Gramercy Property Trust, or the Company or Gramercy, a Maryland real estate investment trust, or REIT, is a leading global investor and asset manager of commercial real estate. Gramercy specializes in acquiring and managing single-tenant, net leased industrial, office, and specialty properties. The Company focuses on income producing properties leased to high quality tenants in major markets in the United States and Europe.

Gramercy earns revenues primarily through three sources: (i) rental revenues on properties that it owns in the United States (ii)and asset management revenues on properties owned by third parties in the United States and Europe and (iii) pro-rata rental revenues on itsEurope. The Company also owns unconsolidated equity investments in the United States, Europe, and Asia.

In the Merger, Chambers was the legal acquirer and Legacy Gramercy was the accounting acquirer for financial reporting purposes. Thus, the financial information set forth herein subsequent to the close of the Merger on December 17, 2015 reflects results of the combined company, and financial information prior to the close of the Merger reflects Legacy Gramercy results. For this reason, period to period comparisons may not be meaningful. Refer to Note 4 for additional information on the Merger.

Unless the context requires otherwise, all references to “Company,” “Gramercy,” “we,” “our,” and “us” mean Legacy Gramercy and one or more of the Company’sits subsidiaries for the periodperiods prior to the Merger closing and Gramercy Property Trust and one or more of the Company’sits subsidiaries for periods following the Merger closing.

As of March 31,September 30, 2016, the Company’s wholly-owned portfolio consists of 295 properties comprising 53,306,568 rentable square feet with 98.5% occupancy. As of September 30, 2016, the Company owns, either directly orhas ownership interests in an46 industrial and office properties with 97.6% occupancy, which are held in unconsolidated equity investment, a portfolio of 316 industrial, office, and specialty properties with 98.7% occupancy. Tenants include Bank of America, N.A., Healthy Way of Life II, LLC (d.b.a Life Time Fitness), Amazon.com, Inc., JPMorgan Chase Bank, N.A. Nuance Communications, Inc. and others. investments.

As of March 31,September 30, 2016, the Company’s asset management business, which operates under the name Gramercy Asset Management, manages for third-partiesthird parties approximately $900,000$1,200,000 of commercial real estate assets, including approximately $459,000$871,000 of assets in Europe.

During the three months ended March 31,September 30, 2016, the Company acquired three16 properties aggregating 621,6462,795,476 square feet in two separate transactions for a total purchase price of approximately $52,750.$237,432. During the nine months ended September 30, 2016, the Company acquired 48 properties aggregating 11,464,734 square feet for a total purchase price of approximately $862,341. Additionally, on June 30, 2016, the Company received 100.0% ownership of seven properties previously held in its joint venture with Duke Realty Corporation through a distribution of real estate assets by the joint venture, which had an aggregate 4,189,630 square feet and total fair value of $276,100.

During the three months ended March 31,September 30, 2016, the Company sold nineten properties aggregating 2,095,1942,435,130 square feet for total gross proceeds of approximately $531,500.

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, or IRC, and generally will not be subject to U.S. federal income taxes to the extent it distributes its taxable income, if any, to its shareholders. The Company has 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.

The Company’s operating partnership, GPT Operating Partnership LP, or the Operating Partnership, indirectly owns (i) all of the Company’s consolidated real estate investments, (ii) the Company’s interests in unconsolidated equity investments and (iii) the entities, primarily a TRS, that conduct the Company’s third-party asset management operations. The Company is the sole general partner and 100% owner of the Operating Partnership. In April 2016, the common units of limited partnership interest in Legacy Gramercy’s operating partnership were exchanged for common units of limited partnership interest in GPT Operating Partnership LP, or OP Units, and the Company’s partnership agreement was amended and restated to reflect the exchange, or the Fourth Amended and Restated Partnership Agreement. The Operating Partnership is the 100%100.0% owner of all of its direct and indirect subsidiaries, except that, as of March 31,September 30, 2016, third-party holders of limited partnership interests in Legacy Gramercy’s operating partnership, the entity that owns substantially all of Legacy Gramercy’s assets and investments,Operating Partnership owned approximately 0.32%0.22% of the beneficial interest of the Company. These interests are referred to as the noncontrolling interests in Legacy Gramercy’s operating partnership.the Operating Partnership. See Note 12 for more information on the Company’s noncontrolling interests.

