UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File No. 001-32248

GRAMERCY CAPITAL CORP.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes o No ý

The number of shares outstanding of the registrant’s common stock, $0.001 par value, was 22,794,309 at November 9, 2005.

GRAMERCY CAPITAL CORP.

INDEX



PART I.	FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004

	Consolidated Statements of Income for the three months ended September 30, 2005 and 2004 and the nine months ended September 30, 2005 and the period from April 12, 2004 (formation) through September 30, 2004 (unaudited)

	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2005 (unaudited)

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and the period from April 12, 2004 (formation) through September 30, 2004 (unaudited)

	Notes to Consolidated Financial Statements (unaudited)

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4.	CONTROLS AND PROCEDURES

PART II.	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

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

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

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

ITEM 5.	OTHER INFORMATION

ITEM 6.	EXHIBITS

Signatures

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Gramercy Capital Corp.

Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

	September 30,				December 31,
	2005				2004
	(Unaudited)
Assets:
Cash and cash equivalents	$			25,311	$		39,094
Restricted cash	253,797				1,901
Loans and other lending investments, net	878,652				395,717
Commercial mortgage backed securities, net	10,999				10,898
Investment in unconsolidated joint venture	56,930				—
Loans held for sale, net	46,750				—
Operating real estate, net	51,259				—
Stock subscriptions receivable	—				60,445
Accrued interest	6,347				2,921
Deferred financing costs	17,880				2,044
Deferred costs	948				189
Derivative instruments, at fair value	2,417				249
Other assets	1,374				589
Total assets	$	1,352,664			$			514,047

Liabilities and Stockholders’ Equity:
Credit facilities	$	—			$	238,885
Collateralized debt obligation	810,500				—
Mortgage note payable	41,000				—
Management fees payable	1,289				416
Incentive fee payable	1,038				—
Dividends payable	10,159				1,951
Accounts payable and accrued expenses	12,439				1,935
Other liabilities	4,779				1,901
Junior subordinated deferrable interest debentures held by trusts that issued trust preferred securities	100,000				—
Total liabilities	981,204				245,088

Commitments and contingencies	—				—

Stockholders’ Equity:
Preferred stock, par value $0.001, 25,000,000 shares authorized, no shares issued or outstanding	—				—
Common stock, par value $0.001, 100,000,000 shares authorized, 22,794,309 and 18,812,500 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively	23				19
Additional paid-in-capital	368,931				268,558
Accumulated other comprehensive income	2,506				282
Retained earnings	—				100
Total stockholders’ equity	371,460				268,959
Total liabilities and stockholders’ equity	$		1,352,664		$	514,047

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

Gramercy Capital Corp.

Consolidated Statements of Income

(Unaudited, amounts in thousands, except per share data)

	For the Three Months Ended September 30, 2005			For the Three Months Ended September 30, 2004		For the Nine Months Ended September 30, 2005			For the Period April 12, 2004 (formation) through September 30, 2004
Revenues
Investment income	$	21,060		$	1,227	$	46,999		$	1,227
Rental revenue, net	314			—		314			—
Other income	5,218			245		8,727			245
Total revenues	26,592			1,472		56,040			1,472

Expenses
Interest expense	11,250			63		20,316			63
Management fees	2,726			786		6,264			786
Incentive fee	1,038			—		1,038			—
Depreciation and amortization	105			5		232			5
Marketing, general and administrative	1,456			332		4,722			332
Provision for loan loss	430			—		955			—
Total expenses	17,005			1,186		33,527			1,186
Income from continuing operations before equity in net loss of unconsolidated joint venture and taxes	9,587			286		22,513			286
Equity in net loss of unconsolidated joint venture	(510		)	—		(914		)	—
Income from continuing operations before taxes and GKK formation costs	9,077			286		21,599			286
Provision for taxes	(500		)	—		(1,000		)	—
GKK formation costs	—			275		—			275
Net income available to common stockholders	$	8,577		$	11	$	20,599		$	11

Basic earnings per share:
Net income available to common stockholders	$	0.44		$	0.00	$	1.08		$	0.00
Diluted earnings per share:
Net income available to common stockholders	$	0.41		$	0.00	$	1.05		$	0.00
Dividends per common share	$	0.45		$	0.00	$	1.02		$	0.00
Basic weighted average common shares outstanding	19,603			13,313		19,093			13,313
Diluted weighted average common shares and common share equivalents outstanding	20,788			13,321		19,618			13,321

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

Gramercy Capital Corp.

Consolidated Statement of Stockholders’ Equity

(Unaudited, amounts in thousands, except share data)



								Accumulated
	Common			Additional				Other
	Stock			Paid-				Comprehensive		Retained								Comprehensive
	Shares	Par Value		In-Capital				Income		Earnings				Total				Income
Balance at December 31, 2004	18,813	$	19	$		268,558		$	282	$	100			$		268,959
Net income										20,599				20,599				$	20,599
Net unrealized gain on derivative instruments								2,224						2,224				2,224
Net proceeds from common stock offerings	3,833	4		96,585										96,589
Stock-based compensation — fair value				1,031										1,031
Proceeds from stock option exercises	128	—		1,920										1,920
Deferred compensation plan, net	20	—		881										881
Cash distributions declared				(44			)			(20,699			)	(20,743			)
Balance at September 30, 2005	22,794	$	23	$	368,931			$	2,506	$		—		$	371,460			$	22,823

The accompanying notes are an integral part of these financial statements

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

	For the Nine Months Ended September 30, 2005			For the Period April 12, 2004 (formation) through September 30, 2004
Operating Activities
Net income available to common stockholders	$	20,599		$	11
Adjustments to reconcile net income available to common stockholders to net cash provided by operating activities:
Depreciation and amortization	1,966			5
Amortization of discount on investments	(772		)	42
Equity in net income of unconsolidated joint venture	914			—
Provision for loan losses	955			—
Changes in operating assets and liabilities:
Accrued interest	(3,426		)	(695		)
Other assets	(924		)	(521		)
Management fees payable	873			786
Incentive fee payable	1,038			—
Accounts payable, accrued expenses and other liabilities	11,303			1,174
Net cash provided by operating activities	32,526			802
Investing Activities
New investment originations	(733,902		)	(122,306		)
Principal collections on investments	203,701			—
Investment in operating real estate	(50,496		)	—
Investment in joint venture	(57,844		)	—
Change in restricted cash for investments	(250,663		)	—
Deferred investment costs	(759		)	(1,535		)
Net cash used in investing activities	(889,963		)	(123,841		)
Financing Activities
Proceeds from credit facilities	676,290			—
Repayments of credit facilities	(915,175		)	—
Proceeds from issuance of collateralized debt obligation	810,500			—
Proceeds from mortgage note payable	41,000			—
Settlement of derivative instrument	320			—
Proceeds from stock options exercised	1,920			—
Net proceeds from sale of common stock	158,912			173,240
Issuance of trust preferred securities	100,000			—
Deferred financing costs	(17,575		)	—
Dividends paid	(12,538		)	—
Net cash provided by financing activities	843,654			173,240
Net (decrease) / increase in cash and cash equivalents	(13,783		)	50,201
Cash and cash equivalents at beginning of period	39,094			200
Cash and cash equivalents at end of period	$	25,311		$	50,401

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

Gramercy Capital Corp.
Notes To Consolidated Financial Statements
(Unaudited, amounts in thousands, except share and per share data)
September 30, 2005

1. Organization

Gramercy Capital Corp. (the Company or Gramercy), was organized in Maryland on April 12, 2004 as a commercial real estate specialty finance company focused on originating and acquiring, for our own account, fixed and floating rate mortgage loans, bridge loans, subordinate interests in mortgage loans, distressed debt, mortgage-backed securities, mezzanine loans and preferred equity interests in entities that own commercial real estate, primarily in the United States. We also make equity investments in commercial real estate properties net leased to tenants, primarily for the recurring earnings, tax benefits and long-term residual benefits these transactions often hold.

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

We are externally managed and advised by GKK Manager LLC, or the Manager, a majority-owned subsidiary of SL Green Realty Corp., or SL Green. At September 30, 2005, SL Green also owned approximately 25% of the outstanding shares of our common stock. We qualified as a real estate investment trust, or REIT, under the Internal Revenue Code commencing with our taxable year ending December 31, 2004 and expect to qualify for the current fiscal year. To maintain our tax status as a REIT, we plan to distribute at least 90% of our taxable income. Unless the context requires otherwise, all references to “we,” “our,” and “us” means Gramercy Capital Corp.

As of September 30, 2005, we held loans and other lending investments of approximately $936,401 net of fees, discounts, repayments, asset sales and unfunded commitments with an average spread to LIBOR of 475 basis points for our floating rate investments and an average yield of 8.97% for our fixed rate investments. As of September 30, 2005 we also held: (i) a $56,930 investment in an unconsolidated joint venture that owns the South Building located at One Madison Avenue in New York, New York, which is occupied almost entirely by Credit Suisse First Boston (USA), Inc., or CSFB, under a net lease with a 15 year remaining term; and (ii) a $51,259 investment in a 200,000 square foot building in Somerset, New Jersey which is 100% net leased to Philips Holding USA Inc, a wholly-owned subsidiary of Royal Philips Electronics, through December 2021.

Basis of Quarterly Presentation

The accompanying 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 2005 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

The balance sheet at December 31, 2004 has been derived from the audited financial statement at that date, but does not include all the information and footnotes required by GAAP for complete financial statements.

2. Significant Accounting Policies

Principles of Consolidation

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

Cash and Cash Equivalents

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

Restricted Cash

Restricted cash consists primarily of $250,663 on deposit with the trustee of our Collateralized Debt Obligation, or CDO, representing proceeds from our CDO issuance that will be used to fund future investments that will be acquired by the CDO trust. Also included are the proceeds of repayments from loans serving as CDO collateral, which will be used to fund investments to replace those trust assets which are repaid or sold by the trust, interest payments received by the trustee on investments that serve as collateral for the CDO, which are remitted to the Company on a quarterly basis in the month following the end of our fiscal quarter, and future funding obligations on certain investments. The remaining $3,134 consists of interest reserves held on behalf of borrowers.

