBS occurred on September 1, 2011.
 
 
45

 

Gramercy Capital Corp.
Notes to Condensed Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
March 31, 2011
 
The Company expects additional transfers to KBS to occur over the next several months as and when certain third-party conditions are satisfied. Assuming no stay or other injunctive action is then in place to prevent the same, the Settlement Agreement obligates KBS to acquire from the Company any and all remaining Gramercy Realty entities on December 15, 2011. The Company will continue to operate the remaining 555 properties until they are transferred to KBS only to the extent that sufficient cash flow is generated by the properties. KBS may elect to fund all or a portion of any shortfall. The Company has no obligation to contribute any capital or provide other financial support to the remaining properties.
 
The Settlement Agreement also provides for the Company’s continued management of the Gramercy Realty assets on behalf of the Lenders until December 31, 2013, for a fixed fee of $10,000 annually, the reimbursement of certain costs and incentive fees equal to 10.0% of the excess of the equity value, if any, of the transferred collateral over $375,000 plus all new capital invested into the transferred collateral by KBS, its affiliates and/or joint venture partners (the ‘‘Threshold Value Participation’’) and 12.5% of the excess equity value, if any, of the transferred collateral over $468,500 plus all new capital invested into the transferred collateral by KBS, its affiliates and/or joint venture partners (the ‘‘Excess Value Participation’’). The minimum amount of the Threshold Value Participation equals $3,500. The Threshold Value Participation and the Excess Value Participation will be valued and paid following the earlier of December 13, 2013, subject to extension to no later than December 31, 2015, or the sale by KBS of at least 90% (by value) of the transferred collateral. The Interim Management Agreement may be terminated by either party without Cause 90 days following written notice; however, any Company notice of termination cannot be effective until December 31, 2011 at the earliest.
 
KBS and the Company have agreed to promptly commence and diligently seek to negotiate a full and complete management services agreement by no later than March 31, 2012. If the parties do not execute a mutually acceptable asset management services agreement prior to March 31, 2012, the Interim Management Agreement upon the terms and conditions set forth in the Settlement Agreement shall automatically terminate on June 30, 2012 without liability or a penalty of any kind, except for the Company’s loss of the Excess Value Participation.

During the second quarter of 2011, the Company repurchased $36,125 and $1,734 par value of bonds issued by the Company’s 2006 and 2005 CDOs, respectively including $20,000 par value of Class A-1 from the 2006 CDO, $6,667 par value of Class A-2 from the 2006 CDO, and $667 par value of Class B from the 2005 CDO, generating gains on early extinguishment of debt of $10,870.
 
 
46

 
 
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except for share, per share data and Overview section)
 
Overview
 
Gramercy Capital Corp. is a self-managed, integrated commercial real estate finance and property management and investment company. Our commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination, acquisition and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. Our property management and investment business, which operates under the name Gramercy Realty, historically focused on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. Neither Gramercy Finance nor Gramercy Realty is a separate legal entity, but are divisions through which our commercial real estate finance and property investment businesses are conducted.

We conduct substantially all of our operations through our operating partnership, GKK Capital LP, or our Operating Partnership. We are the sole general partner of our Operating Partnership. Our Operating Partnership conducts our finance business primarily through two private real estate investment trusts, or REITs, Gramercy Investment Trust and Gramercy Investment Trust II, and our commercial real estate investment and property management business through various wholly owned entities.
 
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be subject to U.S. federal income taxes to the extent we distribute our taxable income, if any, to our stockholders. We have in the past established, and may in the future establish taxable REIT subsidiaries, or TRSs, to effect various taxable transactions. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities. Unless the context requires otherwise, all references to “we,” “our” and “us” mean Gramercy Capital Corp., a Maryland Corporation, and one or more of its subsidiaries, including our Operating Partnership.

During 2011, we remained focused on improving our consolidated balance sheet by reducing leverage, generating liquidity from existing assets, actively managing portfolio credit, accretively re-investing repayments in loan and CMBS investments and renewing expiring leases. We also sought to extend or restructure Gramercy Realty’s $240.5 million mortgage loan with Goldman Sachs Commercial Mortgage Capital, L.P., or GSMC, Citicorp North America, Inc., or Citicorp, and SL Green Realty Corp., or SL Green, or the Goldman Mortgage Loan, and Gramercy Realty’s $549.7 million senior and junior mezzanine loans with KBS Real Estate Investment Trust, Inc., or KBS, GSMC, Citicorp and SL Green, or the Goldman Mezzanine Loans. The Goldman Mortgage Loan is collateralized by approximately 195 properties held by Gramercy Realty and the Goldman Mezzanine Loans are collateralized by the equity interest in substantially all of the entities comprising our Gramercy Realty division, including its cash and cash equivalents totaling $31.5 million of our unrestricted cash as of March 31, 2011. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, we entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions fail. On May 9, 2011, we announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.
 
Notwithstanding the maturity and non-repayment of the loans, we maintained active communications with the lenders, and in September 2011, we entered into a collateral transfer and settlement agreement, or the Settlement Agreement, for an orderly transition of substantially all of Gramercy Realty’s assets to Gramercy Realty’s senior mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan, and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among us and the mortgage and mezzanine lenders and, subject to certain termination provisions, our continued management of Gramercy Realty’s assets on behalf of the mezzanine lenders for a fixed fee plus incentive fees.  In July 2011, our Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure.
 
Subsequent to the execution of the Settlement Agreement the business of Gramercy Realty will change from being primarily an owner of commercial properties to being primarily a third-party manager of commercial properties. The scale of Gramercy Realty’s revenues will substantially decline as a substantial portion of net revenues from property operations will be replaced with fee revenues of a substantially smaller scale. Additionally, as assets are transferred to the mezzanine lenders, our total assets and liabilities are expected to decline substantially.  If the transfer had happened as of March 31, 2011, our assets would have declined from approximately $5.4 billion to approximately $2.7 billion and our liabilities would have declined from approximately $5.9 billion to approximately $2.8 billion. Our Condensed Consolidated Financial Statements would have reflected significant liquidity, including cash and cash equivalents of approximately $180.8 million and we would have no recourse debt obligations outstanding.  We anticipate all transfers to be completed by December 15, 2011. After all transfers are complete, we expect to own a portfolio of commercial real estate with an aggregate book value of approximately $122.6 million, in addition to approximately $1.1 billion of loan investments, approximately $1.0 billion of CMBS, and approximately $484.3 million in other assets, based on our Consolidated Balance Sheet as of March 31, 2011. 
 
 
47

 
 
During 2010, we recorded impairment charges totaling $912.1 million in continuing operations to reduce the carrying value of 692 properties to estimated fair value.  All of the impaired properties are part of the Gramercy Realty portfolio and serve as collateral for the Goldman Mezzanine Loans.  Substantially all of the impaired properties will be transferred to the mezzanine lenders pursuant to the Settlement Agreement.  As a result of recording these impairments, our total stockholders’ equity, or book equity, is negative $458.6 million and $493.9 million as of March 31, 2011 and December 31, 2010, respectively. The carrying value of liabilities associated with the impaired properties have not been adjusted and remained outstanding as of March 31, 2011 and December 31, 2010, respectively. As of March 31, 2011, the liabilities of the impaired properties exceed the carrying value of the assets and accordingly, the subsequent transfer of assets and liabilities pursuant to the Settlement Agreement will generate gains as the carrying values of such liabilities are reduced to $0, which in turn will reduce our negative book equity balance. After all transfers under the Settlement Agreement are complete, which we anticipate will occur by December 15, 2011, we expect that stockholders’ equity will remain negative, however, such negative balance will be substantially lower than the negative $458.6 million balance presented on the March 31, 2011 balance sheet.
 
In September 2011, we entered into an asset management arrangement upon the terms and conditions set forth in the Settlement Agreement, or the Interim Management Agreement, to provide for our continued management of Gramercy Realty’s assets through December 31, 2013 for a fixed fee of $10.0 million annually, the reimbursement of certain costs and incentive fees equal to 10.0% of the excess of the equity value, if any, of the transferred collateral over $375.0 million plus all new capital invested into the transferred collateral by KBS, its affiliates and/or joint venture partners, or the Threshold Value Participation, and 12.5% of the excess equity value, if any, of the transferred collateral over $468.5 million plus all new capital invested into the transferred collateral by KBS, its affiliates and/or joint venture partners, or the Excess Value Participation. The minimum amount of the Threshold Value Participation equals $3.5 million. The Threshold Value Participation and the Excess Value Participation will be valued and paid following the earlier of December 13, 2013, subject to extension to no later than December 31, 2015, or the sale by KBS of at least 90% (by value) of the transferred collateral. Under the terms of the Interim Management Agreement, we do not forfeit our incentive fee rights unless we resign as manager or are terminated as manager for cause and, with respect to the Excess Value Participation, in the event of a Failure to Agree Termination (as defined below). The Interim Management Agreement may be terminated by either party without cause 90 days following written notice; however, any notice of termination given by us cannot be effective until December 31, 2011 at the earliest. Notwithstanding the foregoing, we have agreed with KBS to promptly commence and diligently seek to negotiate a full and complete management services agreement by no later than March 31, 2012. If the parties do not execute a mutually acceptable asset management services agreement prior to March 31, 2012, a Failure to Agree Termination shall be effectuated and the Interim Management Agreement shall automatically terminate on June 30, 2012, without liability or a penalty of any kind, except for our loss of the Excess Value Participation.
 