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, it doesthey do not include all of the information and footnotes required by 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 2016 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These Condensed Consolidated 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, 2015. The Condensed Consolidated Balance Sheet at December 31, 2015 has been derived from the audited Consolidated Financial Statements at that date.

Certain prior year amounts have been reclassified to conform to the current year presentation. During the first quarter of 2016, the Company adopted ASU 2015-03, Simplifying the Presentation of Debt Issuances Costs, which requires the Company to reclassify debt financing costs, which were previously accounted for on the deferred costs line within the asset section, and present them in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability, with the exception of deferred financing costs associated with the credit facility which remain in deferred costs in the asset section on the Condensed Consolidated Balance Sheets. Deferred financing costs totaling $6,389 have been reclassified in the December 31, 2015 Condensed Consolidated Balance Sheet from the deferred costs line and netted against the corresponding debt liability. See “Recently Issued Accounting Pronouncements” below for further discussion of the new accounting guidance for deferred financing costs.

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 each entity’s equity investment at risk to absorb losses.

The Company records acquired real estate investments as business combinations when the real estate is occupied, at least in part, at acquisition. Costs directly related to the acquisition of such investments are expensed as incurred. The Company allocates the purchase price of real estate to land, building, improvements and intangibles, such as the value of above- and below-market leases, and origination costs associated with the in-place leases at the acquisition date. The values of the above- and below-market leases are amortized and recorded as either an increase, in the case of below-market leases, or a decrease, in the case of above-market leases, to rental revenue over the remaining term of the associated lease. The values associated with in-place leases are amortized to depreciation and amortization expense over the remaining term of the associated lease.

The Company assesses the fair value of the leases at acquisition based upon estimated cash flow projections that utilize appropriate discount rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. Additionally, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase at the time of acquisition.

Acquired real estate investments involving sale-leasebacks that have newly-originated leases are recorded as asset acquisitions and accordingly, transaction costs incurred in connection with the acquisition are capitalized. Acquired real estate investments which are under construction are considered build-to-suit transactions and other acquired real estate investments that do not meet the definition of a business combination are recorded at cost. In build-to-suit transactions, the Company engages a developer to construct a property or provides funds to a tenant to develop a property. The Company capitalizes the funds provided to the developer/tenant and real estate taxes, if applicable, during the construction period.

Certain improvements are capitalized when they are determined to increase the useful life of the building. Depreciation is computed using the straight-line method over the shorter of the estimated useful life at acquisition of the capitalized item or 40 years for buildings, five to ten years for building equipment and fixtures, and the lesser of the useful life or the remaining lease term for tenant improvements and leasehold interests. Maintenance and repair expenditures are charged to expense as incurred.

In leasing space, the Company may provide funding to the lessee through a tenant allowance. If the Company is considered the owner of the leasehold improvements constructed using a tenant allowance, the Company capitalizes the amount of the allowance and depreciates it over the shorter of the useful life of the leasehold improvements or the lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or if the Company is not considered the owner of the improvements for accounting purposes, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue.

The Company also reviews the recoverability of thea property’s carrying value when circumstances indicate a possible impairment ofin the value of a property, expected to result from the property’s use and eventual disposition. If management determines impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded in the Condensed Consolidated Statements of Operations to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used and for assets held for sale, an impairment loss is recorded to the extent that the carrying value exceeds the fair value less estimated cost of disposal. The estimated fair value of the asset becomes its new cost basis and if the asset is to be held and used, the new cost basis will be depreciated or amortized over its remaining useful life.

The Company follows the acquisition method of accounting for business combinations. The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible assets include land, buildings and improvements on an as-if vacant basis and identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates, the value of in-place leases, and above-market and below-market ground rent intangibles.