Loans and Investments and Loans Held for Sale

Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, discounts, repayments, sales of partial interests in loans, and unfunded commitments unless such loan or investment is deemed to be impaired. Loans held for sale are carried at the lower of cost or market value using available market information obtained through consultation with dealers or other originators of such investments. We may originate or acquire preferred equity interests that allow us to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing. Should we make such a preferred equity investment, we must determine whether that investment should be accounted for as a loan, joint venture or as an interest in real estate. Our current preferred equity investment does not entitle us to a percentage of the underlying property’s cash flows from operations or proceeds from a sale or refinancing and is, therefore, accounted for as a loan.

Specific valuation allowances are established for impaired loans based on the fair value of collateral on an individual loan basis. The fair value of the collateral is determined by an evaluation of operating cash flow from the property during the projected holding period, and the estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, all of which are discounted at market discount rates.

If upon completion of the valuation, the fair value of the underlying collateral securing the impaired 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 we believe is adequate to absorb probable losses. At September 30, 2005 we maintained a reserve of $955.

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

Classifications of Mortgage-Backed Securities

Mortgage-backed securities, or MBS, are classified as available-for-sale securities. As a result, changes in fair value will be recorded as a balance sheet adjustment to accumulated other comprehensive income, which is a component of stockholders equity, rather than through our statement of operations. If available-for-sale securities were classified as trading securities, there could be substantially greater volatility in earnings from period-to-period as these investments would be marked to market and any reduction in the value of the securities versus the previous carrying value would be considered an expense on our statement of operations. We had no investments as of September 30, 2005 that were accounted for as trading securities.

Valuations of Mortgage-Backed Securities

All MBS will be carried on the balance sheet at fair value. We determine the fair value of MBS based on the types of securities in which we have invested. For liquid, investment-grade securities, we consult with dealers of such securities to periodically obtain updated market pricing for the same or similar instruments. For non-investment grade securities, we actively monitor the performance of the underlying properties and loans and update our pricing model to reflect changes in projected cash flows. The value of the securities is derived by applying discount rates to such cash flows based on current market yields. The yields employed are obtained from our own experience in the market, advice from dealers and/or information obtained in consultation with other investors in similar instruments. Because fair value estimates may vary to some degree, we must make certain judgments and assumptions about the

appropriate price to use to calculate the fair values for financial reporting purposes. Different judgments and assumptions could result in different presentations of value.

When the fair value of an available-for-sale security is less than the amortized cost, we consider whether there is an other-than-temporary impairment in the value of the security (for example, whether the security will be sold prior to the recovery of fair value). If, in our judgment, an other-than-temporary impairment exists, the cost basis of the security is written down to the then-current fair value, and this loss is realized and charged against earnings. The determination of other-than temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization.

Credit Tenant Lease Investments

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

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

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

As a result of our evaluation under SFAS No. 141 of our acquisition of 200 Franklin Square Drive, we recognized an increase of approximately $4 in rental revenue for the three and nine months ended September 30, 2005 for the amortization of below market leases and lease origination costs, resulting from the reallocation of the purchase price of the property.

At September 30, 2005 we held two CTL investments totaling $108,189 comprised of a $56,930 investment in the joint venture that acquired the South Building located at One Madison Avenue in New York, New York, and a $51,259 investment in 200 Franklin Square Drive in Somerset, New Jersey.

Investment in Unconsolidated Joint Venture

We account for our investment in an unconsolidated joint venture under the equity method of accounting since we exercise significant influence, but do not unilaterally control, the entity and are not considered to be the primary beneficiary under FIN 46. In the joint venture, the rights of the other investor are protective and participating. These rights preclude us from consolidating the investment. The investment is recorded initially at cost, as an investment in an unconsolidated joint venture, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in net income (loss) of unconsolidated joint ventures over the lesser of the joint venture term or 40 years. See Note 4. None of the joint venture debt is recourse to us.

Revenue Recognition

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

Income recognition is generally suspended for debt investments at the earlier of the date at which payments become 90 days past due or when, in our opinion, 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.

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

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

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

Reserve for Possible Credit Losses

The expense for possible credit losses in connection with debt investments is the charge to earnings to increase the allowance for possible credit losses to the level that management estimates to be adequate considering delinquencies, loss experience and collateral quality. Other factors considered relate to geographic trends and project diversification, the size of the portfolio and current economic conditions. Based upon these factors, we establish the provision for possible credit losses by category of asset. When it is probable that we will be unable to collect all amounts contractually due, the account is considered impaired.

Where impairment is indicated, a valuation write-down or write-off is measured based upon the excess of the recorded investment amount over the net fair value of the collateral, as reduced by selling costs. Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral is charged to the allowance for credit losses. At September 30, 2005 we maintained a reserve for possible credit losses of $955.

Deferred Costs

Deferred costs consist of fees and direct costs incurred to originate new investments and are amortized using the effective yield method over the related term of the investment.

Deferred Financing Costs

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

Stock Based Employee Compensation Plans

We have a stock-based employee compensation plan, described more fully in Note 13. We account for this plan using the fair value recognition provisions of FASB Statement No. 123, or SFAS 123, “Accounting for Stock-Based Compensation.”

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

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

The fair value of each stock option granted is estimated on the date of grant, and quarterly for options issued to non-employees, using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2005 and 2004.

	2005		2004
Dividend yield	8.4	%	10.0	%
Expected life of option	6.9 years		7 years
Risk-free interest rate	4.14	%	4.10	%
Expected stock price volatility	19.1	%	18.0	%

Incentive Distribution (Class B Limited Partner Interest)

The Class B limited partner interests are entitled to receive an incentive return equal to 25% of the amount by which funds from operations (as defined in the partnership agreement of the Operating Partnership) plus certain accounting gains exceed the product of our weighted average stockholders equity (as defined in the partnership agreement of the Operating Partnership) multiplied by 9.5% (divided by 4 to adjust for quarterly calculations). We will record any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payment of such amounts has become probable and reasonably estimable in accordance with the partnership agreement. These cash distributions will reduce the amount of cash available for distribution to our common unitholders in our Operating Partnership and to common stockholders. We incurred approximately $1,038 with respect to such Class B limited partner interests for the nine months ended September 30, 2005.

Derivative Instruments

In the normal course of business, we use a variety of derivative instruments to manage, or hedge, interest rate risk. We require that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Some derivative instruments are associated with an anticipated transaction. In those cases, hedge effectiveness criteria also require that it be probable that the underlying transaction occurs. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract.

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

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

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

FASB No. 133, or SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” which became effective January 1, 2001, as amended by FASB No. 149, requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. SFAS 133 may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

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

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

Income Taxes

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

Our taxable REIT subsidiaries, individually referred to as a TRS, are subject to federal, state and local taxes.

Underwriting Commissions and Costs

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

Organization Costs

Costs incurred to organize Gramercy in 2004 were expensed as incurred.

Earnings Per Share

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

Use of Estimates

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

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments, debt investments and accounts receivable. Gramercy places its cash investments in excess of insured amounts with high quality financial institutions. Our Manager performs ongoing analysis of credit risk concentrations in our debt investment portfolio by evaluating exposure to various markets, underlying property types, investment structure, term, sponsors, tenant mix and other credit metrics. Four investments accounted for more than 27% of the total carrying value of our debt investments as of September 30, 2005. Three investments accounted for approximately 25% of the revenue earned on our debt investments for the three months ended September 30, 2005 and the same three investments accounted for more than 29% of the revenue earned on our debt investments for the nine months ended September 30, 2005.

Recently Issued Accounting Pronouncements

SFAS No. 123(R), “Share-Based Payment, a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation,” requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair value. The new standard is effective for interim or annual reporting periods beginning after January 1, 2006. The implementation of SFAS No. 123(R) is expected to have no impact on the our financial statements.

In June 2005, the FASB ratified the consensus in EITF Issue No. 04-5, or Issue 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights, which provides guidance in determining whether a general partner controls a limited partnership. Issue 04-5 states that the general partner in a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s business and thereby preclude the general partner from exercising unilateral control over the partnership. If the criteria in Issue 04-5 are met, a company could be required to consolidate certain of its existing unconsolidated joint ventures. Our adoption of Issue 04-5 for new or modified limited partnership arrangements effective June 30, 2005 and existing limited partnership arrangements effective January 1, 2006 is not expected to have any effect on our financial position or results of operations.

3. Loans and Other Lending Investments

The aggregate carrying values, allocation by product type and weighted average coupons of our loans and other lending investments as of September 30, 2005 and December 31, 2004 were as follows:

	Carrying Value ($ in thousands)				Allocation by Investment Type				Fixed Rate: Average Yield				Floating Rate: Average Spread over LIBOR
	2005		2004		2005		2004		2005		2004		2005	2004
Whole loans, floating rate	$	397,271	$	155,215	43	%	38	%	—		—		309 bps	373 bps
Whole loans, fixed rate	65,836		—		7	%	—		8.12	%	—		—	—
Subordinate mortgage interests, floating rate	298,026		209,286		32	%	51	%	—		—		575 bps	640 bps
Subordinate mortgage interests, fixed rate	36,639		31,216		4	%	8	%	9.23	%	9.57	%	—	—
Mezzanine loans, floating rate	72,540		—		8	%	—		—		—		908 bps	—
Mezzanine loans, fixed rate	43,323		—		4	%	—		8.88	%	—		—	—
Preferred equity	11,767		—		1	%	—		—		—		900 bps	—
Commercial mortgage backed securities	10,999		10,898		1	%	3	%	13.49	%	13.49	%	—	—
Total / Average	$	936,401	$	406,615	100	%	100	%	8.97	%	10.58	%	475 bps	526 bps

For the three and nine months ended September 30, 2005 and the period from April 12, 2004 (formation) through September 30, 2004 the Company’s investment income from debt investments was generated by the following investment types:

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,				For the Period April 12, 2004 (formation) through September 30,
	2005				2004				2005				2004
Investment Type	Investment Income		% of Total		Investment Income		% of Total		Investment Income		% of Total		Investment Income			% of Total
Subordinate mortgage interests	$	7,529	36	%	$	1,047	85	%	$	19,689	42	%	$		1,047	85	%
Whole loans	9,410		44	%	—		—		18,394		39	%	—			—
Mezzanine loans	3,313		16	%	—		—		6,682		14	%	—			—
Preferred Equity	421		2	%	—		—		1,112		2	%	—			—
CMBS	387		2	%	180		15	%	1,122		3	%	180			15	%
	$	21,060	100	%	$	1,227	100	%	$	46,999	100	%	$	1,227		100	%

At September 30, 2005 and December 31, 2004, our debt investment portfolio had the following geographic diversification:

	2005				2004
Region	Carrying Value		% of Total		Carrying Value		% of Total
Northeast	$	429,012	46	%	$	185,081	46	%
South	127,973		14	%	126,493		31	%
West	251,853		27	%	20,804		5	%
Midwest	107,563		11	%	26,284		6	%
Various	20,000		2	%	47,953		12	%
Total	$	936,401	100	%	$	406,615	100	%

In connection with our preferred equity investment we have guaranteed a portion of the outstanding principal balance of the first mortgage loan, up to approximately $1,400, that is a financial obligation of the entity in which we have invested in the event of a borrower default under such loan. The loan matures in 2032. This guarantee is considered to be an off-balance sheet arrangement. As compensation, we received a credit enhancement fee of $125 from the borrower in exchange for the guarantee, which is recognized as the fair value of the guarantee and has been recorded on our balance sheet as a liability. The liability will be amortized over the life of the guarantee using the straight-line method and corresponding fee income will be recorded. Our maximum exposure under this guarantee is approximately $1,400 as of September 30, 2005. Under the terms of the guarantee, the investment sponsor is required to reimburse us for the entire amount paid under the guarantee until the guarantee expires.

