Gramercy Property Trust 10Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

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

For the transition period from to .

Commission File Number: 001-32248

GRAMERCY CAPITAL CORP.

(Exact name of registrant as specified in its charter)

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

420 Lexington Avenue, New York, New York 10170

(Address of principal executive offices) (Zip Code)

(212) 297-1000

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

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

Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller
		reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

The number of shares outstanding of the registrant's common stock, $0.001 par value, was 50,517,365 as of October 7, 2011.

GRAMERCY CAPITAL CORP.

INDEX

		PAGE
PART I.	FINANCIAL INFORMATION	3
ITEM 1.	FINANCIAL STATEMENTS	3
	Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 (unaudited)	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)	5
	Condensed Consolidated Statement of Stockholders’ Equity and Non-controlling Interests for the six months ended June 30, 2011 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	45
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	64
ITEM 4.	CONTROLS AND PROCEDURES	66
PART II.	OTHER INFORMATION	67
ITEM 1.	LEGAL PROCEEDINGS	67
ITEM 1A.	RISK FACTORS	67
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	67
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	67
ITEM 4.	(REMOVED AND RESERVED)	67
ITEM 5.	OTHER INFORMATION	67
ITEM 6.	EXHIBITS	68
SIGNATURES		69

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

Gramercy Capital Corp.

Condensed Consolidated Balance Sheets

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

	June 30,			December 31,
	2011			2010
Assets:
Real estate investments, at cost:
Land	$	611,839		$	608,455
Building and improvements		1,834,139			1,818,012
Other real estate investments		20,318			20,318
Less: accumulated depreciation		(191,381	)		(168,333	)
Total real estate investments, net		2,274,915			2,278,452

Cash and cash equivalents		166,890			220,777
Restricted cash		124,261			128,806
Pledged government securities, net		90,524			92,918
Loans and other lending investments, net		273			1,512
Investment in joint ventures		1,404			3,650
Assets held for sale, net		857
Tenant and other receivables, net		46,499			44,788
Derivative instruments, at fair value		-			4
Acquired lease assets, net of accumulated amortization of $164,861 and $147,366		298,358			310,207
Deferred costs, net of accumulated amortization of $35,413 and $29,929		6,997			8,156
Other assets		14,280			15,210
Subtotal		3,025,258			3,104,480

Assets of Consolidated Variable Interest Entities ("VIEs"):
Real estate investments, at cost:
Land		21,967			26,486
Building and improvements		4,083			18,970
Less: accumulated depreciation		(207	)		(208	)
Total real estate investments directly owned		25,843			45,248

Cash and cash equivalents		58			68
Restricted cash		155,685			116,591
Loans and other lending investments, net		1,101,841			1,122,016
Commercial mortgage-backed securities - available for sale		897,187			31,889
Commercial mortgage-backed securities - held to maturity		-			973,278
Assets held for sale, net		9,912			28,660
Derivative instruments, at fair value		1,912			1,632
Accrued interest		31,146			29,784
Acquired lease assets, net of accumulated amortization of $0 and $153		-			5,546
Deferred costs, net of accumulated amortization of $28,692 and $25,760		11,782			14,744
Other assets		18,099			18,057
Subtotal		2,253,465			2,387,513

Total assets	$	5,278,723		$	5,491,993

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

Gramercy Capital Corp.

Condensed Consolidated Balance Sheets

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

	June 30,			December 31,
	2011			2010
Liabilities and Equity:
Liabilities:
Mortgage notes payable	$	1,618,120		$	1,640,671
Mezzanine notes payable		549,456			549,713
Total secured and other debt		2,167,576			2,190,384

Accounts payable and accrued expenses		52,997			57,688
Dividends payable		19,695			16,114
Accrued interest payable		22,274			6,934
Deferred revenue		145,477			152,601
Below market lease liabilities, net of accumulated amortization of $257,985 and $223,256		658,443			691,592
Leasehold interests, net of accumulated amortization of $9,311 and $7,770		16,207			17,027
Liabilities related to assets held for sale		7			-
Other liabilities		-			734
Subtotal		3,082,676			3,133,074

Non-Recourse Liabilities of Consolidated VIEs:
Collateralized debt obligations		2,580,266			2,682,321
Total secured and other debt		2,580,266			2,682,321

Accounts payable and accrued expenses		4,169			1,438
Accrued interest payable		3,151			4,818
Deferred revenue		142			188
Below market lease liabilities, net of accumulated amortization of $0 and $26		-			1,556
Liabilities related to assets held for sale		-			531
Derivative instruments, at fair value		155,921			157,932
Other Liabilities		764			3,128
Subtotal		2,744,413			2,851,912

Total liabilities		5,827,089			5,984,986

Commitments and contingencies		-			-

Equity:
Common stock, par value $0.001, 100,000,000 shares authorized, 49,999,739 and 49,984,559 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively.		50			50
Series A cumulative redeemable preferred stock, par value $0.001, liquidation preference $88,146, 4,600,000 shares authorized, 3,525,822 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively.		85,235			85,235
Additional paid-in-capital		1,078,698			1,078,198
Accumulated other comprehensive loss		(237,089	)		(160,785	)
Accumulated deficit		(1,476,163	)		(1,496,594	)
Total Gramercy Capital Corp. stockholders' equity		(549,269	)		(493,896	)
Non-controlling interest		903			903
Total equity		(548,366	)		(492,993	)
Total liabilities and equity	$	5,278,723		$	5,491,993

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

Gramercy Capital Corp.

Condensed Consolidated Statements of Operations

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

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Revenues
Rental revenue	$	74,350		$	76,654		$	149,909		$	154,651
Investment income		39,748			43,808			80,259			88,059
Operating expense reimbursements		29,058			29,120			57,316			57,988
Other income		19,541			2,086			23,862			3,955
Total revenues		162,697			151,668			311,346			304,653

Expenses
Property operating expenses
Real estate taxes		9,972			10,137			20,315			20,660
Utilities		9,796			9,057			20,041			19,247
Ground rent and leasehold obligations		5,063			5,022			9,888			9,839
Property and leasehold impairments		691			-			721			(1	)
Direct billable expenses		1,559			1,046			2,614			2,360
Other property operating expenses		22,010			19,840			46,208			39,114
Total property operating expenses		49,091			45,102			99,787			91,219

Interest expense		56,690			48,476			107,280			98,746
Depreciation and amortization		18,626			26,399			37,511			54,076
Management, general and administrative		7,694			9,830			14,111			17,316
Management fees		-			-			-			-
Impairment on commercial mortgage-backed securities		6,037			2,277			6,037			14,603
Provision for loan loss		18,783			13,230			36,283			54,390
Total expenses		156,921			145,314			301,009			330,350

Income (loss) from continuing operations before equity in income (loss) from unconsolidated joint ventures, provisions for taxes and non-controlling interest		5,776			6,354			10,337			(25,697	)

Equity in net income of unconsolidated joint ventures		(706	)		(1,017	)		(1,393	)		(2,687	)
Income (loss) from continuing operations before provision for taxes, gain on extinguishment of debt and discontinued operations		5,070			5,337			8,944			(28,384	)