The above- and below-market lease values are amortized as a reduction of and increase to rental revenue, respectively, over the remaining non-cancelable terms of the respective leases. The value of in-place leases is amortized to depreciation and amortization expense over the remaining non-cancelable term of the respective leases. To the extent acquired leases contain fixed rate renewal options that are below-market and determined to be material, the Company amortizes such below-market lease value into rental revenue over the renewal period. If a tenant terminates its lease prior to its contractual expiration and no future rental payments will be received, any unamortized balance of the market lease intangibles will be written off to rental revenue and any unamortized balance of the in-place lease intangibles will be written off to depreciation and amortization expense. The above- and below-market ground rent intangible values are amortized as a reduction of and increase to rent expense, respectively, over the remaining non-cancelable terms of the respective leases. If the Company terminates its lease prior to its contractual expiration and no future rent payments will be paid, any unamortized balance of the ground rent intangibles will be written off to rent expense.

Intangible assets and liabilities consist of the following:

The following table provides the weighted-average amortization period as of March 31,September 30, 2016 for intangible assets and liabilities and the projected amortization expense for the next five years.

The Company recorded $27,560$29,670 and $7,997$9,808 of amortization of in-place lease intangible assets as part of depreciation and amortization for the three months ended March 31,September 30, 2016 and 2015, respectively. The Company recorded $181$86,845 and $3,945$27,947 of amortization of in-place lease intangible assets as part of depreciation and amortization for the nine months ended September 30, 2016 and 2015, respectively. The Company recorded $4,578 and $4,309 of amortization of market lease intangible assets and liabilities as an increase (decrease) to rental revenue for the three months ended March 31,September 30, 2016 and 2015, respectively. The Company recorded $9$10,388 and $39$10,359 of amortization of market lease intangible assets and liabilities as an increase to rental revenue for the nine months ended September 30, 2016 and 2015, respectively. The Company recorded $8 and $(1) of amortization of ground rent intangible assets and liabilities as a reduction topart of other property operating expense for the three months ended March 31,September 30, 2016 and 2015, respectively. The Company recorded $25 and $(41) of amortization of ground rent intangible assets and liabilities as part of other property operating expense for the nine months ended September 30, 2016 and 2015, respectively.

Goodwill represents the fair value of the collaboration expected to be achieved upon consummation of a business combination and is measured as the excess of consideration transferred over the net assets acquired at acquisition date. The Company initially recognized goodwill of $3,887 related to the acquisition of Gramercy Europe Limited, or Gramercy Europe Asset Management, however during the second quarter of 2015, as a result of finalization of the purchase price allocation for the acquisition, the Company decreased the amount allocated to goodwill by $85 and thus the final purchase price allocation to goodwill as a result of the acquisition was $3,802. The adjustment to goodwill for the finalized purchase price was primarily related to a reduction in the contract intangible value as well as an increase in the accrued income recorded for incentive fees. The carrying value of goodwill is adjusted each reporting period for the effect of foreign currency translation adjustments. The carrying value of goodwill at March 31,September 30, 2016 and December 31, 2015 was $3,477$3,141 and $3,568, respectively. The Company’s goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company takes a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. The Company did not record any impairment on its goodwill during the threenine months ended March 31,September 30, 2016 or 2015.

The Company’s 5.07% unconsolidated equity investment in CBRE Strategic Partners Asia, the Company’s unconsolidated equity investment described more in Note 5, is presented in the Condensed Consolidated Financial Statements at fair value. CBRE Strategic Partners Asia is an investment company that accounts for its investments at fair value with changes in the fair value of the investments recorded in the statement of operations. See the “Fair Value Measurements” section of this Note 2 as well as Note 9, “Fair Value Measurements,” for further discussion of the fair value accounting methodology used for CBRE Strategic Partners Asia.

Carrying values of the Company’s unconsolidated equity investments were $527,269$120,176 and $580,000 at March 31,September 30, 2016 and December 31, 2015, respectively.

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

The Company had restricted cash of $166,552$171,895 and $17,354 at March 31,September 30, 2016 and December 31, 2015, respectively, which primarily consists of proceeds from property sales held by qualified intermediaries to be used for tax-deferred, like-kind exchanges under IRC Section 1031, as well as reserves for certain capital improvements, leasing, interest and real estate tax and insurance payments as required by certain mortgage loan obligations.