We rely on the credit and equity markets to finance and grow our business.  Despite signs of improvement in 2011, market conditions remained difficult for us with limited, if any, availability of new debt or equity capital. Our stock price remained low and we currently have limited, if any access to the public or private equity capital markets.   In this environment, we have sought to raise capital or maintain liquidity through other means, such as modifying debt arrangements, selling assets and aggressively managing our loan portfolio to encourage repayments, as well as reducing capital and overhead expenses and as a result, have engaged in limited new investment activity, other than reinvestment of available restricted cash within our CDOs.

We may need to modify our strategies, businesses or operations, and we may incur increased capital requirements and constraints to compete in a changed business environment. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects. 
 
Notwithstanding the challenges which confront us and continued volatility within the capital markets, our board of directors remains committed to identifying and pursuing strategies and transactions that could preserve or improve our cash flows from our CDOs, increase our net asset value per share of common stock, improve our future access to capital or otherwise potentially create value for our stockholders. In considering these alternatives (which could include additional repurchases or issuances of our debt or equity securities or strategic sales of our company or our assets), we expect our board of directors will carefully consider the potential impact of any such transaction on our liquidity position before deciding to pursue it. We expect our board of directors will only authorize us to take any of these actions if they can be accomplished on terms our board of directors finds attractive. Accordingly, there is a substantial possibility that not all such actions can or will be implemented.
 
In early June 2011, our board of directors created a special committee to evaluate strategic alternatives of our Company following the anticipated disposition of our Gramercy Realty’s assets.  The committee is authorized to engage a financial advisor to assist in this process.
 
Our property management and investment business, which operates under the name Gramercy Realty, historically focused on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. Our commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination, acquisition and portfolio management of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate-related securities. Neither Gramercy Realty nor Gramercy Finance is a separate legal entity but are divisions through which our property management and investment and commercial real estate finance businesses are conducted.
 
 
48

 
 
The aggregate carrying values, allocated by product type and weighted average coupons of Gramercy Finance’s loans, and other lending investments and CMBS investments as of March 31, 2011 and December 31, 2010, were as follows:
 
   
Carrying Value (1)
   
Allocation by
Investment Type
   
Fixed Rate Average
Yield
   
Floating Rate Average
Spread over LIBOR (2)
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
Whole loans, floating rate
  $ 633,010     $ 659,095       62.5 %     58.7 %     -       -    
352 bps
   
330 bps
 
Whole loans, fixed rate
    132,325       132,268       13.1 %     11.8 %     7.16 %     7.16 %     -       -  
Subordinate interests in whole loans, floating rate
    30,522       75,066       3.0 %     6.7 %     -       -    
614 bps
   
297 bps
 
Subordinate interests in whole loans, fixed rate
    46,465       46,468       4.6 %     4.1 %     6.01 %     6.01 %     -       -  
Mezzanine loans, floating rate
    112,594       152,349       11.1 %     13.5 %     -       -    
730 bps
   
754 bps
 
Mezzanine loans, fixed rate
    49,645       48,828       4.9 %     4.3 %     12.74 %     12.69 %     -       -  
Preferred equity, floating rate
    5,224       5,224       0.5 %     0.5 %     -       -    
350 bps
   
350 bps
 
Preferred equity, fixed rate
    2,285       4,230       0.2 %     0.4 %     7.22 %     7.25 %     -       -  
Subtotal/ Weighted average
    1,012,070       1,123,528       100.0 %     100.0 %     8.13 %     8.09 %  
417 bps
   
400 bps
 
CMBS, floating rate
    48,940       50,798       4.7 %     5.1 %     -       -    
399 bps
   
394 bps
 
CMBS, fixed rate
    993,606       954,369       95.3 %     94.9 %     7.54 %     8.37 %     -       -  
Subtotal/ Weighted average
    1,042,546       1,005,167       100.0 %     100.0 %     7.54 %     8.37 %  
399 bps
   
394 bps
 
Total
  $ 2,054,616     $ 2,128,695       100.0 %     100.0 %     7.65 %     8.32 %  
408 bps
   
400 bps
 
  
(1)
Loans and other lending investments and CMBS investments are presented net of unamortized fees, discounts, unfunded commitments, reserves for loan losses, impairments and other adjustments.
 
 
(2)
Spreads over an index other than 30 day-LIBOR have been adjusted to a LIBOR based equivalent. In some cases, LIBOR is floored, giving rise to higher current effective spreads.
 
The period during which we are permitted to reinvest principal payments on the underlying assets into qualifying replacement collateral for our 2005 CDO and 2006 CDO expired in July 2010 and July 2011, respectively, and will expire for our 2007 CDO in August 2012. In the past, our ability to reinvest has been instrumental in maintaining compliance with the overcollateralization and interest coverage tests for our CDOs. Following the conclusion of each CDO’s reinvestment period, our ability to maintain compliance with such tests for that CDO will be negatively impacted.
 
As of March 31, 2011, Gramercy Finance also held interests in one credit tenant net lease investments, or CTL investment and seven interests in real estate acquired through foreclosures.
 
As of March 31, 2011, Gramercy Realty owned a portfolio comprised of 621 bank branches, 321 office buildings and two land parcels, of which 52 bank branches were owned through an unconsolidated joint venture. Gramercy Realty’s consolidated properties aggregated approximately 25.3 million rentable square feet and its unconsolidated properties aggregated approximately 237 thousand rentable square feet. As of March 31, 2011, the occupancy of Gramercy Realty’s consolidated properties was 82.4% and the occupancy for its unconsolidated properties was 100%. Gramercy Realty’s two largest tenants are Bank of America and Wells Fargo Bank and as of March 31, 2011, they represented approximately 40.6% and 15.4%, respectively, of the rental income of Gramercy Realty’s portfolio and occupied approximately 42.7% and 16.6%, respectively, of its total rentable square feet.

 Summarized in the table below are our key property portfolio statistics as of March 31, 2011 and December 31, 2010:
 
   
Number of Properties
   
Rentable Square feet
   
Occupancy
 
Properties (1)
 
March 31,
2011
   
December 31,
2010
   
March 31,
2011
   
December 31,
2010
   
March 31,
2011
   
December 31,
2010
 
Branches
    569       571       3,676,185       3,689,190       84.4 %     84.4 %
Office Buildings
    321       321       21,613,441       21,613,441       82.1 %     82.3 %
Land
    2       2       -       -       -       -  
Total
    892 (2)     894       25,289,626       25,302,631       82.4 %     82.6 %
 
 
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(1)
Excludes investments in unconsolidated joint ventures. Approximately 872 properties, of which 52 properties are held by an unconsolidated joint venture, comprising of approximately 20,935,656 rentable square feet, of which approximately 237,172 rentable square feet are held owned through an unconsolidated joint venture, or the Lender Portfolio, are expected to be subject to the Settlement Agreement and ownership will be transferred to Gramercy Realty’s mezzanine lenders, in exchange for a mutual release of claims among us and the mortgage and mezzanine lenders and, subject to certain termination provisions, our continued management of the properties on behalf of the mezzanine lenders for a fixed fee plus incentive fees.  In  addition, our Dana portfolio, which consists of 15 properties comprising of approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. We will continue to manage the Lender Portfolio.

(2)
As of March 31, 2011, includes the sale of two properties.
 
Liquidity

Liquidity is a measurement of the ability to meet cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay dividends and other general business needs. In addition to cash on hand, our primary sources of funds for short-term liquidity (within the next 12 months) requirements, including working capital, distributions, if any, debt service and additional investments, if any, consists of (i) cash flow from operations; (ii) proceeds and management fees from our existing CDOs; (iii) proceeds from principal and interest payments and rents on our investments; (iv) proceeds from potential loan and asset sales; (v) proceeds from the Interim Management Agreement; and to a lesser extent, (vi) new financings or additional securitization or CDO offerings, and, (vii) proceeds from additional common or preferred equity offerings. We believe these sources of financing will be sufficient to meet our short term liquidity requirements. We do not anticipate having the ability in the near term to access new equity or debt capital through new warehouse lines, CDO issuances, term or credit facilities or trust preferred issuances, although we continue to explore capital raising options. In the event we are not able to successfully secure financing, we will rely primarily on cash on hand, cash flows from operations, principal, interest and lease payments on our investments, management fees, and proceeds from asset and loan sales to satisfy our liquidity requirements. If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset and loan sales in a timely manner or to receive anticipated proceeds from them or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations, and ability to make distributions to our stockholders.
 