Gain on extinguishment of debt		10,870			-			14,526			7,740
Provision for taxes		(3	)		(66	)		(73	)		(104	)
Net income (loss) from continuing operations		15,937			5,271			23,397			(20,748	)
Net income (loss) from discontinued operations		(112	)		3,490			(1,760	)		6,080
Net gains from disposals		1,437			271			2,374			1,312
Net income (loss) from discontinued operations		1,325			3,761			614			7,392
Net income (loss)		17,262			9,032			24,011			(13,356	)
Net (income) loss attributable to non-controlling interest		-			20			-			(24	)
Net income (loss) attributable to Gramercy Capital Corp.		17,262			9,052			24,011			(13,380	)
Accrued preferred stock dividends		(1,790	)		(2,336	)		(3,580	)		(4,672	)
Net income (loss) available to common stockholders	$	15,472		$	6,716		$	20,431		$	(18,052	)

Basic earnings per share:
Net income (loss) from continuing operations, net of non-controlling interest and after preferred dividends	$	0.28		$	0.05		$	0.40		$	(0.51	)
Net income (loss) from discontinued operations		0.03			0.08			0.01			0.15
Net income (loss) available to common stockholders	$	0.31		$	0.13		$	0.41		$	(0.36	)

Diluted earnings per share:
Net income (loss) from continuing operations, net of non-controlling interest and after preferred dividends	$	0.28		$	0.05		$	0.39		$	(0.51	)
Net income (loss) from discontinued operations		0.03			0.08			0.01			0.15
Net income (loss) available to common stockholders	$	0.31		$	0.13		$	0.40		$	(0.36	)
Basic weighted average common shares outstanding		49,998,728			49,905,648			49,995,429			49,902,248
Diluted weighted average common shares and common share equivalents outstanding		50,692,846			50,432,260			50,716,953			49,902,248

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

Gramercy Capital Corp.

Condensed Consolidated Statement of Stockholders’ Equity and Non-controlling Interests

(Unaudited, amounts in thousands, except share data)

	Common Stock								Accumulated Other
	Shares		Par Value		Series A Preferred Stock		Additional Paid- In-Capital		Comprehensive Income (Loss)			Accumulated Deficit			Total Gramercy Capital Corp.			Non-controlling Interest		Total			Comprehensive Income (Loss)
Balance at December 31, 2010		49,984,559	$	50	$	85,235	$	1,078,198	$	(160,785	)	$	(1,496,594	)	$	(493,896	)	$	903	$	(492,993	)
Net income (loss)		-		-		-		-		-			24,011			24,011			-		24,011		$	24,011
Change in net unrealized loss on derivative instruments		-		-		-		-		1,500			-			1,500			-		1,500			1,500
Net unrealized gain (loss) on available-for-sale securities		-		-		-		-		(77,804	)		-			(77,804	)		-		(77,804	)		(77,804	)
Issuance of stock - stock purchase plan		3,648		-		-		-		-			-			-			-		-			-
Stock based compensation - fair value		11,532		-		-		500		-			-			500			-		500			-
Dividends accrued on preferred stock		-		-		-		-		-			(3,580	)		(3,580	)		-		(3,580	)		-
Balance at June 30, 2011		49,999,739	$	50	$	85,235	$	1,078,698	$	(237,089	)	$	(1,476,163	)	$	(549,269	)	$	903	$	(548,366	)	$	(52,293	)

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

Gramercy Capital Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

	Six months ended June 30,
	2011			2010
Operating Activities:
Net income (loss)	$	24,011		$	(13,356	)
Adjustments to net cash provided by operating activities:
Depreciation and amortization		40,207			57,469
Amortization of leasehold interests		(1,541	)		(1,368	)
Amortization of acquired leases to rental revenue		(31,056	)		(32,264	)
Amortization of deferred costs		4,708			3,882
Amortization of discount and other fees		(16,626	)		(13,691	)
Payment of capitalized tenant leasing costs		(1,096	)		(987	)
Straight-line rent adjustment		(4,245	)		16,235
Non-cash impairment charges		7,093			14,784
Net gain on sale of properties and lease terminations		(2,374	)		(1,391	)
Net realized gain on loans		(17,151	)		-
Equity in net (income) loss of joint ventures		1,393			(2,864	)
Gain on extinguishment of debt		(14,526	)		(7,740	)
Amortization of stock compensation		502			557
Provision for loan losses		36,283			54,390
Changes in operating assets and liabilities:
Restricted cash		(655	)		(1,650	)
Tenant and other receivables		2,045			(1,423	)
Accrued interest		(1,733	)		(4,846	)
Other assets		1,383			(4,848	)
Accounts payable, accrued expenses and other liabilities		9,269			2,450
Deferred revenue		(5,912	)		(16,415	)
Net cash provided by operating activities		29,979			46,924

Investing Activities:
Capital expenditures and leasehold costs		(2,380	)		(8,390	)
Deferred investment costs		1,891			-
Proceeds from sale of real estate		20,491			18,113
Proceeds from sale of securities available for sale		65,584			-
New investment originations and funded commitments		(193,763	)		(70,060	)
Principal collections on investments		184,457			70,813
Proceeds from loan syndications		-			3,832
Investment in commercial mortgage-backed securities		(17,926	)		(43,324	)
Distribution received from joint venture		668			-
Investment in joint venture		186			(825	)
Change in accrued interest income		42			(8	)
Purchase of marketable investments		2			1
Sale of marketable investments		3,621			3,044
Change in restricted cash from investing activities		9,594			(1,389	)
Net cash provided by (used in) investing activities		72,467			(28,193	)

Financing Activities:
Repayment of unsecured credit facility		-			(85	)
Repayment of mortgage notes		(20,928	)		(12,910	)
Purchase of interest rate caps		(1,182	)		(2,982	)
Repayments of collateralized debt obligations		(54,318	)		(17,701	)
Repurchase of collateralized debt obligations		(33,747	)		(11,260	)
Payment for exchange of junior subordinated notes		-			(5,000	)
Deferred financing costs and other liabilities		(3,700	)		(6,330	)
Change in restricted cash from financing activities		(42,468	)		32,923
Net cash used in financing activities		(156,343	)		(23,345	)
Net decrease in cash and cash equivalents		(53,897	)		(4,614	)
Cash and cash equivalents at beginning of period		220,845			138,345
Cash and cash equivalents at end of period	$	166,948		$	133,731

Non-cash activity:
Deferred gain and other non-cash activity related to derivatives	$	1,500		$	(61,581	)
Supplemental cash flow disclosures:
Interest paid	$	65,391		$	103,844
Income taxes paid	$	898		$	212

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

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

1. Business and Organization

Gramercy Capital Corp. (the “Company” or “Gramercy”) is a self-managed, integrated, commercial real estate finance and property management and investment company. The Company was formed in April 2004 and commenced operations upon the completion of its initial public offering in August 2004. The Company’s commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination, acquisition and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. The Company’s property management and investment business, which operates under the name Gramercy Realty, historically focused on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. These institutions are, for the most part, deposit-taking commercial banks, thrifts and credit unions, which the Company generally refers to as “banks.” The Company’s portfolio of wholly-owned and jointly-owned bank branches and office buildings is leased to large banks such as Bank of America, N.A., or Bank of America, Wells Fargo Bank National Association (formerly Wachovia Bank, National Association), or Wells Fargo Bank, Regions Financial Corporation, or Regions Financial and Citizens Financial Group, Inc., or Citizens Financial, and to mid-sized and community banks. Neither Gramercy Finance nor Gramercy Realty is a separate legal entity but are divisions of the Company through which the Company’s commercial real estate finance and property investment businesses are conducted. At June 30, 2011 and December 31, 2010, SL Green Operating Partnership, L.P., or SL Green OP, a wholly-owned subsidiary of SL Green Realty Corp (NYSE: SLG), or SL Green, owned approximately 10.7% of the outstanding shares of the Company’s common stock.