The Company had fourthree consolidated VIEs as of March 31,September 30, 2016 and two consolidated VIEs as of December 31, 2015. The Company had four unconsolidated VIEs as of March 31,September 30, 2016 and December 31, 2015. The following is a summary of the Company’s involvement with VIEs as of March 31,September 30, 2016:

The following is a summary of the Company’s involvement with VIEs as of December 31, 2015:

The construction of the facility on the property is expected to be completecompleted in December 2016 and the Company has committed $24,950 in financing for the construction. BIG is responsible for funding in excess of the $24,950 mortgage note. As of March 31,September 30, 2016, the Company has funded $8,270$12,849 for the property.

In connection with the Company’s December 2014 investment in the Gramercy European Property Fund, the Company acquired equity interests in the entity, hereinafter European Fund Manager, which provides investment and asset management services to the Gramercy European Property Fund. The Company has determined that European Fund Manager is a VIE, as the equity holders of that entity do not have controlling financial interests and the obligation to absorb losses. As Gramercy Europe Asset Management, through an investment advisory agreement with the VIE, controls the activities that most significantly affect the economic outcome of European Fund Manager, the Company has concluded that it is the entity’s primary beneficiary and has consolidated the VIE.

European Fund Manager is expected to generate net cash inflows for the Company in the form of management fees in the future, however, if the VIE’s cash inflows are not sufficient to cover its obligations, the Company may provide financial support for the VIE.

In connection with the Company’s December 2014 investment in the Gramercy European Property Fund, the Company acquired equity interests in the entity, hereinafter European Fund Carry Co., entitled to receive certain

The Retained CDO Bonds areCompany holds non-investment grade subordinate bonds, preferred shares and ordinary shares of three collateralized debt obligations, or CDOs,the Retained CDO Bonds, which the Companyit recognized subsequent to the disposal of its Gramercy Finance segment, or Gramercy Finance, and exit from the commercial real estate finance business in March 2013. The Company is not obligated to provide any financial support to these collateralized debt obligations, or CDOs. The Company’s maximum exposure to loss is limited to its interest in the Retained CDO Bonds and the Company does not control the activities that most significantly impact the VIE’s economic performance.

Tenant and other receivables are derived from management fees, rental revenue and tenant reimbursements.

Management fees, including incentive management fees, are recognized as earned in accordance with the terms of the management agreements. The management agreements may contain provisions for fees related to dispositions, administration of the assets including fees related to accounting, valuation and legal services, and management of capital improvements or projects on the underlying assets.

Rental revenue 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,September 30, 2016 and December 31, 2015 were $261$43 and $204, respectively. The Company continually reviews receivables related to rent, tenant reimbursements, and management fees, including incentive fees, and determines collectability by taking into consideration the tenant or asset management clients’client’s payment history, the financial condition of the tenant or asset management client, business conditions in the industry in which the tenant or asset management client operates and economic conditions in the area in which the property or asset management client 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.

Deferred costs consist of deferred financing costs, deferred acquisition costs, and deferred leasing costs. Deferred costs are presented net of accumulated amortization.

The Company’s deferred financing costs are comprised of costs associated with the Company’s unsecured credit facilities and include commitment fees, issuance costs, and legal and other third-party costs associated with obtaining

The Company’s deferred acquisition costs consist primarily of lease inducement fees paid to secure acquisitions and are amortized on a straight-line basis over the related lease term as a reduction fromof rental revenue.

The Company’s deferred leasing costs include direct costs, such as lease commissions, incurred to initiate and renew operating leases and are amortized on a straight-line basis over the related lease term as a reduction from rental revenue.

At March 31,September 30, 2016 and December 31, 2015, the Company measured its Retained CDO Bonds, derivative instruments, and CBRE Strategic Partners Asia on a recurring basis and measured its real estate investments classified as held for sale at Merger closing on a non-recurring basis. 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 and other assets and liabilities 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 these assets and liabilities. 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 and other assets and liabilities. The investment manager of CBRE Strategic Partners Asia applies valuation techniques for the Company’s investment carried at fair value based upon the application of the income approach, the direct market comparison approach, the replacement cost approach or third-party appraisals to the underlying assets held in the unconsolidated entity in determining the net asset value attributable to the Company’s ownership interest therein. The three broad levels defined are as follows:

For a further discussion regarding fair value measurements see Note 9, “Fair Value Measurements.”