Substantially all of our loan and other investments and CMBS are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO bonds and the remaining income, if any, is retained by us. Our CDO bonds contain minimum interest coverage and asset overcollateralization covenants that must be met in order for us to receive cash flow on the interests retained by us in the CDOs and to receive the subordinate collateral management fee earned. If we fail these covenants in some or all of the CDOs, all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO bonds and we may not receive some or all residual payments or the subordinate collateral management fee until that CDO regained compliance with such tests. As of July 2011 the most recent distribution date, our 2005 and 2006 CDOs were in compliance with their interest coverage and asset overcollateralization covenants, however the compliance margin was narrow and relatively small declines in collateral performance and credit metrics could cause the CDOs to fall out of compliance. We expect that the overcollateralization test for our 2005 CDO will fail at the October 2011 distribution date. Our 2005 CDO failed its overcollateralization test at the April 2011 and January 2011 distribution dates and our 2007 CDO failed its overcollateralization test at the August 2011, May 2011 and February 2011 distribution dates. The chart below is a summary of our CDO compliance tests as of the most recent distribution date (July 25, 2011 for our 2005 and 2006 CDOs and August 19, 2011 for our 2007 CDO):

Cash Flow Triggers
 
CDO 2005-1
   
CDO 2006-1
   
CDO 2007-1
 
Overcollateralization (1)
                 
Current
    118.96 %     109.21 %     87.26 %
Limit
    117.85 %     105.15 %     102.05 %
Compliance margin
    1.11 %     4.06 %     -14.79 %
Pass/Fail
 
Pass
   
Pass
   
Fail
 
Interest Coverage (2)
                       
Current
    650.49 %     695.19 %     N/A  
Limit
    132.85 %     105.15 %     N/A  
Compliance margin
    517.64 %     590.04 %     N/A  
Pass/Fail
 
Pass
   
Pass
      N/A  
  
 
(1)
The overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total bonds outstanding for the classes senior to those retained by us. To the extent, an asset is considered a defaulted security, the asset’s principal balance is multiplied by the asset’s recovery rate which is determined by the rating agencies.

 
(2)
The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by us.
 
 
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In the event of a breach of our CDO covenants that we could not cure in the near term, we would be required to fund our non-CDO expenses, with (i) cash on hand, (ii) income from any CDO not in default, (iii) income from our real property and unencumbered loan assets, (iv) management fees, (v) sale of assets, or (vi) accessing the equity or debt capital markets, if available.
 
The following discussion related to our Condensed Consolidated Financial Statements should be read in conjunction with our Condensed Consolidated Financial Statements appearing in Item 1 of this Quarterly Report on Form 10-Q.
 
Critical Accounting Policies
 
Our discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, known as GAAP. These accounting principles require us to make some complex and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments, which could significantly affect our reported assets, liabilities and contingencies, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time and made based upon information available to us at that time. We evaluate these decisions and assessments on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Refer to our 2010 Annual Report on Form 10-K for a discussion of our critical accounting policies, which include variable interest entities, or VIEs, real estate and CTL investments, leasehold interests, investments in unconsolidated joint ventures, assets held-for-sale, commercial mortgage-backed securities, pledged government securities, tenant and other receivables, intangible assets, deferred costs, revenue recognition, reserve for loan losses, rent expense, stock-based compensation plans, incentive distribution (Class B Limited Partner Interest), derivative instruments and income taxes. There have been no changes to these policies in 2011 except as disclosed below.
 
Variable Interest Entities
 
Consolidated VIEs
 
As of March 31, 2011, the Condensed Consolidated Balance Sheet includes $2,354,401 of assets and $2,786,363 of liabilities related to three consolidated VIEs. Due to the non-recourse nature of these VIEs, and other factors discussed below, our net exposure to loss from investments in these entities is limited to its beneficial interests in these VIEs.
  
Collateralized Debt Obligations
 
We currently consolidate three CDOs, which are VIEs.  These CDOs invest in commercial real estate debt instruments, the majority of which we originated within the CDOs, and are financed by the debt and equity issued. We are named as collateral manager of all three CDOs. As a result of consolidation, our subordinate debt and equity ownership interests in these CDOs have been eliminated, and the Condensed Consolidated Balance Sheet reflects both the assets held and debt issued by these CDOs to third parties. Similarly, the operating results and cash flows include the gross amounts related to the assets and liabilities of the CDOs, as opposed to our net economic interests in these CDOs.
 
Our interest in the assets held by these CDOs is restricted by the structural provisions of these entities, and the recovery of these assets will be limited by the CDOs’ distribution provisions, which are subject to change due to non-compliance with covenants.  The liabilities of the CDO trusts are non-recourse, and can generally only be satisfied from the respective asset pool of each CDO.
 
We are not obligated to provide any financial support to these CDOs. As of March 31, 2011, we have no exposure to loss as a result of the investment in these CDOs.  Since we are the collateral manager of the three CDOs and can make decisions related to the collateral that would most significantly impact the economic outcome of the CDOs, we have concluded that we are the primary beneficiary of the CDOs.
 
Unconsolidated VIEs
 
Investment in Commercial Mortgage-Backed Securities

We have investments in CMBS, which are considered to be VIEs.  These securities were acquired through investment, and are comprised primarily of securities that were originally investment grade securities, and do not represent a securitization or other transfer of our assets. We are not named as the special servicer or collateral manager of these investments, except as discussed further below.
 
 
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We are not obligated to provide, nor have we provided, any financial support to these entities. The majority of our securities portfolio, with an aggregate face amount of $1,246,650, is financed by our CDOs, and our exposure to loss is therefore limited to our interests in these consolidated entities described above. We have not consolidated the aforementioned CMBS investments due to the determination that based on the structural provisions and nature of each investment, we do not directly control the activities that most significantly impact the VIEs economic performance.
 
We further analyzed our investment in controlling class CMBS to determine if we are the primary beneficiary.  At March 31, 2010, we owned securities of a controlling non-investment grade CMBS investment, GS Mortgage Securities Trust 2007-GKK1, or the Trust, with a carrying value of $0. The total par amounts of CMBS issued by the Trust was $633,654.
 
The Trust is a resecuritization of $633,654 of CMBS originally rated AA through BB.  We purchased a portion of the below investment-grade securities, totaling approximately $27,300. The Manager is the collateral administrator on the transaction and receives a total fee of 5.5 basis points on the par value of the underlying collateral. We have determined that we are the non-transferor sponsor of the Trust. As collateral administrator, the Manager has the right to purchase defaulted securities from the Trust at fair value if very specific triggers have been reached. We have no other rights or obligations that could impact the economics of the Trust and therefore have concluded that we are not the primary beneficiary. The Manager can be removed as collateral administrator, for cause only, with the vote of 66 2/3% of the certificate holders. There are no liquidity facilities or financing agreements associated with the Trust. Neither we nor the Manager has any on-going financial obligations, including advancing, funding or purchasing collateral in the Trust.
 
At March 31, 2010, our maximum exposure to loss as a result of its investment in the Trust totaled $0, which equals the book value of this investment as of March 31, 2011.

Stock-Based Compensation Plans
 
The fair value of each stock option granted is estimated on the date of grant for options issued to employees, and quarterly for options issued to non-employees, using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2011 and 2010:
 
   
2011
   
2010
 
Dividend yield
    5.9 %     5.7 %
Expected life of option
 
5.0 years
   
5.0 years
 
Risk-free interest rate
    2.02 %     2.65 %
Expected stock price volatility
    105.0 %     75.0 %

Results of Operations
 
Comparison of the three months ended March 31, 2011 to the three months ended March 31, 2010
 
Revenues
   
2011
   
2010
   
$ Change
 
                   
Rental revenue
  $ 75,601     $ 78,039     $ (2,438 )
Investment income
    40,511       44,251       (3,740 )
Operating expense reimbursements
    28,281       28,888       (607 )
Other income
    4,321       1,868       2,453  
Total revenues
  $ 148,714     $ 153,046     $ (4,332 )
                         
Equity in net loss from unconsolidated joint ventures
  $ (687 )   $ (1,670 )   $ 983  
                         
Gain on extinguishment of debt
  $ 3,656     $ 7,740     $ (4,084 )
 
 
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Rental revenue for the three months ended March 31, 2011 and 2010 were $75,601 and $78,039, respectively. The decrease in rental revenue of $2,438 is primarily due to the non-renewal of nine leases and renewal of 37 leases at lower annual rents within our Wells Fargo Bank portfolio resulting in a decrease of $1,525, and reduced amortization and write-off of market lease intangibles of $1,004 primarily due to lease expirations, $1,167 decreases due to early terminations of leases by Bank of America and other tenants, and reduced parking revenue within our Dana portfolio of $443.  These reductions are partially offset by an increase of $1,069 from properties that we foreclosed on since April 2010 and leasing to new third party tenants of $553.
 