4. Investment in Unconsolidated Joint Venture

One Madison Office Fee LLC

On April 29, 2005, we closed on a $57,503 initial investment in a joint venture with SL Green to acquire, own and operate the South Building located at One Madison Avenue, New York, New York, or the Property. The joint venture is owned 45% by our wholly-owned subsidiary and 55% by a wholly-owned subsidiary of SL Green. The joint venture interests are pari passu. Also on April 29, 2005, the joint venture completed the acquisition of the Property from Metropolitan Life Insurance Company for the purchase price of approximately $802,800 plus closing costs, financed in part through a $690,000 first mortgage loan on the Property. The first mortgage is non-recourse to us. The Property comprises approximately 1.2 million square feet and is almost entirely net leased to CSFB pursuant to a lease with a 15-year remaining term. As of September 30, 2005 the investment has a carrying value of $56,930. For the three and nine months ended September 30, 2005, we recorded our pro rata share of net losses of the joint venture of $510 and $914, respectively.

5. Property Acquisition

200 Franklin Square Drive

On September 6, 2005, we closed on the acquisition of a 100% fee interest in 200 Franklin Square Drive, located in Somerset, New Jersey. The property is a two hundred thousand square foot building which is 100% net leased to Philips Holding USA Inc, a wholly-owned subsidiary of Royal Philips Electronics, through December 2021. The property was acquired for a purchase price of $50,250, excluding closing costs, and financed with a $41,000, 10-year, fixed-rate first mortgage loan.

6. Junior Subordinated Debentures

On May 20, 2005 we completed the issuance of $50,000 in unsecured trust preferred securities through a newly formed Delaware statutory trust, Gramercy Capital Trust I, or GCTI, that is a wholly owned subsidiary of the Operating Partnership. The securities bear interest at a fixed rate of 7.57% for the first ten years ending June 2015. Thereafter the rate will float based on the three-month LIBOR plus 300 basis points.

On August 9, 2005 we completed an additional issuance of $50,000 in unsecured trust preferred securities through a separate newly formed Delaware statutory trust, Gramercy Capital Trust II, or GCTII, that is also a wholly owned subsidiary of the Operating Partnership. The securities bear interest at a fixed rate of 7.75% for the first ten years ending October 2015. Thereafter the rate will float based on the three-month LIBOR plus 300 basis points.

Both issuances of trust preferred securities require quarterly interest distributions; however, payments may be deferred while the interest expense is accrued for a period of up to four consecutive quarters if the Operating Partnership exercises its right to defer such payments. The trust preferred securities are redeemable, at the option of the Operating Partnership, in whole or in part, with no prepayment premium any time after June 30, 2010 for the securities issued in May 2005 and October 30, 2010 for the securities issued in August 2005.

GCTI and GCTII each issued $1,550 aggregate liquidation amount of common securities, representing 100% of the voting common stock of GCTI and GCTII to the Operating Partnership for a total purchase price of $3,100. GCTI and GCTII used the proceeds from the sale of the trust preferred securities and the common securities to purchase the Operating Partnership’s junior subordinated notes. The terms of the junior subordinated notes match the terms of the trust preferred securities. The notes are subordinate and junior in right of payment to all present and future senior indebtedness and certain other of our financial obligations. We realized net proceeds from each offering of approximately $48,956.

Our interests in GCTI and GCTII are accounted for using the equity method and the assets and liabilities of GCTI and GCTII are not consolidated into our financial statements. Interest on the junior subordinated notes is included in interest expense on our consolidated income statements while the junior subordinated notes are presented as a separate item in our consolidated balance sheet.

7. Collateralized Debt Obligation

On July 14, 2005, we issued approximately $1,000,000 of collateralized debt obligations, or CDO, through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2005-1 Ltd., or the Issuer, and Gramercy Real Estate CDO 2005-1 LLC, or the Co-Issuer. The CDO consists of $810,500 of investment grade notes, and $84,500 of non-investment grade notes, which were co-issued by the Issuer and the Co-Issuer, and $105,000 of preferred shares, which were issued by the Issuer. We retained all non-investment grade securities and the preferred shares in the Issuer. The Issuer holds assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans and preferred equity investments, which serve as collateral for the CDO. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.49%. The CDO may be replenished pursuant to certain rating agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid during the first five years of the CDO. Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as loans are repaid. We incurred approximately $11,580 of issuance costs, which is amortized on a level yield basis over the average life of the CDO. The Issuer is consolidated in our financial statements. The investment grade notes are treated as a secured financing, and are non-recourse to us. Proceeds from the sale of the investment grade notes issued were used to repay substantially all outstanding debt under our repurchase agreements and to fund additional investments.

8. Debt Obligations

Credit Facilities

We have three secured credit facilities: two with Wachovia Capital Markets, LLC or one or more of its affiliates and one with Goldman Sachs Mortgage Company.

The first facility with Wachovia Capital Markets, LLC and its affiliates is a $500,000 repurchase facility. This facility was increased to $350,000 from $250,000 effective January 3, 2005, and subsequently increased to $500,000 effective April 22, 2005. As part of the April 2005 increase to $500,000, the initial term of the facility was modified to reflect staggered maturities in which $250,000 matures in August 2007, $150,000 matures in December 2007 and the remaining $100,000 matures in June 2008. Also in conjunction with the April 2005 increase, the $50,000 credit facility we previously maintained with Wachovia was consolidated into the $500,000 repurchase facility. The $500,000 facility bears interest at spreads of 1.25% to 3.50% over a 30-day LIBOR and, based on our expected investment activities, provides for advance rates that vary from 50% to 95% based upon the collateral provided under a borrowing base calculation. The lender has a consent right to the inclusion of investments in this facility, determines periodically the market value of the investments, and has the right to require additional collateral if the estimated market value of the included investments declines. We had borrowings of $0 and $239 under this facility at September 30, 2005 and December 31, 2004, respectively. We can utilize the $25,000 revolving credit facility described below to fund requirements for additional collateral pursuant to the warehouse financing or to fund the acquisition of assets.

The second facility with Wachovia Capital Markets, LLC and its affiliates is a $25,000 revolving credit facility with a term of two years. Amounts drawn under this facility for liquidity purposes bear interest at a rate equal to a spread over LIBOR of 525 basis points. Amounts drawn under this facility for acquisition purposes bear interest at a spread over LIBOR of 225 basis points. Amounts drawn under this facility for liquidity purposes must be repaid within 105 days. Amounts drawn under this facility generally will be secured by assets established under a borrowing base calculation unless certain financial covenants are satisfied. These covenants are generally more restrictive than those set forth below. At September 30, 2005 and December 31, 2004 we had no borrowings under this facility.

We have an additional repurchase facility of $200,000 with Goldman Sachs Mortgage Company, an affiliate of Goldman Sachs & Co. This facility has an initial term of three years expiring in January 2008 with one six-month extension option. This facility bears interest at spreads of 1.125% to 2.75% over a 30-day LIBOR and, based on our expected investment activities, provides for advance rates that vary from 75% to 90% based upon the collateral provided under a borrowing base calculation. As with the Wachovia facility, the lender has a consent right to the inclusion of investments in this facility, determines periodically the market value of the investments, and has the right to require additional collateral if the estimated market value of the included investments declines. At September 30, 2005 we had no borrowings under this facility.

The terms of both of our repurchase facilities and our credit facility include covenants that (a) limit our maximum total indebtedness to no more than 85% of total assets, (b) require us to maintain minimum liquidity of at least $10,000 for the first two years and $15,000 thereafter, (c) our fixed charge coverage ratio shall at no time be less than 1.50 to 1.00, (d) our minimum interest coverage ratio shall at no time be less than 1.75 to 1.00, (e) require us to maintain minimum tangible net worth of not less than the greater of (i) $129,750, or (i) plus (ii) 75% of the proceeds of our subsequent equity issuances and (f) restrict the maximum amount of our total indebtedness. The covenants also restrict us from making distributions in excess of a maximum of 103% of our funds from operations (as defined by the National Association of Real Estate Investment Trusts) through July 2005 and 100% thereafter, except that we may in any case pay distributions necessary to maintain our REIT status. Under our facilities with Wachovia Capital Markets, LLC, an event of default will be triggered if GKK Manager LLC ceases to be the Manager.

The revolving credit facility and the repurchase facilities require that we pay down borrowings under these facilities as principal payments on the loans and investments pledged to these facilities are received.

Mortgage Loan

We have one interest-only mortgage loan of $41,000 that bears interest at a fixed rate of 4.90% and has a term of ten years, resulting in a balloon payment in 2015. This mortgage was used to finance our acquisition of 200 Franklin Square Drive for approximately $50,250, excluding closing costs, in September 2005.

9. Operating Partnership Agreement / Manager

At September 30, 2005, we owned all of the Class A limited partnership interests in our Operating Partnership. At September 30, 2005, the majority of the Class B limited partnership interests were owned by our Manager and SL Green Operating Partnership, L.P. Interests were also held by certain officers and employees of SL Green Realty Corp., including some of whom are our executive officers, which interests are subject to performance thresholds.

At September 30, 2005, the majority of the interests in our Manager were held by SL Green Operating Partnership, L.P. Interests were also held by certain officers and employees of SL Green Realty Corp., including some of whom are our executive officers, which interests are subject to performance thresholds.