Rental revenue from leases on real estate investments is recognized on a straight-line basis over the term of the lease, regardless of when payments are contractually due. The excess of rental revenue recognized over the amounts contractually due according to the underlying leases are included in deferred revenue on the Condensed Consolidated Balance Sheets. For leases on properties that are under construction at the time of acquisition, the Company begins recognition of rental revenue upon completion of construction of the leased asset and delivery of the leased asset to the tenant.

The Company’s lease agreements with tenants also generally contain provisions that require tenants to reimburse the Company for real estate taxes, insurance costs, common area maintenance costs, and other property-related expenses. Under lease arrangements in which the Company is the primary obligor for these expenses, such amounts are recognized as both revenues and operating expenses for the Company. Under lease arrangements in which the tenant pays these expenses directly, such amounts are not included in revenues or expenses. These reimbursement amounts are recognized in the period in which the related expenses are incurred.

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.

The Company’s asset and property management agreements may contain provisions for fees related to dispositions, administration of the assets including fees related to accounting, valuation and legal services, and management of capital improvements or projects on the underlying assets. The Company recognizes revenue for fees pursuant to its management agreements in the period in which they are earned. Management fees received prior to the date earned are included in deferred revenue on the Condensed Consolidated Balance Sheets.

Certain of the Company’s asset management contracts include provisions that may allow it to earn additional fees, generally described as incentive fees or profit participation interests, based on the achievement of a targeted valuation of the managed assets or the achievement of a certain internal rate of return on the managed assets. The Company recognizes incentive fees on its asset management contracts based upon the amount that would be due pursuant to the contract, if the contract were terminated at the reporting date. If the contract may be terminated at will, revenue will only be recognized for the amount that would be due pursuant to that termination. If the incentive fee is a fixed amount, only a proportionate share of revenue is recognized at the reporting date, with the remaining fees recognized on a straight-line basis over the measurement period. The values of incentive management fees are periodically evaluated by management. For the three and nine months ended March 31,September 30, 2016, the Company recognized incentive fees of $2,931 and $18,121, respectively. For the three and nine months ended September 30, 2015, the Company recognized incentive fees of $973$111 and $3,035,$3,082, respectively.

Investment income consists primarily of income accretion on the Company’s Retained CDO Bonds, which are measured at fair value on a quarterly basis using a discounted cash flow model. Other income primarily consists of interest income on servicing advances andmodel, as well as realized foreign currency exchange gain (loss)gains (losses).

The Company has share-based compensation plans, described more fully in Note 11. The Company accounts for share-based awards using the fair value recognition provisions. Awards of shares or restricted shares are expensed as compensation over the benefit period and may require inputs that are highly subjective and require significant management judgment and analysis to develop. The Company assumes a forfeiture rate which impacts the amount of aggregate compensation cost recognized. In accordance with the provisions of the Company’s share-based compensation plans, the Company accepts the return of shares of the Company’sits common shares at the current quoted market price to satisfy minimum statutory tax-withholding requirements related to shares that vested during the period. The Company also grants awards pursuant to its share-based compensation plans in the form of LTIP units, which are a class of limited partnership interests in the Company’s operating partnerships.Operating Partnership, or LTIP Units.

Gramercy Europe Asset Management operates an asset and property management business located in the United Kingdom. The Company owns one property located in the United Kingdom, two properties in Canada, and has unconsolidated equity investments in Europe and Asia. The Company also has euro-denominatedoutstanding borrowings outstandingdenominated in euros and British pounds sterling under the multi-currencymulticurrency portion of its revolving credit facility. Refer to Note 5 for more information on the Company’s foreign unconsolidated equity investments.

A transaction gain or loss realized upon settlement of a foreign currency transaction will be included in earnings forduring the period in which the transaction is settled. Foreign currency intercompany transactions that are scheduled for settlement are included in the determination of net income.

Intercompany foreign currency transactions of a long-term nature that do not have a planned or foreseeable future settlement date, and in which the entities to the transactions are consolidated or accounted for by the equity method in the Company’s financial statements, are not included in net income but are reported as a component of other comprehensive income (loss).