Substantially all of the Company’s operations are conducted through GKK Capital LP, a Delaware limited partnership, or the Operating Partnership. The Company, as the sole general partner, has responsibility and discretion in the management and control of the Operating Partnership. Accordingly, the Company consolidates the accounts of the Operating Partnership. The Company qualified as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, commencing with its taxable year ended December 31, 2004 and the Company expects to qualify for the current fiscal year. To maintain the Company’s qualification as a REIT, the Company plans to distribute at least 90% of taxable income, if any. The Operating Partnership conducts its finance business primarily through the use of two private REITs, Gramercy Investment Trust and Gramercy Investment Trust II and its commercial real estate investment and property management business through various wholly owned entities.

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

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

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

As of June 30, 2011, Gramercy Finance held loans and other lending investments and CMBS of $1,999,301, net of unamortized fees, discounts, unfunded commitments, reserves for loan losses and other adjustments, with an average spread to 30-day LIBOR of 402 basis points for its floating rate investments, and an average yield of approximately 7.94% for its fixed rate investments. As of June 30, 2011, Gramercy Finance also held interests in one credit tenant net lease investment, or CTL investment, and seven interests in real estate acquired through foreclosures.

As of June 30, 2011, Gramercy Realty’s portfolio consisted of 620 bank branches, 320 office buildings and one land parcels, of which 52 bank branches were owned through an unconsolidated joint venture. Gramercy Realty’s consolidated properties aggregated approximately 25,261,851 rentable square feet and its unconsolidated properties aggregated approximately 237,172 rentable square feet. As of June 30, 2011, the occupancy of Gramercy Realty’s consolidated properties was 82.0% and the occupancy for its unconsolidated properties was 100.0%. As of June 30, 2011, the weighted average remaining term of Gramercy Realty’s leases was 8.3 years and approximately 70.6% of its base revenue was derived from net leases. Gramercy Realty’s two largest tenants are Bank of America, N.A., or Bank of America, and Wells Fargo Bank National Association (formerly Wachovia Bank National Association), or Wells Fargo Bank, and as of June 30, 2011, they represented approximately 41.1% and 15.5%, respectively, of the rental income of the Company’s portfolio and occupied approximately 42.7% and 16.6%, respectively, of Gramercy Realty’s total rentable square feet.

The Company relies on the credit and equity markets to finance and grow its business. Despite signs of improvement in 2010 and to date in 2011, market conditions remained difficult for the Company with limited, if any, availability of new debt or equity capital. The Company’s stock price remained low and the Company currently has limited, if any, access to the public or private equity capital markets. In this environment, the Company has sought to raise capital or maintain liquidity through other means, such as modifying debt arrangements, selling assets and aggressively managing our loan portfolio to encourage repayments as well as reducing capital and overhead expenses, and as a result, the Company has engaged in limited new investment activity, other than reinvestment of available restricted cash within our CDOs. Nevertheless, the Company remains committed to identifying and pursuing strategies and transactions that could preserve or improve cash flows to the Company from its CDOs, increase the Company’s net asset value per share of common stock, improve the Company’s future access to capital or otherwise potentially create value for the Company’s stockholders.

Basis of Quarterly Presentation

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

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

2. Significant Accounting Policies

Reclassification

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

Principles of Consolidation

The Condensed Consolidated Financial Statements include the Company’s accounts and those of the Company’s subsidiaries which are wholly-owned or controlled by the Company, or entities which are variable interest entities, or VIEs, in which the Company is the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. The Company has evaluated its investments for potential classification as variable interests by evaluating the sufficiency of entity’s equity investment at risk to absorb losses, and determined that the Company is the primary beneficiary for three VIEs and has included the accounts of these entities in the Condensed Consolidated Financial Statements.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

All significant intercompany balances and transactions have been eliminated. Entities which the Company does not control and entities which are VIEs, but where the Company is not the primary beneficiary, are accounted for as investments in joint ventures or as investments in CMBS.

Variable Interest Entities

The following is a summary of the Company’s involvement with VIEs as of June 30, 2011:

	Company carrying value-assets			Company carrying value- liabilities		Face value of assets held by the VIE		Face value of liabilities issued by the VIE
Consolidated VIEs
CDOs	$	2,253,465		$	2,744,413	$	3,030,431	$	3,012,616
Unconsolidated VIEs
CMBS-controlling class	$	-	(1)	$	-	$	633,654	$	633,654

(1)

CMBS are assets held by the CDOs classified on the Condensed Consolidated Balance Sheet as an Asset of Consolidated VIEs.

Consolidated VIEs

As of June 30, 2011, the Condensed Consolidated Balance Sheet includes $2,253,465 of assets and $2,744,413 of liabilities related to three consolidated VIEs. Due to the non-recourse nature of these VIEs, and other factors discussed below, the Company’s net exposure to loss from investments in these entities is limited to its beneficial interests in these VIEs.

Collateralized Debt Obligations

The Company currently consolidates three collateralized debt obligations, or CDOs, which are VIEs. These CDOs invest in commercial real estate debt instruments, the majority of which the Company originated within the CDOs, and are financed by the debt and equity issued. The Company is named as collateral manager of all three CDOs. As a result of consolidation, the Company’s subordinate debt and equity ownership interests in these CDOs have been eliminated, and the Condensed Consolidated Balance Sheets reflect both the assets held and debt issued by these CDOs to third parties. Similarly, the operating results and cash flows include the gross amounts related to the assets and liabilities of the CDOs, as opposed to the Company’s net economic interests in these CDOs. Refer to Note 6 for further discussion of fees earned related to the management of the CDOs.

The Company’s interest in the assets held by these CDOs is restricted by the structural provisions of these entities, and the recovery of these assets will be limited by the CDOs’ distribution provisions, which are subject to change due to non-compliance with covenants, which are described further in Note 6. The liabilities of the CDO trusts are non-recourse, and can generally only be satisfied from the respective asset pool of each CDO.

The Company is not obligated to provide any financial support to these CDOs. As of June 30, 2011, the Company has no exposure to loss as a result of the investment in these CDOs. Since the Company is the collateral manager of the three CDOs and can make decisions related to the collateral that would most significantly impact the economic outcome of the CDOs, the Company has concluded that it is the primary beneficiary of the CDOs.

Unconsolidated VIEs

Investment in CMBS

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

The Company is not obligated to provide, nor has it provided, any financial support to these entities. Substantially all of the Company’s securities portfolio, with an aggregate face amount of $1,168,403, is financed by the Company’s CDOs, and the Company’s exposure to loss is therefore limited to its interests in these consolidated entities described above. The Company has not consolidated the aforementioned CMBS investments due to the determination that based on the structural provisions and nature of each investment, the Company does not directly control the activities that most significantly impact the VIE’s economic performance.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

The Company further analyzed its investment in controlling class CMBS to determine if it was the primary beneficiary. At June 30, 2011, the Company owned securities of one controlling non-investment grade CMBS investment, GS Mortgage Securities Trust 2007-GKK1, or the Trust, with a carrying value of $0. The total par amount of CMBS issued by the Trust was $633,654.