10. Related Party Transactions

In connection with our initial public offering, we entered into a management agreement with GKK Manager LLC, which provides for an initial term through December 2007 with automatic one-year extension options and is subject to certain termination rights. We pay the Manager an annual management fee equal to 1.75% of our gross stockholders equity (as defined in the Management Agreement) inclusive of the trust preferred securities issued on May 20, 2005 and August 9, 2005. We paid or had payable to the Manager under this agreement an aggregate of approximately $1,678 and $4,208, for the three and nine months ended September 30, 2005, respectively and approximately $547 for the period from April 12, 2004 through September 30, 2004.

At September 30, 2005, the majority of the Class B limited partnership interests were owned by our Manager and SL Green Operating Partnership, L.P. Interests were also held by certain officers and employees of SL Green Realty Corp., including some of whom are our executive officers, which interests are subject to performance thresholds. To provide an incentive for the Manager to enhance the value of the common stock, the Manager and SL Green Operating Partnership, L.P. are entitled through their ownership of Class B limited partner interests of the Operating Partnership to an incentive return equal to 25% of the amount by which funds from operations (as defined in the partnership agreement of the Operating Partnership) plus certain accounting gains exceed the product of our weighted average stockholders equity (as defined in the partnership agreement of the Operating Partnership) multiplied by 9.5% (divided by 4 to adjust for quarterly calculations). We will record any distributions on the Class B limited partner interests as an incentive distribution expense in the period when earned and when payments of such amounts have become probable and reasonably estimable in accordance with the partnership agreement. We incurred approximately $1,038 of incentive distribution expense for the nine months ended September 30, 2005.

We are obligated to reimburse the Manager for its costs incurred under an Asset Servicing Agreement between our Manager and an affiliate of SL Green Operating Partnership, L.P. and a separate Outsourcing Agreement between our Manager and SL Green Operating Partnership, L.P. The Asset Servicing Agreement provides for an annual fee payable by us of 0.15% of the carrying value of our investments, excluding certain defined investments for which other servicing arrangements are executed and further reduced by fees paid directly to outside servicers by us which have been approved by SL Green Operating Partnership, L.P. The Outsourcing Agreement provides a fee payable by us of $1,288 per year, increasing 3% annually over the prior year. For the three months ended September 30, 2005, we paid or had payable an aggregate of $319 and $291 to our Manager under the Outsourcing and Asset Servicing Agreements, respectively. For the nine months ended September 30, 2005 and the period from April 12, 2004 through September 30, 2004, we paid or had payable an aggregate of $944 and $208, respectively, to our Manager under the Outsourcing Agreement. For the nine months ended September 30, 2005 and the period from April 12, 2004 through September 30, 2004, we paid or had payable an aggregate of $674 and $31 to our Manager under the Asset Servicing Agreement, respectively.

In connection with the closing of our CDO in July 2005, the Issuer entered into a Collateral Management Agreement with the Manager. Pursuant to the Collateral Management Agreement, the Manager has agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. The Collateral Management Agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and an additional subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager, our Board of Directors has allocated to the Manager the portion of the subordinate collateral management fee paid on securities not held by us. The senior collateral management

fee and balance of the subordinate collateral management fee is allocated to us. For the three and nine months ended September 30, 2005 we paid or had payable $438 to the Manager under the Collateral Management Agreement.

In connection with the 5,500,000 shares of common stock that were sold on December 3, 2004 and settled on December 31, 2004 and January 3, 2005 in a private placement, we agreed to pay the Manager a fee of $1,000 as compensation for financial advisory, structuring and costs incurred on our behalf. This fee was recorded as a reduction in the proceeds of the private placement. Apart from legal fees and stock clearing charges totaling $245, no other fees were paid by us to an investment bank, broker/dealer or other financial advisor in connection with the private placement, resulting in total costs of 1.3% of total gross proceeds.

On April 29, 2005, we closed on a $57,503 initial investment in a joint venture with SL Green to acquire, own and operate the South Building located at One Madison Avenue, New York, New York, or the Property. The joint venture, which was created to acquire, own and operate the Property, is owned 45% by a wholly-owned subsidiary of us and 55% by a wholly-owned subsidiary of SL Green. The joint venture interests are pari passu. Also on April 29, 2005, the joint venture completed the acquisition of the Property from Metropolitan Life Insurance Company for the purchase price of approximately $802,800 plus closing costs, financed in part through a $690,000 first mortgage loan on the Property. The Property comprises approximately 1.2 million square feet and is almost entirely net leased to Credit Suisse First Boston (USA), Inc., or CSFB, pursuant to a lease with a 15-year remaining term.

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

Bright Star Couriers LLC, or Bright Star, provides messenger services to us. Bright Star is owned by Gary Green, a son of Stephen L. Green. The aggregate amount of fees paid by us for such services for the three and nine months ended September 30, 2005 was approximately $1 and $2, respectively and less than $1 for the three months ended September 30, 2004 and the period from April 12, 2004 through September 30, 2004.

SL Green Operating Partnership, L.P. has invested $75,000 and $6,100 in preferred equity interests that are subordinate to two of our investments with book values of $94,273 and $6,439, respectively, as of September 30, 2005.

On July 14, 2005, we closed on the purchase from an SL Green affiliate of a $40,000 mezzanine loan which bears interest at 11.20%. As part of that sale, the seller retained an interest-only participation. We have determined that the yield on our mezzanine loan after giving effect to the interest-only participation retained by the seller is at market. The mezzanine loan is secured by the equity interests in an office property in New York, New York.

11. Deferred Costs

Deferred costs at September 30, 2005 and December 31, 2004 consisted of the following (in thousands):

	2005			2004
Deferred financing	$	19,909		$	2,334
Deferred acquisition	1,013			215
	20,922			2,549
Less accumulated amortization	(2,094		)	(316		)
	$	18,828		$	2,233

Deferred financing costs relate to our existing repurchase and credit facilities with Wachovia and Goldman Sachs, our CDO and our mortgage note. These costs are amortized on a straight-line basis to interest expense based on the remaining term of the related financing.

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

12. Fair Value of Financial Instruments

The following discussion of fair value was determined by our Manager, 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 we 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.

Cash equivalents, accrued interest, and accounts payable balances reasonably approximate their fair values due to the short maturities of these items. The carrying value of our CDO, repurchase and credit facilities approximate fair value because they bear interest at floating rates, which we believe, for facilities with a similar risk profile, reasonably approximate market rates. Loans and commercial mortgage backed securities are carried at amounts, which reasonably approximate their fair value as determined by our Manager.

Disclosure about fair value of financial instruments is based on pertinent information available to us at September 30, 2005. Although we are not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

13. Stockholders’ Equity

Common Stock

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

As of the date of our formation, April 12, 2004, we had 500,000 shares of common stock outstanding valued at approximately $200,000. On August 2, 2004 we completed our initial public offering of 12,500,000 shares of common stock resulting in net proceeds of approximately $177,600, which was used to fund investments and commence our operations. As of September 30, 2005, 333,000 restricted shares had also been issued under our 2004 Equity Incentive Plan, or the Equity Incentive Plan. These shares have a vesting period of three to four years and are not entitled to receive distributions declared by us on our common stock until such time as the shares have vested, or the shares have been designated to receive dividends by the Compensation Committee of our Board of Directors.

On December 3, 2004 we sold 5,500,000 shares of common stock resulting in net proceeds of approximately $93,740 under a private placement exemption from the registration requirements of Section 5 of the Securities Act of 1933, as amended. A total of 4,225,000 shares were sold to various institutional investors and an additional 1,275,000 shares were sold to SL Green Operating Partnership, L.P. pursuant to its contractual right to maintain a 25% ownership interest in the outstanding shares of our common stock. Of the 5,500,000 shares sold, 2,000,000 shares were settled on December 31, 2004 and the remaining 3,500,000 shares were settled on January 3, 2005. The value of the shares settled on January 3, 2005 were reflected as a stock subscription receivable for financial statement purposes as of December 31, 2004.

On September 9, 2005 we sold 3,833,333 shares of common stock resulting in net proceeds of approximately $98,100. A total of 2,875,000 shares were sold through public offering and an additional 958,333 shares were sold to SL Green Operating Partnership, L.P. pursuant to its contractual right to maintain a 25% ownership interest in our outstanding shares of common stock. After this offering, SL Green Operating Partnership, L.P. owned 5,668,333 shares of our common stock. Net proceeds were used for acquisitions, repayment of outstanding principal under one of our repurchase facilities and general corporate purposes.

In August 2005 our $350,000 shelf registration statement was declared effective by the Securities and Exchange Commission, or SEC. This registration statement provides us with the ability to issue common and preferred stock, depository shares and warrants. We currently have $251,100 available under the shelf.

As of September 30, 2005, 22,794,309 shares of common stock and no shares of preferred stock were issued and outstanding.

Equity Incentive Plan

As part of our initial public offering we instituted our Equity Incentive Plan. The Equity Incentive Plan, as amended, authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or ISOs, (ii) the grant of stock options that do not qualify, or NQSOs, (iii) the grant of stock options in lieu of cash directors’ fees and (iv) grants of shares of restricted and unrestricted common stock. The exercise price of stock options will be determined by the compensation committee, but may not be less than 100% of the fair market value of the shares of common stock on the date of grant. At September 30, 2005, approximately 1,091,930 shares of common stock were available for issuance under the Equity Incentive Plan.

Options granted under the Equity Incentive Plan to employees are exercisable at the fair market value on the date of grant and, subject to termination of employment, expire ten years from the date of grant, are not transferable other than on death, and are exercisable in three to four annual installments commencing one year from the date of grant. In some instances, options may be granted under the Equity Incentive Plan to persons who provide significant services to us or our affilliates, but are not considered employees because compensation for their services is not covered by our Management Agreement or Outsourcing Agreement. Options granted to non-employees have the same terms as those issued to employees except as it relates to any performance-based provisions within the grant. To the extent there are performance provisions associated with a grant to a non-employee, an estimated expense related to these options is recognized over the vesting period and the final expense is reconciled at the point performance has been met, or the measurement date. If no performance based provision exists, the fair value of the options is calculated on a quarterly basis and the related expense is recognized over the vesting period.