Net realized gains (losses) are recognized on foreign currency transactions in connection with the transfer of cash from or tobetween foreign operations of subsidiaries or equity investments toand the parent company. For the three and nine months ended March 31,September 30, 2016, and 2015, the Company recognized net realized foreign currency transaction gains (losses) of $105$185 and $(6),$104, respectively, on such transactions. For the three and nine months ended September 30, 2015, the Company recognized net realized foreign currency transaction losses of $15 and $25, respectively, on such transactions.

In the normal course of business, the Company is exposed to the effect of interest rate changes and foreign exchange rate changes. The Company limits these risks by following established risk management policies and procedures, including the use of derivatives and non-derivative net investment hedges. The Company uses a variety of derivative instruments that are considered “plain vanilla” derivatives to manage, or hedge, interest rate risk. The Company enters into hedgingderivative and derivativehedging instruments that will be maximally effective in reducing the interest rate risk and foreign currency exchange 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’s derivativederivatives and non-derivative hedging instruments typically include interest rate swaps, caps, collars and floors, foreign currency forward contracts, as well as non-derivative net investment hedges. The Company expressly prohibits the use of unconventional derivative instruments and usingthe use of 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.

The Company recognizes all derivatives on the Condensed Consolidated Balance Sheets at fair value. Derivatives that are not designated as 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 hedging derivative’s change in fair value will beis immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and shareholders’ equity prospectively, depending on future levels of the London Interbank Offered Rate, or LIBOR, swap spreads, foreign exchange rates, and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

The Company makes payments for certain expenses such as insurance and property taxes in advance of the period in which it receives the benefit. These payments are classified as other assets and amortized over the respective period of benefit relating to the contractual arrangement. Other assets also includes deposits related to pending acquisitions and financing arrangements, as required by a seller or lender, respectively. Costs prepaid in connection with securing financing for a property are reclassified into deferred financing costs at the time the transaction is completed. Additionally, other assets includes costs of software purchased for internal use and as well as the value of contracts assumed by the Company pursuant to a business combination, such as asset or property management contracts.

The Company recognized its Retained CDO Bonds are non-investment grade subordinate bonds, preferred shares and ordinary shares of three CDOs, which the Company recognized at fair value and retained in March 2013 subsequent to the disposal of Gramercy Finance. Management estimated the timing and amount of cash flows expected to be collected and recognized an investment in the Retained CDO Bonds equal to the net present value of these discounted cash flows. There is no guarantee that the Company will realize any proceeds from this investment, or what the timing will be for the expected remaining life of the Retained CDO Bonds. The Company considers these investments to be not of high credit quality and does not expect a full recovery of interest and principal. Therefore, the Company has suspended interest income accruals on these investments. On a quarterly basis, the Company evaluates the Retained CDO Bonds to determine whether significant changes in estimated cash flows or unrealized losses on these investments, if any, reflect a decline in value which is other-than-temporary. If there is a decrease in estimated cash flows and the investment is in an unrealized loss position, the Company will record an other-than-temporary impairment, or OTTI, in the Condensed Consolidated Statements of Operations. To determine the component of the OTTI related to expected credit losses, the Company compares the amortized cost basis of the Retained CDO Bonds to the present value of the revised expected cash flows, discounted using the pre-impairment yield. Conversely, if the security is in an unrealized gain position and there is a decrease or significant increase in expected cash flows, the Company will prospectively adjust the yield using the effective yield method. Refer to Note 9 for further discussion regarding the fair value measurement of the Retained CDO Bonds. For the three and nine months ended March 31,September 30, 2016 and 2015, the Company recognized no OTTI on its Retained CDO Bonds.

The following table summarizes the activity related to credit losses on the Retained CDO Bonds for the three month periodnine months ended March 31,September 30, 2016 and for the year ended December 31, 2015:

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%90.0% of its ordinary taxable income, to shareholders. 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 shareholders. 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 shareholders. However, the Company believes that it will be 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 federal, state and local taxes.

For the three and nine months ended March 31,September 30, 2016, the Company recorded $331 and $3,734 of income tax expense, respectively. For the three and nine months ended September 30, 2015, the Company recorded $703$985 and $1,114$2,116 of income tax expense, respectively. Tax expense for each year is comprised of federal, state, local, and foreign taxes. Income taxes,

The Company’s policy for interest and penalties, if any, on material uncertain tax positions recognized in the financial statements is to classify these as interest expense and operating expense, respectively. As of March 31, 2016 and December 31, 2015, the Company did not incur any material interest or penalties.