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

At June 30, 2011, the Company’s maximum exposure to loss as a result of its investment in this Trust totaled $0, which equals the book value of this investment as of June 30, 2011.

Investments in Joint Ventures

The Company accounts for its investments in joint ventures under the equity method of accounting since it exercises significant influence, but does not unilaterally control the entities, and is not considered to be the primary beneficiary. In the joint ventures, the rights of the other investors are both protective and participating. Unless the Company is determined to be the primary beneficiary, these rights preclude it from consolidating the investments. The investments are recorded initially at cost as an investment in joint ventures, and subsequently are adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of the investments on the Company’s balance sheet and the underlying equity in net assets is evaluated for impairment at each reporting period. None of the joint venture debt is recourse to the Company. As of June 30, 2011 and December 31, 2010, the Company had investments of $1,404 and $3,650 in joint ventures, respectively.

Cash and Cash Equivalents

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

Restricted Cash

Restricted cash at June 30, 2011 consists of $155,684 on deposit with the trustee of the Company’s CDOs. The remaining balance consists of $52,105 held as collateral for letters of credit, $77 of interest reserves held on behalf of borrowers and $72,080 which represents amounts escrowed pursuant to mortgage agreements securing the Company’s real estate investments and CTL investments for insurance, taxes, repairs and maintenance, tenant improvements, interest, and debt service and amounts held as collateral under security and pledge agreements relating to leasehold interests.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Assets Held-for-Sale

Real Estate and CTL Investments Held-for-Sale

Real estate investments or CTL investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less cost to sell. Once an asset is classified as held-for-sale, depreciation expense is no longer recorded and current and prior periods are reclassified as “discontinued operations.” As of June 30, 2011 and December 31, 2010, the Company had real estate investments held-for-sale of $10,769 and $28,660, respectively. The Company recorded impairment charges of $0 and $561 for the three and six months ended June 30, 2011, respectively, and $6 and $263 for the three and six months ended June 30, 2010, respectively, related to real estate investments classified as held-for-sale, which are included in net income (loss) from discontinued operations.

One property that serves as collateral for the Goldman Mortgage and Goldman Mezzanine Loans met the criteria to be classified as held-for-sale as of June 30, 2011. All other properties did not meet the criteria to be classified as held-for-sale as they are expected to be disposed of other than by sale. Accordingly, the assets and liabilities of these properties are included in the Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 and their results of operations are presented as part of continuing operations in the Condensed Consolidated Statements of Operations for all periods presented. The assets and liabilities of these properties will be removed from the Condensed Consolidated Balance Sheet and the results of operations will be reclassified to discontinued operations in the Condensed Consolidated Statements of Operations upon the ultimate disposition of each property.

Loans and Other Lending Investments Held-For-Sale

Loans held-for-investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination fees, discounts, repayments, sales of partial interests in loans, and unfunded commitments unless such loan or investment is deemed to be impaired. Loans held-for-sale are carried at the lower of cost or market value using available market information obtained through consultation with dealers or other originators of such investments. As of June 30, 2011 and December 31, 2010, the Company had no loans and other lending investments designated as held-for-sale. The Company had no recorded impairment charges related to the mark-to-market of the loans designated as held-for-sale for the three and six months ended June 30, 2011, respectively. The Company recorded impairment charges of $2,000 and $2,000 related to the mark-to-market of the loans designated as held-for-sale for the three and six months ended June 30, 2010, respectively.

Commercial Mortgage-Backed Securities

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

On a quarterly basis, when significant changes in estimated cash flows from the cash flow previously estimated occur due to actual prepayment and credit loss experience, and the present value of the revised cash flow is less than the present value previously estimated, an other-than-temporary impairment is deemed to have occurred. The security is written down to fair value with the resulting charge against earnings and a new cost basis is established. The Company calculates a revised yield based on the current amortized cost of the investment (including any other-than-temporary impairments recognized to date) and the revised yield is then applied prospectively to recognize interest income. During the three and six months ended June 30, 2011, the Company recognized an other-than-temporary impairment of $6,037, due to an adverse change in expected cash flows related to credit losses for one CMBS investment which are recorded in impairment on loans held-for-sale and CMBS in the Company’s Condensed Consolidated Statement of Operations.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

During the three and six months ended June 30, 2010, the Company recognized an other-than-temporary impairment of $277 and $12,603, respectively, due to an adverse change in expected cash flows related to credit losses for two and eight CMBS investments, respectively, which are recorded in impairment on loans held-for-sale and CMBS in the Company’s Condensed Consolidated Statement of Operations.

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

During the three and six months ended June 30, 2011, the Company sold eight and eight CMBS investments for a realized gain of $15,126 and $15,126, respectively. During the six months ended June 30, 2010, the Company sold four CMBS investments for a realized gain of $179.

Pledged Government Securities

The Company maintains a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt previously collateralized by properties in its real estate portfolio. The Company does not intend to sell the securities and believes it is more likely than not that it will realize the full amortized cost basis of the securities over their remaining life. These securities had a carrying value of $90,524 and $92,918, a fair value of $94,232 and $96,729 and unrealized gains of $3,708 and $3,811 at June 30, 2011 and December 31, 2010, respectively, and have maturities that extend through November 2013.

Tenant and Other Receivables

Tenant and other receivables are primarily derived from the rental income that each tenant pays in accordance with the terms of its lease, which is recorded on a straight-line basis over the initial term of the lease. Since many leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that will only be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Tenant and other receivables also include receivables related to tenant reimbursements for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred.

Tenant and other receivables are recorded net of the allowances for doubtful accounts, which as of June 30, 2011 and December 31, 2010, were $5,213 and $5,440, respectively. The Company continually reviews receivables related to rent, tenant reimbursements and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company increases the allowance for doubtful accounts or records a direct write-off of the receivable in the Condensed Consolidated Statements of Operations.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Intangible Assets

As of June 30, 2011 and December 31, 2010, the Company’s intangible assets and acquired lease obligations were comprised of the following:

	June 30, 2011		December 31, 2010
Intangible assets:
In-place leases, net of accumulated amortization of $128,081 and $114,383	$	234,273	$	248,021
Above-market leases, net of accumulated amortization of $36,780 and $33,136		64,085		67,732
Amounts related to assets held for sale, net of accumulated amortization of $45 and $0		-		-
Total intangible assets	$	298,358	$	315,753

Intangible liabilities:
Below-market leases, net of accumulated amortization of $257,985 and $223,282	$	658,443	$	693,148
Total intangible liabilities	$	658,443	$	693,148

Valuation of Financial Instruments

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

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

The three broad levels defined are as follows:

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

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

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Level III — This level is comprised of financial instruments that have little to no pricing observability as of the reported date. These financial instruments do not have active markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment and assumptions. Instruments that are generally included in this category are derivatives, whole loans, subordinate interests in whole loans and mezzanine loans.

For a further discussion regarding the measurement of financial instruments see Note 9, “Fair Value of Financial Instruments.”