Investment income is generated on our whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS. For the three months ended March 31, 2011 and 2010, $25,413 and $24,134, respectively, were earned on fixed rate investments while the remaining $15,098 and $20,117, respectively, were earned on floating rate investments. The decrease of $3,740 over the prior period is primarily due to the payoff of six loans accounting for a $3,480 decrease in investment income, $3,807 due to the suspensions and reversals of interest income accruals, and a $999 decrease in loans foreclosed upon.  These decreases were partially offset by a $4,505 increase in investment income on new loan and lending investments since March 2010.
 
Operating expense reimbursement were $28,281 for the three months ended March 31, 2011 and $28,888 for the three months ended March 31, 2010, a decrease of $607.  The decrease is primarily attributable to a $586 reduction in direct billable reimbursement income that corresponds with a $591 decrease in direct billable expenses.  Within our Realty portfolio, our weighted average reimbursement rate decreased 0.4% from 72.2% for the three months ended March 31, 2010 to 71.8% for the three months ended March 31, 2011, which accounted for a decrease in reimbursement income of approximately $28.
 
Gains on sales and other income of $4,321 for the three months ended March 31, 2011 is comprised of income from the operations of foreclosed properties of $1,803, a gain on the sale of a loan of $1,241, lease termination fees of $8, interest on restricted and unrestricted cash balances held by us of $650 and $619 of other income.  For the three months ended March 31, 2010, gains on sales and other income is comprised of lease termination fees of $783, income from the operations of foreclosed properties of $4, interest on restricted and unrestricted cash balances held by us of $818 and $263 of other income. 

The loss on investments in unconsolidated joint ventures of $687 for the three months ended March 31, 2011 represents our proportionate share of the income generated by our joint venture interests includes $1,096 of real estate-related depreciation and amortization, which when added back, results in a contribution to Funds from Operations, or FFO, of $409. The loss on investments in unconsolidated joint ventures of $1,670 for the three months ended March 31, 2010 represents our proportionate share of income generated by our joint venture interests including $1,080 of real estate-related depreciation and amortization, which when added back, results in a reduction to FFO of $590. Our use of FFO as an important non-GAAP financial measure is discussed in more detail below.
 
During the three months ended March 31, 2011 and 2010, we repurchased at a discount, $10,400 and $19,000 of notes, respectively, issued by our three CDOs, generating net gains on early extinguishment of debt of $3,656 and $7,740, respectively.
 
 Expenses
 
   
2011
   
2010
   
$ Change
 
                   
Property operating expenses
  $ 50,762     $ 46,167     $ 4,595  
Interest expense
    50,589       50,269       320  
Depreciation and amortization
    18,898       27,689       (8,791 )
Management, general and administrative
    6,417       7,486       (1,069 )
Impairment on securities
    -       12,326       (12,326 )
Provision for loan loss
    17,500       41,160       (23,660 )
Provision for taxes
    70       38       32  
Total expenses
  $ 144,236     $ 185,135     $ (40,899 )
 
Property operating expenses increased $4,595 from the $46,167 recorded in the three months ended March 31, 2010 to $50,762 recorded in the three months ended March 31, 2011. The increase is primarily attributable to an increase of $2,992 related to properties we foreclosed on since January 2010, $1,331 of costs incurred in connection with our Goldman Mortgage Loan and Goldman Mezzanine Loans, $756 of additional property salary and benefit costs due to the reassignment of staff, and $583 of additional repair and maintenance costs.  These increases were offset by a reduction of $591 in direct billable expenses and $455 of saving in real estate tax assessments.
 
Interest expense was $50,589 for the three months ended March 31, 2011 compared to $50,269 for the three months ended March 31, 2010. The increase of $320 is primarily attributed to increased interest rates on our Goldman Mortgage Loan and Goldman Mezzanine Loans, totaling $1,861 and increased amortization of financing costs of $951 related to the extension of our Goldman Mortgage and Goldman Mezzanine Loans.  These increases were partially offset by $582 reduction of interest expense due the redemption of the $52,500 Junior Subordinated Notes, the reduction in our Realty portfolio of interest expense due to the amortization of the outstanding principal balances which totaled $777, reduced amortization of financing costs on our CDO bonds and lower interest within our CDOs of $497 as a result of our derivatives.
 
 
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We recorded depreciation and amortization expenses of $18,898 for the three months ended March 31, 2011, compared to $27,689 for the three months ended March 31, 2010. The decrease of $8,791 is primarily related to a reduction in amortization of $3,094 due to lease intangibles and loan costs becoming fully amortized, and reduced depreciation and amortization of $6,474 on our Realty assets resulting from the recording an impairment on our Realty portfolio of $909,805 in December 2010.  These reductions are offset by $373 of depreciation and amortization on property acquired through foreclosure and $404 of additional depreciation on capital additions.
 
Management, general and administrative expenses were $6,417 for the three months ended March 31, 2011, compared to $7,486 for the same period in 2010. The decrease of $1,069 includes $1,121 of lower salaries and benefits due to reduced and reassigned staff and lower legal and professional fees of $78.  These savings were offset by increased audit and tax fees of $128.
 
During the three months ended March 31, 2010, we recorded impairment charges of $12,326 on an other-than-temporary impairment due to an adverse change in expected cash flows related to credit losses for six CMBS investments. During the three months ended March 31, 2011, we did not record any impairment charges our CMBS investments.
 
Provision for loan losses was $17,500 for the three months ended March 31, 2011, compared to $41,160 for the three months ended March 31, 2010, a decrease of $23,660. The provision was based upon periodic credit reviews of our loan portfolio.

Liquidity and Capital Resources
 
Liquidity is a measurement of the ability to meet cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay dividends, if any, and other general business needs. In addition to cash on hand, our primary sources of funds for short-term liquidity requirements, including working capital, distributions, if any, debt service and additional investments, if any, consist of: (i) cash flow from operations; (ii) proceeds and management fees from our existing CDOs; (iii) proceeds from principal and interest payments and rents on our investments; (iv) proceeds from potential loan and asset sales; (v) proceeds from the Interim Management Agreement, and, to a lesser extent; (vi) new financings or additional securitizations or CDO offerings and, (vii) proceeds from additional common or preferred equity offerings. We believe these sources of financing will be sufficient to meet our short-term liquidity requirements. We do not anticipate having the ability in the near-term to access equity or debt capital through new warehouse lines, CDO issuances, term or credit facilities or trust preferred issuances, although we continue to explore capital raising options. In the event we are not able to successfully secure financing, we will rely primarily on cash on hand, cash flows from operations, principal, interest and lease payments on our investments, management fees, and proceeds from asset and loan sales to satisfy our liquidity requirements. If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset and loan sales in a timely manner or to receive anticipated proceeds from them or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations, and our ability to make distributions to our stockholders.
 
Our ability to fund our short-term liquidity needs, including debt service and general operations (including employment related benefit expenses) through cash flow from operations can be evaluated through the Condensed Consolidated Statement of Cash Flows provided in our financial statements.
 
Beginning with the third quarter of 2008 our board of directors elected not to pay a dividend on our common stock. Additionally our board of directors elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. As of March 31, 2011 and December 31, 2010, we accrued $17,905 and $16,114, respectively, for the Series A preferred stock dividends. As a result, we have accrued dividends for over six quarters which pursuant to the terms of our charter permits the Series A preferred stockholders to elect an additional director to our board of directors. We may, or upon a properly submitted request of the holders of the Series A preferred stock representing 20% or more of the liquidation value of the Series A preferred stock, shall call a special meeting of our stockholders to elect such additional director in accordance with the provisions of our bylaws and other procedures established by our board of directors.  In accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full. We do not know when or if we will pay future dividends, including accumulated and unpaid dividends on the Series A preferred stock.
 
Our ability to meet our long-term liquidity (beyond the next 12 months) and capital resource requirements will be subject to obtaining additional debt financing and equity capital. Our inability to renew, replace or expand our sources of financing on substantially similar terms, or any at all may have an adverse effect on our business and results of operations. Any indebtedness we incur will likely be subject to continuing or more restrictive covenants and we will likely be required to make continuing representations and warranties in connection with such debt. 
 