A summary of the status of our stock options as of September 30, 2005 and December 31, 2004 are presented below:

	2005				2004
	Options Outstanding		Weighted Average Exercise Price		Options Outstanding	Weighted Average Exercise Price
Balance at beginning of year	640,500		$	15.05	—	$	—
Granted	224,000		$	19.47	640,500	$	15.05
Exercised	(127,916	)	$	15.01	—	$	—
Lapsed or cancelled	(10,000	)	$	18.73	—	$	—
Balance at end of period	726,584		$	16.39	640,500	$	15.05

All options were granted within a price range of $15.00 to $24.66. The remaining weighted average contractual life of the options was 9.06 years. Of the options granted 22% have vested. Compensation expense of $46 and $13 was recorded during the three months ended September 30, 2005 and 2004, respectively, and $105 and $13 was recorded for the nine months ended September 30, 2005 and the period from April 12, 2004 through September 30, 2004, respectively, related to the issuance of stock options.

As of September 30, 2005, 333,000 restricted shares had been issued under the Equity Incentive Plan, of which 32% have vested. The unvested shares are not currently entitled to receive distributions declared by us on our common stock until such time as the shares have vested. Unvested shares may be entitled to receive dividends at the discretion of the Compensation Committee of our Board of Directors. Holders of restricted shares are prohibited from selling such shares until they vest but are provided the ability to vote such shares beginning on the date of grant. Compensation expense of $274 and $142 was recorded during the three months ended September 30, 2005 and 2004, respectively, and $926 and $142 was recorded for the nine months ended September 30, 2005 and the period from April 12, 2004 through September 30, 2004, respectively, related to the issuance of restricted shares.

Outperformance Plan

On June 15, 2005, the Compensation Committee of our Board of Directors approved the 2005 Outperformance Plan, a long-term incentive compensation program.

Under the 2005 Outperformance Plan, award recipients will share in a “performance pool” if our total return to stockholders for the period from June 1, 2005 through May 31, 2008 exceeds a cumulative total return to stockholders of 30%. The size of the pool will be 10% of the outperformance amount in excess of the 30% benchmark, subject to a maximum limit equal to the lesser of 4% of our outstanding shares or 1,200,000 shares. If our total return to stockholders from June 1, 2005 to any subsequent date exceeds 80% and remains at that level or higher for 30 consecutive days, then a minimum performance pool will be established. In the event the potential outperformance pool reaches the maximum dilution cap before May 31, 2008 and remains at that level or higher for 30 consecutive days, the performance period will end early and the pool will be formed at such earlier date.

Each officer’s award under the 2005 Outperformance Plan is designated as a specified percentage of the aggregate performance award pool. Assuming that the 30% benchmark is achieved, the pool will be allocated among our senior officers in accordance with the percentage specified in each officer’s participation agreement. Individual awards under the 2005 Outperformance Plan will be made in the form of partnership units, or LTIP Units, that are convertible into shares of our common stock or cash, at our election. LTIP Units will be granted prior to the determination of the performance pool; however, they will only vest upon satisfaction of performance and other thresholds, and will not be entitled to distributions until after the performance pool, or minimum performance pool, is established. Distributions on LTIP Units will equal the dividends paid on our common stock on a per unit basis. The 2005 Outperformance Plan provides that if a pool is established, each officer will also be entitled to the distributions that would have been paid by us had the LTIP Units been issued on the date the 2005 Outperformance Plan was approved. Those distributions will be paid in the form of additional LTIP Units. Once a performance pool has been established, distributions will commence with respect to any LTIP Units that are a part of the performance pool.

Although the amount of the awards will be determined on the measurement date, none of the awards vest at that time. Instead, 50% of the awards vest in May 2009 and the balance vest one year later based on continued employment.

In the event of a change in control of us prior to the establishment of the pool, the performance period will be shortened to end on a date immediately prior to such event and the cumulative shareholder return benchmark will be adjusted on a pro rata basis. The pool will be formed as described above if the adjusted benchmark target is achieved and fully vested awards will be issued. All determinations, interpretations and assumptions relating to the vesting and calculation of the performance awards will be made by the Compensation Committee. We will record the expense of the restricted stock award in accordance with SFAS 123. Compensation expense of $881 was recorded for the nine months ended September 30, 2005 related to the 2005 Outperformance Plan.

Deferred Stock Compensation Plan for Directors

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

During the three months ended September 30, 2005, 665 phantom stock units were earned. As of September 30, 2005 there were approximately 1,498 phantom stock units outstanding.

Earnings per Share

Earnings per share for the three and nine months ended September 30, 2005 and the three months ended September 30, 2004 and the period from April 12, 2004 (formation) through September 30, 2004 is computed as follows:

	Three months ended September 30,				For the Nine Months Ended September 30,		For the Period April 12, 2004 (formation) through September 30,
	2005		2004		2005		2004
Numerator (Income)
Basic Earnings:
Net income available to common stockholders	$	8,577	$	11	$	20,599	$	11
Effect of dilutive securities	—		—		—		—
Diluted Earnings:
Net income available to common stockholders	$	8,577	$	11	$	20,599	$	11

Denominator (Weighted Average Shares)
Basic
Shares available to common stockholders	19,603		13,313		19,093		13,313
Effect of Diluted Securities:
Stock-based compensation plans	1,184		8		524		8
Phantom stock units	1		—		1		—
Diluted Shares	20,788		13,321		19,618		13,321

14. Minority Interest

15. Benefit Plans

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

16. Commitments and Contingencies

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

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

The following is a schedule of future minimum lease payments under our operating lease as of September 30, 2005.

	Operating Leases
2005	$	62
2006	252
2007	256
2008	261
2009	265
Thereafter	1,633
Total minimum lease payments	$	2,729

17. Financial Instruments: Derivatives and Hedging

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

The following table summarizes the notional and fair value of our derivative financial instrument at September 30, 2005. All derivative instruments have been designated as cash flow hedges. The notional value is an indication of the extent of our involvement in this instrument at that time, but does not represent exposure to credit, interest rate or market risks (in thousands):

	Notional Value		Strike Rate		Effective Date		Expiration Date		Fair Value
Interest Rate Swap	$	10,729	3.360	%	8/2004		12/2007		$	255
Interest Rate Swap	$	31,686	3.855	%	4/2005		11/2009		773
Interest Rate Swap	$	3,465	3.300	%(1)	2/2005	(1)	2/2006	(1)	41
Interest Rate Swap	$	19,800	3.625	%	5/2005		2/2006		32
Interest Rate Swap	$	26,235	4.188	%	6/2005		6/2010		363
Interest Rate Swap	$	20,048	4.348	%	6/2005		6/2015		457
Interest Rate Swap	$	40,000	4.420	%	7/2005		2/2014		496

(1) This swap has a step-up component with a strike rate of 4.28%, an effective date of February 2006 and an expiration of December 2009. The total fair value of the initial swap and the step-up provisions are reflected in the fair value.

On September 30, 2005, the derivative instruments were reported as an asset at their fair value of $2,417. Offsetting adjustments are represented as deferred losses and are a component of Accumulated Other Comprehensive Income of $2,506. Currently, all derivative instruments are designated as effective hedging instruments. Over time, the realized and unrealized gains and losses held in Accumulated Other Comprehensive Income will be reclassified into earnings as interest expense in the same periods in which the hedged interest payments affect earnings.

We are hedging exposure to variability in future interest payments on our debt facilities except in the case of TROR swaps we may enter into from time to time, which are intended to hedge our exposure to variability in the rate of return in excess of anticipated future interest payments on that portion of our debt facilities used to fund fixed rate mortgage loan assets held as available for sale.

18. Income Taxes

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

During the three and nine months ended September 30, 2005, we recorded $500 and $1,000 of income tax expense, respectively, for income attributable to GKK Trading Corp., our wholly owned taxable REIT subsidiary. We have assumed an effective tax rate for the year ended December 31, 2005 of 40% taking into consideration the anticipated applicable U.S. federal statutory tax rate at December 31, 2005 of 34% and state and local taxes, net of federal tax benefit.

19. Environmental Matters

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

20. Segment Reporting

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

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

The following table represents non-cash investing and financing activities (in thousands):

	2005
Derivative instruments at fair value	$	2,417

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a national commercial real estate specialty finance company formed in April of 2004 focused on originating and acquiring, for our own account, fixed and floating rate mortgage loans, bridge loans, subordinate interests in mortgage loans, distressed debt, mortgage-backed securities, mezzanine loans and preferred equity interests in entities that own commercial real estate, primarily in the United States. We also make equity investments in commercial real estate properties net leased to tenants, primarily for the recurring earnings, tax benefits and long-term residual benefits these transactions often hold. We conduct substantially all of our operations through our operating partnership, GKK Capital LP. We are externally managed and advised by GKK Manager LLC, or the Manager, a majority-owned subsidiary of SL Green Realty Corp., or SL Green. We have elected to be taxed as a REIT under the Internal Revenue Code and generally will not be subject to federal income taxes to the extent we distribute our income to our stockholders. However, we may establish taxable REIT subsidiaries to effect various taxable transactions. Those taxable REIT subsidiaries would incur federal, state and local taxes on the taxable income from their activities. Unless the context requires otherwise, all references to “we,” “our” and “us” mean Gramercy Capital Corp.

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

Since our inception, we have completed transactions in a variety of markets and secured by several property types. During this period, the market for commercial real estate debt has continued to demonstrate low rates of default, high relative returns and tremendous inflows of capital. Consequently, the market for debt instruments has evidenced moderately declining yields and more flexible credit standards and loan structures. In particular, “conduit” originators who package whole loans for resale to investors have driven debt yields lower while maintaining substantial liquidity because of the strong demand for the resulting securities. Because of reduced profits in the most liquid sectors of the mortgage finance business, several large institutions have begun originating large bridge loans for the purpose of generating interest income, rather than the typical focus on trading profits. In this environment we have focused on areas where we have comparative advantages rather than competing for product merely on the basis of yield or structure. This has particularly included whole loan origination in markets and transactions where we have an advantage due to knowledge or relationships we have or our largest shareholder, SL Green, has or where we have an ability to better assess and manage risks over time. When considering investment opportunities in secondary market transactions in tranched debt, we generally avoid first loss risk in larger transactions due to the high historic valuations of most of the corresponding assets. Because of the significant increase in the value of institutional quality assets relative to historic norms, we typically focus on positions in which a customary refinancing at loan maturity would provide for a return of our investment. Because of our relatively small size at this time, we can meet our growth objectives with a moderate amount of new investment activity.