Revenue Recognition

Real Estate and CTL Investments

Rental income from leases is recognized on a straight-line basis regardless of when payments are contractually due. Certain lease agreements also contain provisions that require tenants to reimburse the Company for real estate taxes, common area maintenance costs, use of parking facilities and the amortized cost of capital expenditures with interest. Such amounts are included in both revenues and operating expenses when the Company is the primary obligor for these expenses and assumes the risks and rewards of a principal under these arrangements. Under leases where the tenant pays these expenses directly, such amounts are not included in revenues or expenses.

Deferred revenue represents rental revenue and management fees received prior to the date earned. Deferred revenue also includes rental payments received in excess of rental revenues recognized as a result of straight-line basis accounting.

Other income includes fees paid by tenants to terminate their leases, which are recognized when fees due are determinable, no further actions or services are required to be performed by the Company, and collectability is reasonably assured. In the event of early termination, the unrecoverable net book values of the assets or liabilities related to the terminated lease are recognized as depreciation and amortization expense in the period of termination.

The Company recognizes sales of real estate properties only upon closing. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sale price is reasonably assured and the Company is not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sale of real estate.

Finance Investments

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

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

The Company designates loans as non-performing at such time as: (1) the loan becomes 90 days delinquent or (2) the loan has a maturity default. All non-performing loans are placed on non-accrual status and subsequent cash receipts are applied to principal or recognized as income when received. At June 30, 2011, the Company had one second lien loan with a carrying value of $0 and one third lien loan with a carrying value of $0, which were classified as non-performing loans. At December 31, 2010, the Company had one second lien loan with a carrying value of $0 and one third lien loan with a carrying value of $0, which were classified as non-performing loans.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

The Company classifies loans as sub-performing if they are not performing in material accordance with their terms, but they do not qualify as non-performing loans and the specific facts and circumstances of these loans may cause them to develop into non-performing loans should certain events occur in the normal passage of time, which the Company considers to be 90 days from the measurement date. At June 30, 2011, the Company had seven whole loans with an aggregate carrying value of $138,863, one subordinate interest in a whole note with a carrying value of $1,225, five mezzanine loans with an aggregate carrying value of $27,380 and two preferred equity investments with an aggregate carrying value of $7,514 classified as sub-performing. At December 31, 2010, one first mortgage loan with a carrying value of $13,222 and two mezzanine loans with an aggregate carrying value of $9,826 were classified as sub-performing.

Reserve for Loan Losses

Specific valuation allowances are established for loan losses on loans in instances where it is deemed probable that the Company may be unable to collect all amounts of principal and interest due according to the contractual terms of the loan. The reserve is increased through the provision for loan losses on the Condensed Consolidated Statements of Operations and is decreased by charge-offs when losses are realized through sale, foreclosure, or when significant collection efforts have ceased.

The Company considers the present value of payments expected to be received, observable market prices or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment), and compares it to the carrying value of the loan. The determination of the estimated fair value is based on the key characteristics of the collateral type, collateral location, quality and prospects of the sponsor, the amount and status of any senior debt, and other factors. The Company also includes the evaluation of operating cash flow from the property during the projected holding period, and the estimated sales value of the collateral computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, all of which are discounted at market discount rates. The Company also considers if the loan’s terms have been modified in a troubled debt restructuring. Because the determination of estimated value is based upon projections of future economic events, which are inherently subjective, amounts ultimately realized from loans and investments may differ materially from the carrying value at the balance sheet date.

If, upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan is maintained at a level the Company believes is adequate to absorb losses. During the six months ended June 30, 2011, the Company incurred charge-offs totaling $403 relating to realized losses on one loan. During the year ended December 31, 2010, the Company incurred charge-offs totaling $239,078 relating to realized losses on ten loans. The Company maintained a reserve for loan losses of $299,396 against 20 investments with an aggregate carrying value of $395,302 as of June 30, 2011, and a reserve for loan losses of $263,516 against 19 separate investments with an aggregate carrying value of $438,541 as of December 31, 2010.

Stock Based Compensation Plans

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

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

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

The fair value of each stock option granted is estimated on the date of grant for options issued to employees, and quarterly awards to non-employees, using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2011 and 2010:

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

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

Derivative Instruments

In the normal course of business, the Company uses a variety of derivative instruments to manage, or hedge, interest rate risk. The Company requires that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company uses a variety of commonly used derivative products that are considered “plain vanilla” derivatives. These derivatives typically include interest rate swaps, caps, collars and floors. The Company expressly prohibits the use of unconventional derivative instruments and using derivative instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.

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

In the normal course of business, the Company is exposed to the effect of interest rate changes and limits these risks by following established risk management policies and procedures including the use of derivatives. To address exposure to interest rates, the Company uses derivatives primarily to hedge the cash flow variability caused by interest rate fluctuations of its liabilities. Each of the Company’s CDOs maintains a maximum amount of allowable unhedged interest rate risk. The 2005 CDO permits 20% of the net outstanding principal balance and the 2006 CDO and the 2007 CDO permit 5% of the net outstanding principal balance to be unhedged.

The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of LIBOR, swap spreads and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

All hedges held by the Company are deemed effective based upon the hedging objectives established by the Company’s corporate policy governing interest rate risk management. The effect of the Company’s derivative instruments on its financial statements is discussed more fully in Note 12.

Income Taxes

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

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Earnings Per Share

The Company presents both basic and diluted earnings per share, or EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, as long as their inclusion would not be anti-dilutive.

Use of Estimates

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

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash investments, debt investments and accounts receivable. The Company places its cash investments in excess of insured amounts with high quality financial institutions. The Company performs ongoing analysis of credit risk concentrations in its loan and other lending investment portfolio by evaluating exposure to various markets, underlying property types, investment structure, term, sponsors, tenants and other credit metrics.

Three investments accounted for approximately 20.5% of the total carrying value of the Company's loan and other lending investments as of June 30, 2011 compared to four investments which accounted for approximately 24.2% of the total carrying value of the Company's loan and other lending investments as of December 31, 2010. Six investments accounted for approximately 15.6% and 15.5% of the revenue earned on the Company's loan and other lending investments for the three and six months ended June 30, 2011 compared to six investments which accounted for approximately 16.2% and 16.7% of the revenue earned on the Company's loan and other lending investments for the three and six months ended June 30, 2010, respectively. The largest sponsor accounted for approximately 6.5% and 10.7% of the total carrying value of the Company’s loan and other lending investments as of June 30, 2011 and December 31, 2010, respectively. The largest sponsor accounted for approximately 5.5% and 5.9% of the revenue earned on the Company's loan and other lending investments for the three and six months ended June 30, 2011, respectively, compared to approximately 6.0% and 6.0% of the revenue earned on the Company's loan and other lending investments for the three and six months ended June 30, 2010, respectively.

Additionally, two tenants, Bank of America and Wells Fargo Bank, accounted for approximately 41.5% and 15.7% of the Company's rental revenue for the three months ended June 30, 2011, respectively, and approximately 41.1% and 15.5% of the Company's rental revenue for the six months ended June 30, 2011, respectively.