 
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As of the date of this filing, we expect that our cash on hand and cash flow from operations will be sufficient to satisfy our current and our anticipated liquidity needs as well as our recourse liabilities.
 
Our current and future borrowings may require us, among other restrictive covenants, to keep uninvested cash on hand, to maintain a certain portion of our assets free from liens and to secure such borrowings with assets. These conditions could limit our ability to do further borrowings. We were in compliance with all such covenants as of March 31, 2011. We were not in compliance with the tangible net worth covenant under our loan agreement with PB Capital Corporation, or the PB Loan Agreement, as of June 30, 2011, and such non-compliance may permit the lender to exercise remedies against the mortgage collateral on a non-recourse basis.  In September 2011, pursuant to the Settlement Agreement, the PB Loan Agreement and the related collateral will be transitioned to the mezzanine lenders. Accordingly, as a result of the execution of the Settlement Agreement, any acceleration of the PB Loan Agreement loan is not expected to have an adverse effect on us. If we are unable to make required payments under such borrowings, breach any representation or warranty in the loan documents or violate any covenant contained in a loan document, lenders may accelerate the maturity of our debt. If we are unable to retire our borrowings in such a situation, (i) we may need to prematurely sell the assets securing such debt, (ii) the lenders could accelerate the debt and foreclose on our assets pledged as collateral to such lenders, (iii) such lenders could force us into bankruptcy, (iv) such lenders could force us to take other actions to protect the value of their collateral and/or (v) our other debt financings could become immediately due and payable. Any such event would have a material adverse effect on our liquidity, the value of our common stock, and our ability to make distributions to our stockholders.
 
The majority of our loan and other investments are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO bonds and the remaining income, if any, is retained by us. Our CDO indentures contain minimum interest coverage and asset overcollateralization covenants that must be met in order for us to receive cash flow on the interests retained by us and to receive the subordinate collateral management fee earned. If some or all of our CDOs fail to comply with the covenants all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO bonds and we may not receive some or all residual payments or the subordinate collateral management fee until that CDO regained compliance with such tests. As of July 2011, our 2005 and 2006 CDOs were in compliance with their interest coverage and asset overcollateralization covenants; however, the compliance margin was narrow and relatively small declines in collateral performance and credit metrics could cause the CDO fall out of compliance. We expect that the overcollateralization test for the 2005 CDO will fail at the October 2011 distribution date. Our 2005 CDO failed its overcollateralization test at the April 2011 and January 2011 distribution dates and our 2007 CDO failed the overcollateralization test at the August 2011, May 2011 and February 2011 distribution dates.
 
To maintain our qualification as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income, if any. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital for operations. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. However, in accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A Preferred Stock are paid in full.
 
Cash Flows
 
Net cash provided by operating activities decreased $10,835 to $9,565 for the three months ended March 31, 2011 compared to cash provided by of $20,400 for the same period in 2010. Operating cash flow was generated primarily by net interest income from our commercial real estate finance segment and net rental income from our property investment segment. The decrease in operating cash flow for the three months ended March 31, 2011 compared to the same period in 2010 was primarily due to a decrease in operating assets and liabilities of $8,061.  The increase in net income of $29,137 is primarily attributable to the decrease of non-cash impairment charges of $12,219, a gain on extinguishment of debt of $4,084 and provision of loan loss of $23,660.

Net cash provided by investing activities for the three months ended March 31, 2011 was $98,908 compared to net cash provided by investing activities of $48,033 during the same period in 2010. The increase in cash flow from investing activities is primarily due to the principal collections on investments.

Net cash used in financing activities for the three months ended March 31, 2011 was $117,008 as compared to net cash used in financing activities of $79,332 during the same period in 2010. The change is primarily attributable to the repayments of CDOs.
 
 
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Capitalization
 
Our authorized capital stock consists of 125.0 million shares, $0.001 par value, of which we have authorized the issuance of up to 100.0 million shares of common stock, $0.001 par value per share, and 25.0 million shares of preferred stock, par value $0.001 per share. As of March 31, 2011, 49,992,705 shares of common stock and 3,525,822 shares of 8.125% Series A cumulative redeemable preferred stock were issued and outstanding.
 
Preferred Stock
 
Beginning with the fourth quarter of 2008, our board of directors elected not to pay the quarterly Series A preferred stock dividends of $0.50781 per share. As of March 31, 2011 and December 31, 2010, we have accrued Series A preferred stock dividends of $17,905 and $16,114, respectively. As a result, we have accrued dividends for over six quarters which pursuant to the terms of our charter, permits the Series A preferred stockholders to elect an additional director to our board of directors. We may, or upon a properly submitted request of the holders of the Series A preferred stock representing 20% or more of the liquidation value of the Series A preferred stock, shall call a special meeting of our stockholders to elect such additional director in accordance with the provisions of our bylaws and other procedures established by our board of directors relating to election of directors.

 Market Capitalization
 
At March 31, 2011, our CDOs and mortgage loans (including the Goldman Mortgage Loan and the Goldman Mezzanine Loans) represented 94% of our consolidated market capitalization of $5, 115,420 (based on a common stock price of $4.24 per share, the closing price of our common stock on the New York Stock Exchange on March 31, 2011). Market capitalization includes our consolidated debt and common and preferred stock.
 
Indebtedness
 
The table below summarizes secured and other debt at March 31, 2011 and December 31, 2010:

   
March 31, 2011
   
December 31,
2010 (1)
 
Mortgage notes payable
  $ 1,633,785     $ 1,640,671  
Mezzanine notes payable
    549,713       549,713  
Collateralized debt obligations
    2,631,807       2,682,321  
                 
Total
  $ 4,815,305     $ 4,872,705  
                 
Cost of debt
 
LIBOR+3.14%
   
LIBOR+2.47%
 

 
(1)
In September 2011, pursuant to the Settlement Agreement with respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the mortgage notes payable and the related collateral will be transitioned to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of the Lender Portfolio on behalf of the mezzanine lenders for a fixed fee plus incentive fees.

Mortgage and Mezzanine Loans
 
Certain real estate assets are subject to mortgage and mezzanine liens. As of March 31, 2011, 944 (including 52 properties held by an unconsolidated joint venture) of our real estate assets were encumbered with mortgages and mezzanine debt with a cumulative outstanding balance of $2,183,498.  In September 2011, pursuant to the Settlement Agreement with respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the mortgage notes payable and the related collateral will be transitioned to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of the Lender Portfolio on behalf of the mezzanine lenders for a fixed fee plus incentive fees.
 
Our mortgage notes payable typically require that specified loan-to-value and debt service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not satisfied, in addition to other conditions that we may have to observe, our ability to release properties from the financing may be restricted and the lender may be able to “trap” portfolio cash flow until the required ratios are met on an ongoing basis. As of March 31, 2011 and December 31, 2010, we were in covenant compliance on all of our mortgage and mezzanine loans, except that, as of March 31, 2011 and December 31, 2010, we were out of debt service coverage compliance under two of our mortgage note financings. Such non-compliance does not constitute an event of default under the applicable loan agreements. Under one of the loans, the lender has the ability to restrict distributions which are limited to budgeted property operating expenses; under the other loan, the lender has the right to replace the management of the property. We also were not in compliance with the tangible net worth covenant under our PB Loan Agreement, and such non-compliance may permit the lender to exercise remedies against the mortgage collateral on a non-recourse basis. In September 2011, pursuant to the Settlement Agreement, the PB Loan Agreement and the related collateral will be transitioned to the mezzanine lenders. Accordingly, as a result of the execution of the Settlement Agreement, any acceleration of the PB Loan Agreement loan is not expected to have an adverse effect on us.
  
 
56

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

Goldman Mortgage Loan
 
On April 1, 2008, certain of our subsidiaries, collectively, the Goldman Loan Borrowers, entered into the Goldman Mortgage Loan with GSMC, Citicorp and SL Green in connection with a mortgage loan in the amount of $250,000, which is secured by certain properties owned or ground leased by the Goldman Loan Borrowers. The Goldman Mortgage Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mortgage Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mortgage Loan. The Goldman Mortgage Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during the first six months, payable to the lender, as long as simultaneously therewith a proportionate prepayment of the Goldman Mezzanine Loans (discussed below) shall also be made on such date. In August 2008, an amendment to the loan agreement was entered into for the Goldman Mortgage Loan in conjunction with the bifurcation of the Goldman Mezzanine Loan into two separate mezzanine loans. Under this loan agreement amendment, the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. We have accrued interest of $711 and $256 and borrowings of $240,523 and $240,523 as of March 31, 2011 and December 31, 2010, respectively.
 