Because of the high relative valuation of debt instruments in the current market and a generally increasing rate environment, we have carefully managed our exposure to interest rate changes that could affect our liquidity. We generally match our assets and liabilities in terms of base interest rate (generally 30-day LIBOR) and expected duration. We raised $95.0 million of additional equity in December 2004 and January 2005 to reduce our outstanding indebtedness and maintain sufficient liquidity for our investment portfolio. We sold a total of $100.0 million of trust preferred securities in two $50.0 million issuances in May 2005 and August 2005 through wholly-owned subsidiaries of the Operating Partnership with 30 year terms expiring in June 2035 and October 2035, respectively. The securities issued in May bear interest at a fixed rate of 7.57% for the first ten years ending June 2015 while the securities issued in August bear interest at a fixed rate of 7.75% for the first ten years ending October 2015. After the first ten years, both issuances bear interest at three month LIBOR plus 300 basis points. The proceeds from the issuances of the trust preferred securities were used to fund existing and future investment opportunities. In July 2005 we closed on a $1.0 billion collateralized debt obligation, or CDO, which will serve to extend the term of our liabilities and lower our overall cost of funds from approximately 200 basis points over LIBOR to approximately 49 basis points over LIBOR, excluding transaction costs. The proceeds of the CDO were used to refinance our warehouse facilities and to fund additional investment activities. In September 2005 we sold 3,833,333 shares of common stock resulting in net proceeds of approximately $98.1 million which were used to fund acquisitions, repay outstanding principal amounts under our warehouse facilities and for general corporate purposes.

As of September 30, 2005, we held loans and other lending investments of approximately $936,401 million net of fees, discounts, repayments, asset sales and unfunded commitments. As of September 30, 2005 we also held a $56,930 investment in an unconsolidated joint venture that acquired the South Building located at One Madison Avenue in New York, New York, which is almost entirely net leased to Credit Suisse First Boston (USA), Inc., or CSFB, under a net lease with a 15 year remaining term and a $51,259 investment in a 200,000 square foot building in Somerset, New Jersey which is 100% net leased to Philips Holding USA Inc, a wholly-owned subsidiary of Royal Philips Electronics, through December 2021.

The aggregate carrying values, allocation by product type and weighted average coupons of our loans and other lending investments as of September 30, 2005 and December 31, 2004 were as follows:

	Carrying Value ($ in thousands)				Allocation by Investment Type				Fixed Rate: Average Yield				Floating Rate: Average Spread over LIBOR
	2005		2004		2005		2004		2005		2004		2005	2004
Whole loans, floating rate	$	397,271	$	155,215	43	%	38	%	—		—		309 bps	373 bps
Whole loans, fixed rate	65,836		—		7	%	—		8.12	%	—		—	—
Subordinate mortgage interests, floating rate	298,026		209,286		32	%	51	%	—		—		575 bps	640 bps
Subordinate mortgage interests, fixed rate	36,639		31,216		4	%	8	%	9.23	%	9.57	%	—	—
Mezzanine loans, floating rate	72,540		—		8	%	—		—		—		908 bps	—
Mezzanine loans, fixed rate	43,323		—		4	%	—		8.88	%	—		—	—
Preferred equity	11,767		—		1	%	—		—		—		900 bps	—
Commercial mortgage backed securities	10,999		10,898		1	%	3	%	13.49	%	13.49	%	—	—
Total / Average	$	936,401	$	406,615	100	%	100	%	8.97	%	10.58	%	475 bps	526 bps

The following discussion relating to our consolidated financial statements should be read in conjunction with the financial statements appearing in Item 8 of the Annual Report on Form 10-K and Item 1 of this 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 made based upon information available to us at that time. We evaluate these decisions and assessments on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. We have identified our most critical accounting policies to be the following:

Loans and Investments and Loans Held for Sale

Classifications of Mortgage-Backed Securities

Valuations of Mortgage-Backed Securities

Credit Tenant Lease Investments

balance of the related intangible will be written off. The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date). We assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

Investment in Unconsolidated Joint Ventures

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

Revenue Recognition

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

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

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

Reserve for Possible Credit Losses

Incentive Distribution (Class B Limited Partner Interest)

Derivative Instruments

All hedges held by us are deemed to be highly effective in meeting the hedging objectives established by our corporate policy governing interest rate risk management.

Income Taxes

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

Our wholly owned taxable REIT subsidiaries, individually referred to as a TRS, are subject to federal, state and local taxes.

Results of Operations

Comparison of the three months ended September 30, 2005 to the three months ended September 30, 2004 (dollars in thousands)

Revenues

	2005				2004			$ Change
Investment income	$	21,060			$	1,227		$	19,833
Rental revenue	314				—			314
Other income	5,218				245			4,973
Total revenues	$		26,592		$		1,472	$	25,120

Equity in net loss of unconsolidated joint venture	$	(510		)	$		—	$	(510	)

Investment income is generated on our whole loans, senior mortgage interests, subordinate mortgage interests, mezzanine loans, preferred equity interests and CMBS investments. For the three months ended September 30, 2005 $3,409 was earned on fixed rate investments while the remaining $17,651 was earned on floating rate investments. The increase over the prior year is due to a significantly higher number of investments in 2005 versus 2004 and the effect of a full three months of operations in 2005.

Rental revenue of $314 in 2005 was earned on 200 Franklin Square Drive, which was acquired in September 2005. This amount includes the effect of adjustments for straight-line rent and FASB 141 adjustments for below market leases. We did not hold any real estate investments during 2004.

Other income of $5,218 for the three months ended September 30, 2005 is comprised primarily of income recorded on the sale of whole loans of $3,184, interest on restricted cash balances in the CDO, which was not in place in 2004 of approximately $1,212 and a one-time break-up fee paid by a potential borrower of $604. For the three months ended September 30, 2004, other income of $245 was comprised only of interest income on cash balances.

The loss on investment in unconsolidated joint venture of $510 in 2005 represents our proportionate share of the losses generated by the joint venture that owns the South Building at One Madison Avenue. We did not maintain any joint venture investments during 2004.

Expenses

	2005		2004		$ Change
Interest expense	$	11,250	$	63	$		11,187
Management fees	2,726		786		1,940
Incentive fee	1,038		—		1,038
Depreciation and amortization	105		5		100
Marketing, general and administrative	1,456		332		1,124
Provision for loan loss	430		—		430
Provision for taxes	500		—		500
GKK formation costs	—		275		(275			)
Total expenses	$	17,505	$	1,461	$	16,044

Interest expense was $11,250 for the three months ended September 30, 2005 versus $63 for the three months ended September 30, 2004. The increase in 2005 is due primarily to $7,659 of interest on the investment grade tranches of our CDO, which was not in place in 2004, which are not held by us, $1,824 of interest on borrowings on our master repurchase facilities with Wachovia Capital Markets, LLC and Goldman Sachs Mortgage Company and $1,527 of interest expense accrued against our two $50,000 issuances of trust preferred securities. The $63 of interest expense for the three months ended September 30, 2004 was comprised of the amortization of deferred financing costs and interest on one swap agreement.

Management fees increased $1,940 for the three months ended September 30, 2005 versus same period in 2004 due primarily to higher fees of $1,131 paid or payable to the Manager under our management agreement resulting from an increase in our stockholder’s equity, the issuance of trust preferred securities and a full three months of operations in 2005. The remaining increase is comprised of $438 payable to the Manager under the CDO collateral management agreement which was not in place in 2004, and higher fees paid or payable to SL Green Operating Partnership, L.P. of $111 and $260 under our outsourcing and servicing agreements, respectively, due to a full three months of operations in 2005 and a larger asset base on which to calculate the servicing fee. These fees and the relationship between us, the Manager and SL Green Operating Partnership, L.P. are discussed further in “Related Party Transactions.”

We recorded an incentive fee expense of $1,038 during the three months ended September 30, 2005 in accordance with requirements of the partnership agreement of the Operating Partnership which entitles owners of Class B limited partner interests in the Operating Partnership to an incentive return equal to 25% of the amount by which funds from operations (as defined in the partnership agreement of the Operating Partnership) plus certain accounting gains exceed the product of our weighted average stockholders equity (as defined in the partnership agreement of the Operating Partnership) multiplied by 9.5% (divided by 4 to adjust for quarterly calculations). This threshold was not reached during 2004 and, consequently, no expense was recorded. This fee and the relationship between us, the Manager and SL Green Operating Partnership, L.P. are discussed further in “Related Party Transactions.”

The increase in marketing, general and administrative expenses of $1,124 for the three months ended September 30, 2005 versus the same period in 2004 reflects a full three months of operations in 2005 and a corresponding increase in professional fees, stock-based compensation, insurance and general overhead costs.

Stock-based compensation expense included in marketing, general and administrative expenses was $455 for the three months ended September 30, 2005 representing a ratable portion of the expense for the issuance of restricted stock, options or other equity awards over their respective vesting periods.

Comparison of the nine months ended September 30, 2005 to the period from April 12, 2004 (formation) through September 30, 2004 (dollars in thousands)

Revenues

	2005				2004			$ Change
Investment income	$	46,999			$	1,227		$	45,772
Rental revenue	314				—			314
Other income	8,727				245			8,482
Total revenues	$		56,040		$		1,472	$	54,568

Equity in net loss of unconsolidated joint venture	$		(914	)	$		—	$	(914	)

For the nine months ended September 30, 2005 $6,716 was earned on fixed rate investments while the remaining $40,283 was earned on floating rate investments. The increase over the prior year is due to a significantly higher number of investments in 2005 versus 2004 and the effect of a full nine months of operations in 2005.

Rental revenue of $314 in 2005 was earned on 200 Franklin Square Drive which was acquired in September 2005. This amount reflects the effect of adjustments for straight-line rent and FASB 141. We did not hold any real estate investments during 2004.

Other income of $8,727 for the nine months ended September 30, 2005 is comprised primarily of income recorded on the sale of whole loans of $6,565, interest on restricted cash balances in the CDO of approximately $1,212 and a one-time break-up fee paid by a potential borrower of $604. For the period from April 12, 2004 through September 30, 2004, other income of $245 was comprised only of interest income on cash balances.

The loss on investment in unconsolidated joint venture of $914 in 2005 represents our proportionate share of the losses generated by the joint venture that owns the South Building at One Madison Avenue. We did not maintain any joint venture investments during 2004.