Recently Issued Accounting Pronouncements

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

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

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

3. Loans and Other Lending Investments

The aggregate carrying values, allocated by product type and weighted-average coupons, of the Company’s loans, other lending investments and CMBS investments as of June 30, 2011 and December 31, 2010, were as follows:

	Carrying Value (1)				Allocation by Investment Type						Fixed Rate Average Yield						Floating Rate Average Spread over LIBOR (2)
	2011		2010		2011			2010			2011			2010			2011		2010
Whole loans, floating rate	$	626,177	$	659,095		56.8	%		58.7	%		-			-		363 bps		330 bps
Whole loans, fixed rate		201,696		132,268		18.3	%		11.8	%		8.34	%		7.16	%		-		-
Subordinate interests in whole loans, floating rate		26,515		75,066		2.4	%		6.7	%		-			-		585 bps		297 bps
Subordinate interests in whole loans, fixed rate		128,067		46,468		11.6	%		4.1	%		8.92	%		6.01	%		-		-
Mezzanine loans, floating rate		61,632		152,349		5.6	%		13.5	%		-			-		734 bps		754 bps
Mezzanine loans, fixed rate		50,512		48,828		4.6	%		4.3	%		12.78	%		12.69	%		-		-
Preferred equity, floating rate		5,224		5,224		0.5	%		0.5	%		-			-		350 bps		350 bps
Preferred equity, fixed rate		2,291		4,230		0.2	%		0.4	%		7.22	%		7.25	%		-		-
Subtotal/ Weighted average		1,102,114		1,123,528		100.0	%		100.0	%		9.11	%		8.09	%	402 bps		400 bps
CMBS, floating rate		48,790		50,798		5.4	%		5.1	%		-			-		404 bps		394 bps
CMBS, fixed rate		848,397		954,369		94.6	%		94.9	%		7.41	%		8.37	%		-		-
Subtotal/ Weighted average		897,187		1,005,167		100.0	%		100.0	%		7.41	%		8.37	%	404 bps		394 bps
Total	$	1,999,301	$	2,128,695		100.0	%		100.0	%		7.94	%		8.32	%	402 bps		400 bps

(1)	Loans and other lending investments and CMBS investments are presented net of unamortized fees, discounts, unfunded commitments, reserves for loan losses, impairments and other adjustments.

(2)	Spreads over an index other than 30 day-LIBOR have been adjusted to a LIBOR based equivalent. In some cases, LIBOR is floored, giving rise to higher current effective spreads.

Whole loans are permanent first mortgage loans with initial terms of up to 15 years. Whole loans are first mortgage liens and senior in interest to subordinate mortgage interest in whole loans, mezzanine loan and preferred equity interest.

Subordinate mortgage interests in whole loans are participation interests in mortgage notes or loans secured by a lien subordinated to a senior interest in the same loan. Subordinate interests in whole loans are subject to greater credit risk with respect to the underlying mortgage collateral than the corresponding senior interest.

Mezzanine loans are senior to the borrower’s equity in, and subordinate to a whole loan and subordinate mortgage interest, on a property. These loans are secured by pledges of ownership interests in entities that directly or indirectly own the real property.

Preferred Equity are investments in entities that directly or indirectly own commercial real estate. Preferred equity is not secured, but holders have priority relative to common equity holders.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Quarterly, the Company evaluates its loans for instances where specific valuation allowances are necessary, as described in Note 2. As a component of the Company's quarterly policies and procedures for loan valuation and risk assessment, each loan is assigned a risk rating. Individual ratings range from one to six, with one being the lowest risk and six being the highest risk. Each credit risk rating has benchmark guidelines which pertain to debt-service coverage ratios, loan-to-value ("LTV") ratio, borrower strength, asset quality, and funded cash reserves. Other factors such as guarantees, market strength, remaining loan term, and borrower equity are also reviewed and factored into determining the credit risk rating assigned to each loan. Loans with a risk rating of one to three have characteristics of a lower risk loan and such loans are generally expected to perform through maturity. Loans with a risk rating of four to five generally have characteristics of a higher risk loan and may indicate instances of a higher likelihood of a contractual default or expectation of a principal loss. Loans with a risk rating of six are non-performing and often times have been fully reserved.

A summary of the Company’s loans by loan class as of June 30, 2011 and December 31, 2010 are as follows:

	Risk Ratings as of June 30, 2011
	One to Three						Four to Six
	Number of Loans		Unpaid Principal Balance		Carrying Value		Number of Loans		Unpaid Principal Balance		Carrying Value
Whole Loans		13	$	489,813	$	461,606		18	$	496,255	$	366,267
Subordinate Mortgage Interests (1)		6		172,029		153,358		3		65,225		1,225
Mezzanine Loans		-		-		-		9		176,114		112,144
Preferred Equity		-		-		-		2		60,716		7,514
Total		19	$	661,842	$	614,964		32	$	798,310	$	487,150

(1)

Includes one Interest-Only Strip.

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

(1)

Includes one Interest-Only Strip.

As of June 30, 2011, the Company’s loans and other lending investments, excluding CMBS investments, had the following maturity characteristics:

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Year of Maturity	Number of Investments Maturing			Current Carrying Value (In thousands)			% of Total
2011 (July 1 - December 31)		22	(1)	$	216,255			19.6	%
2012		10			297,537			27.0	%
2013		5			184,700			16.8	%
2014		4			71,981			6.5	%
2015		3			50,917			4.6	%
Thereafter		7			280,724			25.5	%
Total		51		$	1,102,114			100.0	%

Weighted average maturity				2.4 years		(2)

(1)	Of the loans maturing in 2011, five investments with a carrying value of $61,539 have extension options, which may be subject to performance criteria.

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

For the three and six months ended June 30, 2011 and 2010, the Company’s investment income from loans, other lending investments and CMBS investments, was generated by the following investment types:

	Three months ended June 30, 2011					Three months ended June 30, 2010
	Investment Income		% of Total			Investment Income		% of Total
Whole loans	$	12,045		30.3	%	$	16,108		36.8	%
Subordinate interests in whole loans		1,849		4.7	%		775		1.8	%
Mezzanine loans		4,621		11.6	%		6,212		14.2	%
Preferred equity		667		1.7	%		683		1.6	%
CMBS		20,566		51.7	%		20,030		45.6	%
Total	$	39,748		100.0	%	$	43,808		100.0	%

	Six months ended June 30, 2011					Six months ended June 30, 2010
	Investment Income		% of Total			Investment Income		% of Total
Whole loans	$	23,819		29.7	%	$	32,963		37.4	%
Subordinate interests in whole loans		3,378		4.2	%		1,468		1.7	%
Mezzanine loans		10,283		12.8	%		13,273		15.1	%
Preferred equity		1,388		1.7	%		1,354		1.5	%
CMBS		41,391		51.6	%		39,001		44.3	%
Total	$	80,259		100.0	%	$	88,059		100.0	%

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

At June 30, 2011 and December 31, 2010, the Company’s loans and other lending investments, excluding CMBS investments, had the following geographic diversification:

	June 30, 2011					December 31, 2010
Region	Carrying Value		% of Total			Carrying Value		% of Total
Northeast	$	397,594		36.1	%	$	497,030		44.2	%
West		255,432		23.2	%		277,478		24.7	%
Midwest		219,523		19.9	%		50,298		4.4	%
South		88,025		8.0	%		119,841		10.7	%
Mid-Atlantic		67,956		6.2	%		116,495		10.4	%
Various (1)		43,531		3.9	%		32,365		2.9	%
Southwest		30,053		2.7	%		30,021		2.7	%
Total	$	1,102,114		100.0	%	$	1,123,528		100.0	%

(1)

Includes interest-only strips.