In March 2010, we extended the maturity date of the Goldman Mortgage Loan to March 2011, and amended certain terms of the loan agreement, including, among others, (i) a prohibition on distributions from the Goldman Loan Borrowers to us, other than to cover  direct costs related to executing the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Realty, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Goldman Mortgage Loan extension term, and (iii) within 90 days after the first day of the Goldman Mortgage Loan extension term, delivery by the Goldman Loan Borrowers to GSMC, Citicorp and SL Green of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Goldman Mortgage Loan. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, we entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions fail.  On May 9, 2011, we announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.
 
Notwithstanding the maturity and non-repayment of the loans, we maintained active communications with the lenders and in September 2011, we entered into the Settlement Agreement for an orderly transition of substantially all of Gramercy Realty assets to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among us and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for our continued management of the Lender Portfolio on behalf of the mezzanine lenders for a fixed fee plus incentive fees. In July 2011, our Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. Subsequent to the execution of the Settlement Agreement, the business of Gramercy Realty will change from being primarily an owner of commercial properties to being primarily a third party manager of commercial properties. The scale of Gramercy Realty’s revenues will decline substantially as a substantial portion of net revenues from property operations will be replaced with fee revenues of a substantially smaller scale. Additionally, as assets are transferred, our total assets and liabilities are expected to decline substantially. The transition of Gramercy Realty’s business and the effects of these changes on our Consolidated Financial Statements are expected to be completed by December 31, 2011.
 
 
57

 
 
Goldman Senior and Junior Mezzanine Loans
 
On April 1, 2008, certain of our subsidiaries, collectively, the Mezzanine Borrowers, entered into a mezzanine loan agreement with GSMC, Citicorp and SL Green in connection with a mezzanine loan in the amount of $600,000, or the Goldman Mezzanine Loan, which is secured by pledges of certain equity interests owned by the Mezzanine Borrowers and any amounts receivable by the Mezzanine Borrowers whether by way of distributions or other sources. The Goldman Mezzanine Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mezzanine Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mezzanine Loan. The Goldman Mezzanine Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during the first six months, payable to the lender, as long as simultaneously therewith a proportionate prepayment of the Goldman Mortgage Loan shall also be made on such date. In addition, under certain circumstances the Goldman Mezzanine Loan is cross-defaulted with events of default under the Goldman Mortgage Loan and with other mortgage loans pursuant to which an indirect wholly-owned subsidiary of ours is the mortgagor. In August 2008, the Goldman Mezzanine Loan was bifurcated into two separate mezzanine loans (the Junior Mezzanine Loan and the Senior Mezzanine Loan) by the lenders and the Senior Mezzanine Loan was assigned to KBS.  Additional loan agreement amendments were entered into for the Goldman Mezzanine Loan and Goldman Mortgage Loan. Under these loan agreement amendments, the Junior Mezzanine Loan bears interest at 6.00% over LIBOR and the Senior Mezzanine Loan bears interest at 5.20% over LIBOR, and the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The weighted average of these interest rate spreads is equal to the combined weighted average of the interest rates spreads on the initial loans. The Goldman Mezzanine Loans encumber all properties held by Gramercy Realty.  We have accrued interest of $2,493 and $1,454 and borrowings of $549,713 and $549,713 as of March 31, 2011 and December 31, 2010, respectively.
 
In March 2010, we extended the maturity date of the Goldman Mortgage Loan to March 2011, and amended certain terms of the loan agreement, including, among others, (i) a prohibition on distributions from the Goldman Loan Borrowers to us, other than to cover  direct costs related to executing the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Realty, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Goldman Mortgage Loan extension term, and (iii) within 90 days after the first day of the Goldman Mortgage Loan extension term, delivery by the Goldman Loan Borrowers to GSMC, Citicorp and SL Green of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Goldman Mortgage Loan. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, we entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions fail.  On May 9, 2011, we announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.
 
Notwithstanding the maturity and non-repayment of the loans, we maintained active communications with the lenders and in September 2011, we entered into the Settlement Agreement for an orderly transition of substantially all of Gramercy Realty assets to the mezzanine lenders, in exchange for a mutual release of claims among us and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for our continued management of the Lender Portfolio assets on behalf of the mezzanine lenders for a fixed fee plus incentive fees. In July 2011, our Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. Subsequent to the execution of the Settlement Agreement, the business of Gramercy Realty will change from being primarily an owner of commercial properties to being primarily a third party manager of commercial properties. The scale of Gramercy Realty’s revenues will decline substantially as a substantial portion of net revenues from property operations will be replaced with fee revenues of a substantially smaller scale. Additionally, as assets are transferred, its total assets and liabilities are expected to decline substantially. The transition of Gramercy Realty’s business and the effects of these changes on our Condensed Consolidated Financial Statements are expected to be complete by December 31, 2011.
 
 Collateralized Debt Obligations
 
Our loans and other investments serve as collateral for our CDO securities, and the income generated from these investments is used to fund interest obligations of our CDO securities and the remaining income, if any, is retained by us. The CDO indentures contain minimum interest coverage and asset overcollateralization covenants that must be satisfied in order for us to receive cash flow on the interests retained by us in our CDOs and to receive the subordinate collateral management fee earned. If some or all of our CDOs fail these covenants, all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO securities, and we may not receive some or all residual payments or the subordinate collateral management fee until the applicable CDO regained compliance with such tests. As of the July 2011 distribution date, our 2005 and 2006 CDOs were in compliance with their interest coverage and asset overcollateralization covenants, however the compliance margin was narrow and relatively small declines in collateral performance and credit metrics could cause the CDOs to fall out of compliance. We expect that the overcollateralization test for the 2005 CDO will fail at the October 2011 distribution date. Our 2005 CDO failed its overcollateralization test at the April 2011 and January 2011 distribution dates and our 2007 CDO failed its overcollateralization test at the August 2011, May 2011 and February 2010 distribution dates.

 During the three months ended March 31, 2011 and 2010, we repurchased, at a discount, $10,400 and $19,000, respectively, of notes previously issued by one of our three CDOs. We recorded a net gain on the early extinguishment of debt of $3,656 and $7,740 for the three months ended March 31, 2011 and 2010, respectively. 
 
 
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Contractual Obligations
 
Combined aggregate principal maturities of our CDOs, mortgage loans (including the Goldman Mortgage Loan and Senior and Junior Mezzanine Loans), unfunded loan commitments and operating leases as of March 31, 2011 are as follows:
 
   
CDOs
   
Mortgage and
Mezzanine
Loans (1)
   
Interest
Payments
   
Unfunded Loan
Commitments(2)
   
Operating
Leases
   
Total
 
2011 (April 1 - December 31)
  $ -     $ 809,738     $ 118,331     $ 3,561     $ 16,036     $ 947,666  
2012
    -       80,727       147,323       -       21,132       249,182  
2013
    -       602,906       132,013       -       20,647       755,566  
2014
    -       12,884       109,105       -       20,064       142,053  
2015
    -       47,650       104,712       -       19,243       171,605  
Thereafter
    2,631,807       618,767       214,463       -       159,107       3,624,144  
Above / Below Market Interest
    -       10,826       -       -       -       10,826  
   Total
  $ 2,631,807     $ 2,183,498     $ 825,947     $ 3,561     $ 256,229     $ 5,901,042  
 
(1)
Certain of our real estate assets are subject to mortgage liens. As of March 31, 2011, 709 real estate assets were encumbered with 25 mortgages with a cumulative outstanding balance of approximately $1,622,959. As of March 31, 2011, the mortgages’ balance ranged in amount from approximately $387 to $458,605 and had maturity dates ranging from approximately eight months to 19 years. As of March 31, 2011, 23 of the loans had fixed interest rates ranging 5.06% to 10.29% and four variable rate loans had interest rates ranging from 1.91% to 10.26%. In September 2011, pursuant to the Settlement Agreement with respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the mortgage notes payable and the related collateral will be transitioned to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of the Lender Portfolio on behalf of the mezzanine lenders for a fixed fee plus incentive fees. In July 2011, our Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet was transferred to its mortgage lender through a deed in lieu of foreclosure.

(2)
Based on loan budgets and estimates.

Off-Balance-Sheet Arrangements
 
We have several off-balance-sheet investments, including joint ventures and structured finance investments. These investments all have varying ownership structures. Substantially all of our joint venture arrangements are accounted for under the equity method of accounting as we have the ability to exercise significant influence, but not control over the operating and financial decisions of these joint venture arrangements. Our off-balance-sheet arrangements are discussed in Note 5, “Investments in Joint Ventures” in the accompanying financial statements.
 