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.

Concentrations of credit risk also arise when a number of the Company’s tenants or asset management clients are engaged in similar business activities or are subject to similar economic risks or conditions that could cause their inability to meet contractual obligations to the Company. The Company regularly monitors its portfolio to assess potential concentrations of credit risk. Management believes the current credit risk portfolio is reasonably well diversified. One assetAsset management client,clients KBS Real Estate Investment Trust, Inc., or KBS, and Gramercy Europe Asset Management accounted for 86%82.8% and 80%15.9% of the Company’s management fee income for the three months ended March 31,September 30, 2016, respectively, and 2015, respectively.KBS accounted for 90.5% of the Company’s management fee income for the nine months ended September 30, 2016. KBS and Gramercy Europe Asset Management accounted for 13%81.1% and 10.4% of the Company’s management fee income including European assetrevenue for the three months ended September 30, 2015, respectively, and KBS accounted for 84.0% of the Company’s management fee income for the threenine months ended March 31, 2016.September 30, 2015. One tenant, Bank of America, N.A., accounted for 11%13.7% and 37%13.3% of the Company’s rental revenue for the three and nine months ended September 30, 2016, respectively. Bank of America, N.A. and Healthy Way of Life II, LLC (d.b.a. Life Time Fitness) accounted for 21.2% and 11.6% of the Company’s rental revenue for the three months ended March 31, 2016September 30, 2015, respectively, and 2015 respectively.Bank of America, N.A. accounted for 26.4% of the Company’s rental revenue for the nine months ended September 30, 2015. Additionally, for the three and nine months ended March 31,September 30, 2016, there were three states, California, Florida, and Texas, that each accounted for 10%10.0% or more of the Company’s rental revenue.

The preparation of financial statements in conformity with Generally Accepted Accounting Principles, or 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.

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers, which createsis a comprehensive new Topic ASC 606, Revenue from Contracts with Customers. The core principle of the new guidance is that an entity shouldrevenue recognition model requiring a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflectsreflecting the consideration to which the entityit expects to be entitledreceive in exchange for those goods or services. Additionally, theThe guidance also requires increasedenhanced disclosures related to the nature, amount, timing, and uncertainty of revenue recognition. The update was originally effective for fiscal years, and interim periods within those years, beginning after December 15,that is recognized. In April 2016, with early adoption not permitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers,2016-10, which deferredamends the effective date so that itnew revenue recognition guidance on identifying performance obligations. The new revenue recognition guidance is effective for fiscal years, andthe first interim periodsperiod within those years,annual reporting periods beginning after December 15, 2017, with early adoption only permitted as offor the first interim period within annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company will appropriately2016. Companies may use either a full retrospective or a modified retrospective approach to adopt and apply the guidance retrospectively for its fiscal year ended December 31, 2018 and the interim periods within that year.new guidance. The Company is currently evaluating the guidance to determine the impact it may have on its Condensed Consolidated Financial Statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which amends the current consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities will be considered a VIE unless the limited partners hold substantive kick-out rights or participating rights. The guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company adopted this guidance during the first quarter of 2016, which did not result in changes to the Company’s conclusions regarding consolidation of applicable entities.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which serves to simplify the presentation of debt issuance costs in a company’s financial statements. The amendments in the update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that liability. The update is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. In August 2015, the FASB issued ASU 2015-15, Interest – Imputation of Interest, which allows an entity to present the debt issuance costs from a line-of-credit arrangement as an asset. The Company adopted this guidance during the first quarter of 2016 and reclassified amounts in each period presented. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements as the update relates only to changes in financial statement presentation. See the “Reclassification” section above for further details on the adoption of this guidance.

In April 2015, the FASB issued ASU 2015-05, Intangibles –- Goodwill and Other –- Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The update requires companies to account for the software license element of a cloud computing arrangement consistent with the acquisition of other software licenses and other licenses of intangible assets. The update is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company adopted this guidance during the first quarter of 2016. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The update will be effective beginning in the first quarter of 2019 and early adoption is permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leases standard on its Condensed Consolidated Financial Statements.