At June 30, 2011 and December 31, 2010, the Company’s loans and other lending investments, excluding CMBS investments, by property type were as follows:

	June 30, 2011					December 31, 2010
Property Type	Carrying Value		% of Total			Carrying Value		% of Total
Office	$	530,674		48.2	%	$	425,773		37.9	%
Hotel		181,529		16.5	%		184,306		16.4	%
Retail		130,177		11.8	%		202,090		18.0	%
Land - Commercial		114,377		10.4	%		143,589		12.8	%
Multifamily		52,529		4.8	%		54,488		4.8	%
Other (1)		30,486		2.8	%		5,953		0.5	%
Mixed-Use		28,594		2.6	%		28,622		2.5	%
Condominium		17,687		1.6	%		30,923		2.8	%
Industrial		16,061		1.5	%		47,784		4.3	%
Total	$	1,102,114		100.0	%	$	1,123,528		100.0	%

(1)

Includes interest-only strips.

The Company recorded provisions for loan losses of $18,783 and $36,283 for the three and six months ended June 30, 2011, respectively. The Company recorded provisions for loan losses of $13,230 and $54,390 for the three and six months ended June 30, 2010, respectively. These provisions represent increases in loan loss reserves based on management's estimates considering delinquencies, loss experience, collateral quality by individual asset or category of asset and modifications that resulted in troubled debt restructurings.

For the six months ended June 30, 2011, the Company incurred charge-offs of $403 related to realized losses on one loan investment. During the year ended December 31, 2010, the Company incurred charge-offs totaling $239,078 related to ten loan investments.

The interest income recognized from impaired loans during the time within the financial statement period that they were impaired or reserved for was $7,019 and $14,525 for the three and six months ended June 30, 2011, respectively. The interest income recognized from impaired loans during the time within the financial statement period that they were impaired or reserved for was $13,191 and $27,625 for the three and six months ended June 30, 2010, respectively.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Changes in the reserve for loan losses were as follows:

	Whole loans			Subordinate interest in whole loans		Mezzanine loans		Preferred equity		Total
Reserve for loan losses, December 31, 2010	$	126,823		$	45,585	$	39,708	$	51,400	$	263,516
Additional provision for loan losses		15,500			-		-		2,000		17,500
Charge-offs		(403	)		-		-		-		(403	)
Reserve for loan losses, March 31, 2011		141,920			45,585		39,708		53,400		280,613
Additional provision for loan losses		953			4,000		13,830		-		18,783
Charge-offs		-			-		-		-		-
Reserve for loan losses, June 30, 2011	$	142,873		$	49,585	$	53,538	$	53,400	$	299,396

As of June 30, 2011 and 2010, the Company’s recorded investments in impaired loans were as follows:

	For the six months ended June 30, 2011						For the three months ended June 30, 2011				For the six months ended June 30, 2011
	Unpaid Principal Balance		Carrying Value		Allowance for Loan Losses		Average Recorded Investment Balance (1)		Investment Income Recognized		Average Recorded Investment Balance (1)		Investment Income Recognized
Whole loans	$	491,796	$	351,611	$	142,873	$	352,468	$	4,240	$	365,170	$	9,084
Subordinate interests in whole loans		70,987		6,401		64,585		9,388		177		9,806		234
Mezzanine loans		103,312		45,095		38,537		54,877		1,935		55,871		4,748
Preferred equity		60,716		7,514		53,400		7,511		667		8,359		1,388

Total	$	726,811	$	410,621	$	299,395	$	424,244	$	7,019	$	439,206	$	15,454

(1)	Represents the average of the month end balances for the three and six months ended June 30, 2011.

	For the twelve months ended December 31, 2010						For the three months ended June 30, 2010				For the six months ended June 30, 2010
	Unpaid Principal Balance		Carrying Value		Allowance for Loan Losses		Average Recorded Investment Balance (1)		Investment Income Recognized		Average Recorded Investment Balance (1)		Investment Income Recognized
Whole loans	$	506,211	$	382,272	$	126,823	$	550,888	$	9,740	$	575,086	$	19,252
Subordinate interests in whole loans		50,647		5,062		45,585		2,498		-		1,427		-
Mezzanine loans		156,161		94,312		39,708		98,525		2,820		99,354		4,562
Preferred equity		60,668		9,454		51,400		32,484		631		32,572		1,332

Total	$	773,687	$	491,100	$	263,516	$	684,395	$	13,191	$	708,439	$	25,146

(1)	Represents the average of the month end balances for the three and six months ended June 30, 2010.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

As of June 30, 2011 and December 31, 2010, the Company’s non-performing loans by class were as follows:

	As of June 30, 2011
	Number of Investments		Carrying value		Less Than 90 Days Past Due		Greater Than 90 Days Past Due
Whole loans		-	$	-	$	-	$	-
Subordinate interests in whole loans		2		-		-		-
Mezzanine loans		-		-		-		-
Preferred equity		-		-		-		-

Total		2	$	-	$	-	$	-

	As of December 31, 2010
	Number of Investments		Carrying value		Less Than 90 Days Past Due		Greater Than 90 Days Past Due
Whole loans		-	$	-	$	-	$	-
Subordinate interests in whole loans		2		-		-		-
Mezzanine loans		-		-		-		-
Preferred equity		-		-		-		-

Total		2	$	-	$	-	$	-

At June 30, 2011, the Company did not have any loans contractually past due 90 days or more that are still accruing interest. Also, the Company had no unfunded commitments on modified loans which were considered “troubled debt restructurings.” As of June 30, 2011 and December 31, 2010, there were no loans for which the collateral securing the loan was less than the carrying value of the loan for which the Company did not record a provision for loan loss.

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

The following is a summary of the Company’s CMBS investments at June 30, 2011:

Description	Number of Securities		Face Value		Amortized Cost		Fair Value		Gross Unrealized Gain		Gross Unrealized Loss
Available for sale:
Floating rate CMBS		3	$	53,500	$	51,660	$	48,790	$	-	$	(2,870	)
Fixed rate CMBS		102		1,114,903		921,349		848,397		73,012		(145,964	)
Total		105	$	1,168,403	$	973,009	$	897,187	$	73,012	$	(148,834	)

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

The following is a summary of the Company’s CMBS investments at December 31, 2010:

Description	Number of Securities		Face Value		Amortized Cost		Fair Value		Gross Unrealized Gain			Gross Unrealized Loss
Held to maturity:
Floating rate CMBS		2	$	48,500	$	47,698	$	43,650	$	-		$	(4,048	)
Fixed rate CMBS		97		1,133,574		925,580		825,275		96,428			(196,733	)
Available for Sale:
Floating rate CMBS		1		5,000		3,100		3,100		-			-
Fixed rate CMBS		8		43,444		26,806		28,789		1,983	(1)		-
Total		108	$	1,230,518	$	1,003,184	$	900,814	$	98,411		$	(200,781	)

(1) Included in Other Comprehensive Income.

The following table shows the Company’s fair value unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011.