Dividends
 
To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, if any, determined before taking into consideration the dividends paid deduction and net capital gains. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, which would only be paid out of available cash, we must first meet both our operating requirements and scheduled debt service on our mortgages and loans payable. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. Beginning with the third quarter of 2008, our board of directors elected not to pay a dividend on our common stock.  Our board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividends have been accrued for ten quarters as of March 31, 2011.  As a result, we have accrued dividends for over six quarters which pursuant to the terms of our charter, permits the Series A preferred stockholders to elect an additional director to our board of directors. We may, or upon a properly submitted request of the holders of the Series A preferred stock representing 20% or more of the liquidation value of the Series A preferred stock shall call a special meeting of our stockholders to elect such additional director in accordance with the provisions of our bylaws and other procedures established by our board of directors relating to election of directors.
 
However, in accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full.
 
 
59

 
 
Inflation
 
A majority of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance more so than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.

Further, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors based primarily on our net income as calculated for tax purposes, in each case, our activities and balance sheet are measured with reference to historical costs or fair market value without considering inflation.
 
Related Party Transactions
 
An affiliate of SL Green continues provides special servicing services with respect to a limited number of loans owned by us that are secured by properties in New York City, or in which we and SL Green are co-investors. For the three months ended March 31, 2011 and 2010, we incurred expenses of $41 and $25, pursuant to the special servicing arrangement.

 Commencing in May 2005, we are party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporate offices at 420 Lexington Avenue, New York, New York. The lease is for approximately 7.3 thousand square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in year ten. In May and June 2009, we amended our lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2.3 thousand square feet. The additional premises is leased on a co-terminus basis with the remainder of our leased premises and carries rents of approximately $103 per annum during the initial year and $123 per annum during the final lease year. For the three months ended March 31, 2011 and 2010 we paid $77 and $76 under this lease, respectively.
 
In March 2006, we closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green was an equity holder. The mezzanine loan was repaid in full on May 9, 2006, when we originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint venture. The whole loan is secured by office and industrial properties in northern New Jersey and has a book value of $24,821 as of March 31, 2011 and December 31, 2010, respectively.

In January 2007, we originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a portfolio of multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an office property. On March 8, 2007, the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event our loan became secured by a first mortgage lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and one-month LIBOR plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from us and held a 15.15% pari-passu interest in the mezzanine loan and the whole loan. The investment in the mezzanine loan was repaid in full in September 2007. In September 2010, the whole loan was repaid at a discount.  We received $56,093 and we forgave the remaining balance outstanding.
 
In April 2007, we purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34th Street in New York, New York. The acquisition was financed with $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. We sold our 45% interest in December 2010 to a wholly-owned subsidiary of SL Green for net proceeds of $25,350, resulting in a loss of $11,885. We recorded our pro rata share of net income of $1,263 for the three months ended March 31, 2010.

 In July 2007, we purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu.  We sold our 45% interest in December 2010 to a wholly-owned subsidiary of SL Green for net proceeds of $38,911, resulting in a loss of $15,407. We recorded our pro rata share of net income of $1,523 for the three months ended March 31, 2010.
 
In September 2007, we acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter, we, along with SL Green, sold all of our interests in the loan to an unaffiliated third party. Additionally, we acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same properties as the preceding senior mezzanine loan. Immediately thereafter, we participated 50% of our interest in the loan back to SL Green. As of March 31, 2011 and December 31, 2010, the loan has a book value of $0. In October 2007, we acquired a 50% pari-passu interest in $57,795 of two additional tranches in the senior mezzanine loan from an unaffiliated third party. At closing, an affiliate of SL Green simultaneously acquired the other 50% pari-passu interest in the two tranches. As of March 31, 2011 and December 31, 2010, the loan has a book value of $0. We held a contingent interest in the property which was sold to SL Green in December 2010 for $2,016.
 
 
60

 
 
In December 2007, we acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter, we participated 50% of our interest in the loan to an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%. In December 2010, we subsequently purchased an affiliate of SL Green’s full participation in the senior mezzanine loan at a discount. As of March 31, 2011 and December 31, 2010, the original loan has a book value of $5,224 and $5,224 and the subsequently purchased loan has a book value of $13,939 and $13,586, respectively.
 
In August 2008, we closed on the purchase from an SL Green affiliate of a $9,375 pari-passu participation interest in a $18,750 first mortgage. The loan is secured by a retail shopping center located in Staten Island, New York. The investment bears interest at a fixed rate of 6.50%. In December 2010, we purchased at a discount, the remaining 50% interest in the loan from an SL Green affiliate for $9,420. As of March 31, 2011 and December 31, 2010, the loan has a book value of $19,424 and $19,367, respectively.
 
In September 2008, we closed on the purchase from an SL Green affiliate of a $30,000 interest in a $135,000 mezzanine loan. The loan is secured by the borrower’s interests in a retail condominium located New York, New York. The investment bears interest at an effective spread to one-month LIBOR of 10.00%. As of December 31, 2010, the loan had a book value of $27,778. In December 2010, we sold the contingent interest to SL Green for $300. In March 2011, the loan was paid in full by the borrower.

In December 2010, we sold our interest in a parcel of land located at 292 Madison Avenue in New York, New York to a wholly-owned subsidiary of SL Green. We received proceeds of $16,765 and recorded an impairment charge of $9,759.

Funds from Operations
 
We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITS. We also use FFO as one of several criteria to determine performance-based incentive compensation for members of our senior management, which may be payable in cash or equity awards. The revised White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, in April 2002 defines FFO as net income (loss) (computed in accordance with GAAP, inclusive of the impact of straight line rents), excluding gains (or losses) from items which are not a recurring part of our business, such as sales of properties, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We consider gains and losses on the sales of debt investments to be a normal part of our recurring operations and therefore include such gains and losses when arriving at FFO. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as an indication of our financial performance, or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it entirely indicative of funds available to fund our cash needs, including our ability to make cash distributions. Our calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited.
 
 
61

 
 
FFO for the three months ended March 31, 2011 and 2010 are as follows:
 
   
Three months ended March 31,
 
   
2011
   
2010
 
Net income (loss) available to common stockholders
  $ 4,959     $ (24,768 )
Add:
               
Depreciation and amortization
    20,441       29,565  
FFO adjustments for unconsolidated joint ventures
    1,096       1,080  
Less:
               
Non real estate depreciation and amortization
    (1,827 )     (2,185 )
Gain on sale of real estate
    (937 )     (1,041 )
Funds from operations
  $ 23,732     $ 2,651  
                 
Funds from operations per share - basis
  $ 0.47     $ 0.05  
                 
Funds from operations per share - diluted
  $ 0.47     $ 0.05  
 
 
62

 
 
Cautionary Note Regarding Forward-Looking Information
 
        This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. You can identify forward-looking statements by the use of forward-looking expressions such as "may," "will," "should," "expect," "believe," "anticipate," "estimate," "intend," "plan," "project," "continue," or any negative or other variations on such expressions. Forward-looking statements include information concerning possible or assumed future results of our operations, including any forecasts, projections, plans and objectives for future operations. Although we believe that our plans, intentions and expectations as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions or expectations will be achieved. We have listed below some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from the forward-looking statements we make in this report. These risks, uncertainties and contingencies include, but are not limited to, the following:
 
 
·
our ability to complete an orderly transition of all or substantially all of the collateral for the Goldman Mortgage Loan and the Goldman Mezzanine Loans pursuant to the Settlement Agreement;
 
 
·
the continuity of the management agreement for the lender portfolio;
 
 
·
reduction in cash flows received from our investments, in particular our CDOs and our Gramercy Realty portfolio;
 
 
·
the adequacy of our cash reserves, working capital and other forms of liquidity;
 
 
·
the availability, terms and deployment of short-term and long-term capital;
 
 
·
the performance and financial condition of borrowers, tenants, and corporate customers;
 
 
·
the cost and availability of our financings, which depends in part on our asset quality, the nature of our relationships with our lenders and other capital providers, our business prospects and outlook and general market conditions;
 
 
·
availability of, and ability to retain, qualified personnel and directors;
 
 
·
our ability to satisfy all covenants in our CDOs and specifically compliance with overcollateralization and interest coverage tests,;
 
 
·
changes to our management and board of directors;
 
 
·
the success or failure of our efforts to implement our current business strategy;
 
 
·
economic conditions generally and in the commercial finance and real estate markets and the banking industry specifically;
 
 
·
the resolution of our non-performing and sub-performing assets and any losses we might recognize in connection with such investments;
 
 
·
unanticipated increases in financing and other costs, including a rise in interest rates;
 
 
·
availability of investment opportunities on real estate assets and real estate-related and other securities;
 
 
·
our ability to comply with financial covenants in our debt instruments, but specifically in our loan agreement with PB Capital Corporation;
 
 
·
risks of structured finance investments;
 
 
·
risks of real estate acquisitions;
 
 
·
the actions of our competitors and our ability to respond to those actions;
 
 
·
the timing of cash flows, if any, from our investments;
 