Expenses

	2005		2004		$ Change
Interest expense	$	20,316	$	63	$		20,253
Management fees	6,264		786		5,478
Incentive fee	1,038		—		1,038
Depreciation and amortization	232		5		227
Marketing, general and administrative	4,722		332		4,390
Provision for loan loss	955		—		955
Provision for taxes	1,000		—		1,000
GKK formation costs	—		275		(275			)
Total expenses	$	34,527	$	1,461	$	33,066

Interest expense was $20,316 for the nine months ended September 30, 2005 versus $63 for the period from April 12, 2004 through September 30, 2004. This increase is due primarily to $7,659 of interest on the investment grade tranches of our CDO, which did not exist in 2004, which are not held by us, $10,480 of interest on borrowings on our master repurchase facilities with Wachovia Capital Markets, LLC and Goldman Sachs Mortgage Company and $1,937 of interest expense accrued against our two $50,000 issuances of trust preferred securities. The $63 of interest expense in 2004 was comprised of the amortization of deferred financing costs and interest on one swap agreement.

Management fees increased $5,478 in 2005 due primarily to higher fees of $3,661 paid or payable to the Manager under our management agreement resulting from an increase in our stockholder’s equity, the issuance of trust preferred securities and a full nine months of operations in 2005. The remaining increase is comprised of $438 payable to the Manager under the CDO collateral management agreement which was not in place in 2004, and higher fees paid or payable to SL Green Operating Partnership, L.P. of $736 and $643 under our outsourcing and servicing agreements, respectively, due to a full nine months of operations in 2005 and a larger asset base on which to calculate the servicing fee. These fees and the relationship between us, the Manager and SL Green Operating Partnership, L.P. are discussed further in “Related Party Transactions.”

We recorded an incentive fee expense of $1,038 during the nine months ended September 30, 2005 in accordance with requirements of the partnership agreement of the Operating Partnership as outlined above. This threshold was not reached during 2004 and, consequently, no expense was recorded. This fee and the relationship between us, the Manager and SL Green Operating Partnership, L.P. are discussed further in “Related Party Transactions.”

The increase in marketing, general and administrative expenses of $4,390 for the nine months ended September 30, 2005 versus the period from April 12, 2004 through September 30, 2004 reflects a full nine months of operations in 2005 and a corresponding increase in professional fees, stock-based compensation, insurance and general overhead costs.

Stock-based compensation expense included in marketing, general and administrative expenses was $1,912 for the nine months ended September 30, 2005 representing a ratable portion of the expense for the issuance of restricted stock, options or other equity awards over their respective vesting periods.

Liquidity and Capital Resources

Liquidity is a measurement of the ability to meet cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and investments, pay dividends and other general business needs. We believe that our principal sources of working capital and funds for additional investments will primarily include: 1) cash flow from operations; 2) borrowings under our repurchase and credit facilities; 3) our CDO; 4) other forms of financing or additional securitizations including CMBS or subsequent CDO offerings; 5) proceeds from common or preferred equity offerings and, to a lesser extent, 6) the proceeds from principal payments on our investments. We believe these sources of financing will be sufficient to meet our short-term liquidity needs.

Our ability to meet our long-term liquidity and capital resource requirements will be subject to obtaining additional debt financing and equity capital. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an

adverse effect on our business and results of operations. In addition, an event of default is triggered under our repurchase facility with Wachovia Capital Markets, LLC if the management agreement with GKK Manager LLC is terminated. Depending on market conditions, our debt financing will be in the range of 70% to 80% of the carrying value of our total assets. Any indebtedness we incur will likely be subject to continuing covenants and we will likely be required to make continuing representations and warranties in connection with such debt. Our debt financing terms may require us to keep uninvested cash on hand, or to maintain a certain portion of our assets free of liens, each of which could serve to limit our borrowing ability. Moreover, our debt may be secured by our assets. If we default in the payment of interest or principal on any such debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to immediately repay all outstanding principal. If we are unable to make such payment, our lender could foreclose on our assets that are pledged as collateral to such lender. The lender could also sue us or force us into bankruptcy. Any such event would have a material adverse effect on our liquidity and the value of our common stock. In addition, posting additional collateral to support our credit facilities will reduce our liquidity and limit our ability to leverage our assets.

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

Collateralized Debt Obligation

On July 14, 2005, we issued approximately $1,000,000 of collateralized debt obligations, or CDO, through two newly-formed indirect subsidiaries, Gramercy Real Estate CDO 2005-1 Ltd., or the Issuer, and Gramercy Real Estate CDO 2005-1 LLC, or the Co-Issuer. The CDO consists of $810,500 of investment grade notes, and $84,500 of non-investment grade notes, which were co-issued by the Issuer and the Co-Issuer, and $105,000 of preferred shares, which were issued by the Issuer. We retained all non-investment grade securities and the preferred shares in the Issuer. The Issuer holds assets, consisting primarily of whole loans, subordinate interests in whole loans, mezzanine loans and preferred equity investments, which serve as collateral for the CDO. The investment grade notes were issued with floating rate coupons with a combined weighted average rate of three-month LIBOR plus 0.49%. The CDO may be replenished pursuant to certain rating agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid during the first five years of the CDO. Thereafter, the CDO securities will be retired in sequential order from senior-most to junior-most as loans are repaid. We incurred approximately $11,580 of issuance costs, which will be amortized on a level yield basis over the average life of the CDO. The Issuer is consolidated in our financial statements. The investment grade notes are treated as a secured financing, and are non-recourse to us.

Proceeds from the sale of the investment grade notes issued were used to repay substantially all outstanding debt under our repurchase agreements and fund additional investments.

Junior Subordinated Debentures

Both issuances of trust preferred securities require quarterly interest distributions, however payments may be deferred while the interest expense is accrued for a period of up to four consecutive quarters if the Operating Partnership exercises its right to defer such payments. The trust preferred securities are redeemable, at the option of the Operating Partnership, in whole or in part, with no prepayment premium any time after June 30, 2010 for the securities issued in May 2005 and October 30, 2010 for the securities issued in August 2005.

the junior subordinated notes match the terms of the trust preferred securities. The notes are subordinate and junior in right of payment to all present and future senior indebtedness and certain other of our financial obligations. We realized net proceeds from each offering of approximately $48,956.

Indebtedness

The table below summarizes borrowings under our Wachovia and Goldman repurchase facilities and any term loans at September 30, 2005 and December 31, 2004, respectively (dollars in thousands).

	September 30,			December 31,
Debt Summary:	2005			2004
Balance
Fixed rate	$	41,000		$	—
Variable rate	—			238,885
Total	$	41,000		$	238,885

Effective interest rate for the period:
Fixed rate	4.90		%	—
Variable rate	—			LIBOR + 1.99		%

Repurchase Facilities

We have two repurchase facilities with an aggregate of $700 million of total debt capacity. In August 2004 we closed on a $250 million repurchase facility with Wachovia Capital Markets, LLC. This facility was then increased to $350 million on January 3, 2005 and subsequently increased to $500 million on April 22, 2005. As part of the April 2005 increase to $500 million, the initial term of this facility was modified to reflect a staggered term in which $250 million matures in August 2007, $150 million matures in December 2007 and the remaining $100 million matures in June 2008. Also in conjunction with the April 2005 upsize, the $50 million credit facility we previously maintained with Wachovia was consolidated into the $500 million repurchase facility. The $500 million facility bears interest at spreads of 1.25% to 3.50% over 30-day LIBOR and, based on our investment activities, provides for advance rate that vary from 50% to 95% based upon the collateral provided under a borrowing base calculation. The lender has a consent right with respect to the inclusion of investments in this facility, determines periodically the market value of the investments, and has the right to require additional collateral if the estimated market value of the included investments declines. We did not have any borrowings under this facility at September 30, 2005. $239 was outstanding at December 31, 2004. We can utilize the $25,000 revolving credit facility described below to fund requirements for additional collateral pursuant to the warehouse financing or to fund the acquisition of assets.

On January 3, 2005 we closed an additional repurchase facility of $200 million with Goldman Sachs Mortgage Company, an affiliate of Goldman Sachs & Co. This facility has an initial term of three years expiring in January 2008 with one six-month extension option. This facility bears interest at spreads of 1.125% to 2.75% over a 30-day LIBOR and, based on our investment activities, provides for advance rates that vary from 75% to 90% based upon the collateral provided under a borrowing base calculation. As with the Wachovia repurchase facility, the lender has a consent right to the inclusion of investments in this facility, determines periodically the market value of the investments, and has the right to require additional collateral if the estimated market value of the included investments declines. At September 30, 2005 we had no borrowings under this facility.

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

Credit Facility

We have one $25 million credit facility with Wachovia Capital Markets, LLC. with a term of two years. Amounts drawn under this facility for liquidity purposes bear interest at a spread over LIBOR of 525 basis points. Amounts drawn under this facility for acquisition purposes bear interest at a spread over LIBOR of 225 basis points. Amounts drawn under this facility for liquidity purposes must be repaid within 105 days. Amounts drawn under this facility generally will be secured by assets established under a borrowing base calculation unless certain financial covenants are satisfied. These covenants are generally more restrictive than those set forth below. At September 30, 2005 and December 31, 2004 we had no borrowings under this facility.

The credit facility requires that we pay down borrowings under this facility as principal payments on our loans and investments pledged to this facility are received.

Restrictive Covenants

The terms of both of our repurchase facilities and our credit facility include covenants that (a) limit our maximum total indebtedness to no more than 85% of our total assets, (b) require us to maintain minimum liquidity of at least $10 million for the first two years and $15 million thereafter, (c) our fixed charge coverage ratio shall at no time be less than 1.50 to 1.00, (d) our minimum interest coverage ratio shall at no time be less than 1.75 to 1.00, (e) require us to maintain minimum tangible net worth of not less than the greater of (i) $129.75 million, or (i) plus (ii) 75% of the proceeds of our subsequent equity issuances and (f) restrict the maximum amount of our total indebtedness. The covenants also restrict us from making distributions in excess of a maximum of 103% of our funds from operations (as defined by the National Association of Real Estate Investment Trusts) through July 2005 and 100% thereafter, except that we may in any case pay distributions necessary to maintain our REIT status. Under our facilities with Wachovia Capital Markets, LLC, an event of default will be triggered if GKK Manager LLC ceases to be the Manager. As of September 30, 2005, we were in compliance with all such covenants.