 
·
our ability to lease-up assumed leasehold interests above the leasehold liability obligation;
 
 
·
demand for office space;
 
 
·
our ability to maintain our current relationships with financial institutions and to establish new relationships with additional financial institutions;
 
 
·
our ability to identify and complete additional property acquisitions;
 
 
·
our ability to profitably dispose of non-core assets;
 
 
·
changes in governmental regulations, tax rates and similar matters;
 
 
63

 
 
 
·
legislative and regulatory changes (including changes to laws governing the taxation of REITs or the exemptions from registration as an investment company);
 
 
·
environmental and/or safety requirements;
 
 
·
our ability to satisfy complex rules in order for us to qualify as a REIT, for federal income tax purposes and qualify for our exemption under the Investment Company Act, our operating partnership’s ability to satisfy the rules in order for it to qualify as a partnership for federal income tax purposes, and the ability of certain of our subsidiaries to qualify as REITs and certain of our subsidiaries to qualify as taxable REIT subsidiaries for federal income tax purposes, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;
 
 
·
the continuing threat of terrorist attacks on the national, regional and local economies; and
 
 
·
other factors discussed under Item IA Risk Factors of this Annual Report on Form 10-K for the year ended December 31, 2010 and those factors that may be contained in any filing we make with the SEC, including Part II, Item 1A of the Quarterly Reports on Form 10-Q.

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

        The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
 
Recently Issued Accounting Pronouncements
 
For a discussion of the impact of new accounting pronouncements on our financial condition or results of operation, see Note 2 of the Condensed Consolidated Financial Statements.
 
 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market Risk
 
Market risk includes risks that arise from changes in interest rates, credit, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risks to which we will be exposed are real estate, interest rate, and credit risks. These risks are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
 
Real Estate Risk
 
Commercial and multi-family property values and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions, local real estate conditions (such as an oversupply of retail, industrial, office or other commercial or multi-family space), changes or continued weakness in specific industry segments, construction quality, age and design, demographic factors, retroactive changes to building or similar codes, and increases in operating expenses (such as energy costs). In the event net operating income decreases, a borrower may have difficulty repaying our loans, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses. Even when a property’s net operating income is sufficient to cover the property’s debt service at the time a loan is made, there can be no assurance that this will continue in the future. We employ careful business selection, rigorous underwriting and credit approval processes and attentive asset management to mitigate these risks. These same factors pose risks to the operating income we receive from our portfolio of real estate investments, the valuation of our portfolio of owned properties, and our ability to refinance existing mortgage and mezzanine borrowings supported by the cash flow and value of our owned properties.
 
Interest Rate Risk
 
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our operating results will depend in large part on differences between the income from our assets and our borrowing costs. Most of our commercial real estate finance assets and borrowings are variable-rate instruments that we finance with variable rate debt. The objective of this strategy is to minimize the impact of interest rate changes on the spread between the yield on our assets and our cost of funds. We seek to enter into hedging transactions with respect to all liabilities relating to fixed rate assets. If we were to finance fixed rate assets with variable rate debt and the benchmark for our variable rate debt increased, our net income would decrease. Some of our loans are subject to various interest rate floors. As a result, if interest rates fall below the floor rates, the spread between the yield on our assets and our cost of funds will increase, which will generally increase our returns. Because we generate income on our commercial real estate finance assets principally from the spread between the yields on our assets and the cost of our borrowing and hedging activities, our net income on our commercial real estate finance assets will generally increase if LIBOR increases and decrease if LIBOR decreases. Our real estate assets generate income principally from fixed long-term leases and we are exposed to changes in interest rates primarily from our floating rate borrowing arrangements. We have used interest rate caps to manage our exposure to interest rate changes above 5.25% on $850,000 of borrowings, however, because our borrowing secured by our real estate assets is largely unhedged and because our real estate assets generate income from long-term leases, our net income from our real estate assets will generally decrease if LIBOR increases.  The following chart shows a hypothetical 100 basis point increase in interest rates along the entire interest rate curve:

Change in LIBOR
 
Projected Increase
(Decrease) in Net Income
 
Base case
     
+100 bps
  $ (8,271 )
+200 bps
  $ (12,682 )
+300 bps
  $ (16,651 )

Our exposure to interest rates will also be affected by our overall corporate leverage, which may vary depending on our mix of assets.
 
In the event of a significant rising interest rate environment and/or economic downturn, delinquencies and defaults could increase and result in loan losses to us, which could adversely affect our liquidity and operating results. Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.
 
 
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In the event of a rapidly rising interest rate environment, our operating cash flow from our real estate assets may be insufficient to cover the corresponding increase in interest expense on our variable rate borrowing secured by our real estate assets.
 
Credit Risk
 
Credit risk refers to the ability of each tenant in our portfolio of real estate investments to make contractual lease payments and each individual borrower under our loans and securities investments to make required interest and principal payments on the scheduled due dates.   We seek to reduce credit risk of our real estate investments by entering into long-term leases with investment-grade financial services companies and financial institutions and we attempt to reduce credit risk of our loan and securities investments by actively managing our portfolio and the underlying credit quality of the subject collateral. If defaults occur, we employ our asset management resources to mitigate the severity of any losses and seek to optimize the recovery from assets in the event that we foreclose upon them.  We seek to control the negotiation and structure of the debt transactions in which we invest, which enhances our ability to mitigate our losses, to negotiate loan documents that afford us appropriate rights and control over our collateral, and to have the right to control the debt that is senior to our position. We generally avoid investments where we cannot secure adequate control rights, unless we believe the default risk is very low and the transaction involves high-quality sponsors.  In the event of a significant rising interest rate environment and/or economic downturn, tenant and borrower delinquencies and defaults may increase and result in credit losses that would materially and adversely affect our business, financial condition and results of operations.
 
 
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ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Also, we may have investments in certain unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.
 
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II. OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

None

ITEM 1A.
RISK FACTORS

None

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

None

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.
(REMOVED AND RESERVED)

None

ITEM 5.
OTHER INFORMATION
 
Our 2011 annual meeting of stockholders will be held on Tuesday, December 6, 2011 at 9:30 a.m., local time, at the Grand Hyatt, 109 East 42nd Street, New York, New York.  The date of our 2011 annual meeting of stockholders is more than 30 calendar days from the anniversary date of our 2010 annual meeting of stockholders. Accordingly, for stockholder proposals submitted pursuant to Rule 14a-8 of the Exchange Act to be considered by us for inclusion in our proxy materials for the 2011 annual meeting of stockholders, such proposals must be received by the Secretary of our Company at our principal executive offices a reasonable time before we begin to print and send our proxy materials, which the Company anticipates will be on or about October 14, 2011. Additionally, any stockholder proposals for the 2011 annual meeting of stockholders submitted pursuant to our Amended and Restated Bylaws outside the processes of Rule 14a-8 of the Exchange Act must be received by the Secretary of our Company at our principal executive offices no later than the close of business on October 31, 2011, and otherwise comply with the requirements of our Amended and Restated Bylaws. We have established October 11, 2011 as the record date for determining stockholders of record entitled to notice of, and to vote at, the 2011 annual meeting of stockholders.
 
 
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ITEM6.
 
INDEX TO EXHIBITS

Exhibit No.
 
Description
     
3.1
 
Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Amendment No. 5 to its Registration Statement on Form S-11/A (No. 333-114673), which was filed with the Commission on July 26, 2004 and declared effective by the Commission on July 27, 2004).
     
3.2
 
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K which was filed with the Commission on December 14, 2007).
     
3.3
 
Articles Supplementary designating the Company’s 8.125% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.001 per share (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K which was filed with the Commission on April 18, 2007).
     
4.1
 
Form of specimen stock certificate evidencing the common stock of the Company, par value $0.001 per share (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K which was filed with the Commission on April 18, 2007).
     
4.2
 
Form of stock certificate evidencing the 8.125% Series A Cumulative Redeemable Preferred Stock of the Company, liquidation preference $25.00 per share, par value $0.001 per share (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K which was filed with the Commission on April 18, 2007).
     
10.1
 
Letter Agreement, dated March 13, 2011, by and among the Company, as guarantor, GKK Stars Junior Mezz I, LLC, as guarantor, the Borrowers, the Mortgage Lenders, the Mezzanine Lenders, KBS GKK Participation Holdings I, LLC and KBS GKK Participation Holdings II, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K which was filed with the Commission on March 14, 2011).
     
31.1
 
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
     
31.2
 
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1
 
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
     
32.2
 
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GRAMERCY CAPITAL CORP.
 
   
Dated: October 11, 2011
By:
/s/ Jon W. Clark
 
 
Name: Jon W. Clark
 
Title: Chief Financial Officer (duly authorized officer and
principal financial and accounting officer)
 
 
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