Mortgage Loan

Capitalization

As of September 30, 2005, we had 22,794,309 shares of common stock outstanding.

Market Capitalization

At September 30, 2005, our collateralized debt obligation and borrowings under our repurchase facilities, revolving credit facility and mortgage loan represented 61% of our consolidated market capitalization of $1.5 billion (based on a common stock price of $23.96 per share, the closing price of our common stock on the New York Stock Exchange on September 30, 2005). Market capitalization includes our consolidated debt and common stock.

Contractual Obligations

Combined aggregate principal maturities of our CDO, repurchase facilities, trust preferred securities, mortgage note payable, revolving credit facility and our obligations under our operating lease as of September 30, 2005 are as follows (in thousands):

	Collateralized Debt Obligation		Repurchase Facilities		Trust Preferred Securities			Mortgage Note Payable			Revolving Credit Facility		Operating Leases			Total
2005	$	—	$	—	$		—	$	—		$	—	$	62		$	62
2006	—		—		—			—			—		252			252
2007	—		—		—			—			—		256			256
2008	—		—		—			—			—		261			261
2009	—		—		—			—			—		265			265
Thereafter	810,500		—		100,000			41,000			—		1,633			953,133
	$	810,500	$	—	$	100,000		$		41,000	—		$		2,729	$		954,229

Dividends

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

Related Party Transactions

In connection with our initial public offering, we entered into a management agreement with GKK Manager LLC, or Manager, which provides for an initial term through December 2007 with automatic one-year extension options and is subject to certain termination rights. We pay the Manager an annual management fee equal to 1.75% of our gross stockholders equity (as defined in the management agreement) inclusive of the trust preferred securities issued on May 20, 2005 and August 9, 2005. We paid or had payable to the Manager under this agreement an aggregate of approximately $1,678 and $4,208, for the three and nine months ended September 30, 2005, respectively and approximately $547 for the period from April 12, 2004 through September 30, 2004.

On April 29, 2005, we closed on a $57,503 initial investment in a joint venture with SL Green to acquire, own and operate the South Building located at One Madison Avenue, New York, New York, or the Property. The joint venture, which was created to acquire, own and operate the Property, is owned 45% by a wholly-owned subsidiary of us and 55% by a wholly-owned subsidiary of SL Green. The joint venture interests are pari passu. Also on April 29, 2005, the joint venture completed the acquisition of the Property from Metropolitan Life Insurance Company for the purchase price of approximately $802,800 plus closing costs, financed in part through a $690,000 first mortgage loan on the Property. The Property comprises approximately 1.2 million square feet and is almost entirely net leased to Credit Suisse First Boston (USA), Inc., or CSFB, pursuant to a lease with a 15-year remaining term.

Funds from Operations

FFO is a widely recognized measure of REIT performance. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised White Paper on FFO approved by the Board of Governors of NAREIT in April 2002 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. 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 bonuses for members of our senior management. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs, providing perspective not immediately apparent from net income. 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 indicative of funds available to fund our cash needs, including our ability to make cash distributions.

Funds from Operations for the three and nine months ended September 30, 2005, the three months ended September 30, 2004 and the period from April 12, 2004 (formation) through September 30, 2004 is as follows (in thousands):

	For the Three Months Ended September 30, 2005		For the Three Months Ended September 30, 2004		For the Nine Months Ended September 30, 2005		For the Period April 12, 2004 (formation) through September 30, 2004
Net income available to common stockholders	$	8,577	$	11	$	20,599	$	11
Add:
Depreciation and amortization	1,012		46		1,966		46
FFO adjustment for unconsolidated joint venture	1,784		—		2,984		—
Less:
Non real estate depreciation and amortization	926		46		1,880		46
Funds from operations	$	10,447	$	11	$	23,669	$	11

Funds from operations per share - basic	$	0.53	$	0.00	$	1.24	$	0.00
Funds from operations per share - diluted	$	0.50	$	0.00	$	1.21	$	0.00

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the 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,” “anticipate,” “estimate,” “believe,” “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:

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

• economic conditions generally and in the commercial finance and commercial real estate markets specifically;

• the performance and financial condition of borrowers and corporate customers;

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

• the cost of our capital, 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 qualified personnel;

• availability of investment opportunities on real estate related and other securities;

• the adequacy of our cash reserves and working capital;

• unanticipated increases in financing and other costs, including a rise in interest rates;

• the timing of cash flows , if any, from our investments;

• risks of structured finance investments;

• GKK Manager LLC remaining as our Manager;

• environmental and/or safety requirements;

• continuing threats or terrorist attacks on the national, regional and local economies;

• competition with other companies;

• our ability to satisfy complex rules in order for us to qualify as a REIT for federal income tax purposes, our operating partnership’s ability to satisfy the rules in order for it to qualify as a partnership for federal income tax purposes, the ability of certain of our subsidiaries to qualify as REITs, and the ability of 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;

• changes in governmental regulations, tax rates and similar matters; and

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

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise.

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

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

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

Real Estate Risk

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

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. A hypothetical 100 basis point increase in interest rates along the entire interest rate curve for the nine months ended September 30, 2005 would have increased our interest cost by approximately $2,026, offset by an increase in our investment income of approximately $2,313.

Our operating results will depend in large part on differences between the income from our assets and our borrowing costs. Most of our assets and borrowings are expected to be variable-rate instruments that we will finance with variable rate debt. The objective of this strategy is to minimize the impact of interest rate changes on the spread between the yield on our assets and our cost of funds. We enter into hedging transactions with respect to all liabilities relating to fixed rate assets in the future. If we were to finance fixed rate assets with variable rate debt and the benchmark for our variable rate debt increased, our net income would decrease. Furthermore, as most of our available financing provides for an ability of the lender to mark our assets to market and make margin calls based on a change in the value of our assets, financing fixed rate assets with this debt creates the risk that an increase in fixed rate benchmarks (such as “swap” yields) would decrease the value of our fixed rate assets. We have entered into certain swap transactions in anticipation of drawing upon our mark-to-market debt to hedge against this risk. Some of our loans may be 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 of our strategies to date, our net income will generally increase if LIBOR increases and decreases if LIBOR decreases, but this may not always be true in the future. Our exposure to interest rates will also be affected by our overall corporate leverage, which we anticipate will be 70% to 80% of the carrying value of our assets; but our actual leverage depends 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 credit losses to us, which could adversely affect our liquidity and operating results. Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities

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). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the

desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we 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 Controls over Financial Reporting

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

PART II		OTHER INFORMATION

ITEM 1.		LEGAL PROCEEDINGS

	See Note 16 to the Consolidated Financial Statements

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

	None

ITEM 3.		DEFAULTS UPON SENIOR SECURITIES

	None

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

	None

ITEM 5.		OTHER INFORMATION

	None

ITEM 6.		EXHIBITS

(a) Exhibits:

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

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

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

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

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

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

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

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

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

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

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

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

10.10 Form of Master Repurchase Agreement dated as of January 3, 2005, incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

10.11 Annex to the Form of Master Repurchase Agreement dated as of January 3, 2005, incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

10.12 Form of Employment Agreement by and between Hugh Hall and GKK Manager LLC, incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

10.13 Form of Employment Agreement by and between Robert R. Foley and GKK Manager LLC, incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

10.14 Form of Registration Rights Agreement, by and between various holders of the Company’s common stock and the Company, incorporated by reference to the Company’s Form 8-K, dated December 9, 2004, filed with the Commission on December 9, 2004.

10.15 Form of Amended and Restated Registration Rights Agreement, by and between SL Green Realty Corp. and the Company, incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

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

10.17 Form of LLC Agreement, by and between GKK Madison Investment LLC, a wholly owned subsidiary of the Company, and SLG Madison Investment LLC, a wholly owned subsidiary of SL Green Realty Corp, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005.

10.18 Form of Second Amended and Restated Master Repurchase Agreement, by and between the Company and Wachovia Capital Markets, LLC, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005.

10.19 Form of Indenture by and among Gramercy Real Estate CDO 2005-1, Ltd., as issuer, Gramercy Real Estate CDO 2005-1 LLC, as co-issuer, GKK Liquidity LLC, as advancing agent and Wells Fargo Bank, National Association, as trustee, paying agent, calculation agent, transfer agent, custodial securities intermediary, backup advancing agent, notes registrar, incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005.

10.20 Form of Collateral Management Agreement by and between Gramercy Real Estate CDO 2005-1, Ltd., as issuer and GKK Manager LLC, as collateral manager, incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005.

10.21 Form of Amended and Restated Trust Agreement by and among GKK Capital LP, as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as Delaware trustee, and the administrative trustees named therein, incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005.

10.22 Form of Junior Subordinated Indenture between GKK Capital LP and JPMorgan Chase Bank, National Association, as trustee, incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005.

10.23 Form of Amended and Restated Trust Agreement among GKK Capital LP, as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as Delaware trustee, and the administrative trustees named therein, dated August 9, 2005.

10.24 Form of Junior Subordinated Indenture between GKK Capital LP and JPMorgan Chase Bank, National Association, as trustee, dated August 9, 2005.

20.25 Form of Gramercy Capital Corp. Director’s Deferral Program, incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 2005.

20.26 Form of Underwriting Agreement among Gramercy Capital Corp., GKK Capital LP and Wachovia Capital Markets, LLC, as underwriter, dated September 8, 2005, incorporated by reference to the Company’s Form 8-K, dated September 7, 2005.

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 pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 202 filed herewith.

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

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.




							By:	/s/ Robert R. Foley
								Robert R. Foley
								Chief Financial Officer

Date: November 9, 2005

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Gramercy Property Trust Inactive 10-Q2005 Q3 Quarterly report

Content analysis

ITEM 1. Financial Statements

Classifications of Mortgage-Backed Securities

Valuations of Mortgage-Backed Securities

Credit Tenant Lease Investments

Revenue Recognition

Reserve for Possible Credit Losses

Derivative Instruments

Credit Facilities

Mortgage Loan

Classifications of Mortgage-Backed Securities

Valuations of Mortgage-Backed Securities

Credit Tenant Lease Investments

Revenue Recognition

Reserve for Possible Credit Losses

Results of Operations

Mortgage Loan

Real Estate Risk

Interest Rate Risk

ITEM 1.

LEGAL PROCEEDINGS

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5.

OTHER INFORMATION