	Less than 12 Months					12 Months or More					Total
Description	Estimated Fair Value		Gross Unrealized Loss			Estimated Fair Value		Gross Unrealized Loss			Estimated Fair Value		Gross Unrealized Loss
Floating rate CMBS	$	3,200	$	(22	)	$	45,590	$	(2,848	)	$	48,790	$	(2,870	)
Fixed rate CMBS		14,936		(1,023	)		597,840		(144,941	)		612,776		(145,964	)
Total temporarily impaired securities	$	18,136	$	(1,045	)	$	643,430	$	(147,789	)	$	661,566	$	(148,834	)

As of June 30, 2011, the Company’s CMBS investments had the following maturity characteristics:

Year of Maturity	Number of Investments Maturing		Amortized Cost		Percent of Total Carrying Value			Fair Value		Percent of Total Fair Value
Less than 1 year		2	$	48,438		5.0	%	$	45,590		5.1	%
1 - 5 years		27		161,806		16.6	%		176,759		19.7	%
5 - 10 years		76		762,765		78.4	%		674,838		75.2	%
Total		105	$	973,009		100.0	%	$	897,187		100.0	%

The following is a summary of the underlying credit ratings of the Company’s CMBS investments at June 30, 2011 and December 31, 2010 (for split-rated securities, the higher rating was used):

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

	June 30, 2011					December 31, 2010
	Carrying Value		Percentage			Carrying Value		Percentage
Investment grade:
AAA		58,261		6.5	%		51,590		5.1	%
AA		35,067		3.9	%		76,484		7.6	%
AA-		76,986		8.6	%		67,717		6.7	%
A+		3,788		0.4	%		2,103		0.2	%
A		14,521		1.6	%		57,314		5.7	%
BBB+		33,928		3.8	%		29,775		3.0	%
BBB		66,596		7.4	%		57,663		5.7	%
BBB-		174,149		19.4	%		166,843		16.6	%
Total investment grade		463,296		51.6	%		509,489		50.6	%

Non-investment grade:
BB+		41,926		4.7	%		69,733		6.9	%
BB		44,020		4.9	%		97,261		9.7	%
BB-		103,045		11.5	%		138,680		13.8	%
B+		128,514		14.3	%		153,970		15.3	%
B		94,773		10.6	%		5,160		0.6	%
B-		1,253		0.1	%		30,613		3.1	%
CCC+		18,360		2.1	%		261		0.0	%
CCC		2,000		0.2	%		-		-
Total non-investment grade		433,891		48.4	%		495,678		49.4	%

Total	$	897,187		100.0	%	$	1,005,167		100.0	%

The Company evaluates CMBS investments to determine if there has been an other-than-temporary impairment. The Company’s unrealized losses are primarily the result of market factors other than credit impairment, which is generally indicated by significant change in estimated cash flows from the cash flows previously estimated based on actual prepayments and credit loss experience. Unrealized losses can be caused by changes in interest rates, changes in credit spreads, realized losses in the underlying collateral, or general market conditions. The Company evaluates CMBS investments on a quarterly basis and has determined that there has been an adverse change in expected cash flows related to credit losses for one CMBS investment. Therefore, the Company recognized an other-than-temporary impairment of $6,037 during the three months ended June 30, 2011 that was recorded as an impairment in the Company’s Condensed Consolidated Statements of Operations. The Company recognized an other-than-temporary impairment of $277 during the three months ended June 30, 2010. To determine the component of the other-than-temporary impairment related to expected credit losses, the Company compares the amortized cost basis of each other-than-temporarily impaired security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. Significant judgment of management is required in this analysis that includes, but is not limited to, (i) assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans,(ii) current subordination levels for individual loans which serve as collateral under the Company’s securities, and (iii) current subordination levels for the securities themselves. The Company’s assessment of cash flows, which is supplemented by third-party research reports and dialogue with market participants, combined with the Company’s expectation to recover book value, is the basis for its conclusion the remainder of these investments are not other-than-temporarily impaired, despite the difference between the carrying value and the fair value. The Company has considered rating downgrades in its evaluation and apart from the one bond noted above, it believes that the book value of its CMBS investments is recoverable at June 30, 2011. The Company attributes the current difference between carrying value and market value to current market conditions including a decrease in demand for structured financial products and commercial real estate. The Company has concluded that it does not intend to sell these securities and not likely it will be required to sell the securities before recovering the amortized cost basis.

During the six months ended June 2011, the Company sold eight CMBS securities classified as available for sale. The total face amount and amortized cost of these securities was $78,247 and $50,458, respectively. The proceeds from the sale was $65,584 and resulted in a gain of $15,126.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

In connection with a preferred equity investment which was repaid in October 2006, the Company has guaranteed a portion of the outstanding principal balance of the first mortgage loan that is a financial obligation of the entity in which the Company was previously a preferred equity investor, in the event of a borrower default under such loan. The loan matures in 2012. This guarantee in the event of a borrower default under such loan is considered to be an off-balance-sheet arrangement and will survive until the repayment of the first mortgage loan. As compensation, the Company received a credit enhancement fee of $125 from the borrower, which is recognized as the fair value of the guarantee and has been recorded on the Condensed Consolidated Balance Sheet as a liability. The liability is amortized over the life of the guarantee using the straight-line method and corresponding fee income is recorded. The Company’s maximum exposure under this guarantee is approximately $1,354 and $1,366 as of June 30, 2011 and December 31, 2010, respectively. Under the terms of the guarantee, the investment sponsor is required to reimburse the Company for the entire amount paid under the guarantee until the guarantee expires.

4. Dispositions and Assets Held-for-Sale

During the three and six months ended June 30, 2011, the Company sold or disposed of two and five properties and a partial condemnation, respectively, for net sales proceeds of $2,223 and $20,490, respectively. During the three and six months ended June 30, 2010, the Company sold or disposed of three and 11 properties, respectively, for net sales proceeds of $1,840 and $18,113, respectively. The sales transactions resulted in gains totaling $1,437 and $2,374 for the three and six months ended June 30, 2011, respectively. The sales transactions resulted in gains totaling $202 and $1,243 for the three and six months ended June 30, 2010, respectively.

The Company separately classifies properties held-for-sale in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations. In the normal course of business, the Company identifies non-strategic assets for sale. Changes in the market may compel the Company to decide to classify a property held-for-sale or classify a property that was designated as held-for-sale back to held-for-investment. As of June 30, 2011 and December 31, 2010, the Company did not reclassify any properties previously identified as held-for-sale to held for investment.

The Company classified two properties as held-for-sale as of June 30, 2011 and December 31, 2010. The following table summarizes information for these properties:

	June 30, 2011			December 31, 2010
Assets held for sale:
Real estate investments, at cost:
Land	$	10,420		$	15,142
Building and improvement		382			11,612
Total real estate investments, at cost		10,802			26,754
Less: accumulated depreciation		(34	)		(202	)
Real estate investments held for sale, net		10,768			26,552
Accrued interest and receivables		-			398
Other Assets		1			1,710
Total assets held for sale	$	10,769		$	28,660

Liabilities related to assets held for sale:
Accrued expenses	$	-		$	474
Deferred revenue		7			57
Total liabilities related to assets held for sale:		7			531
Net assets held for sale	$	10,762		$	28,129

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

The following operating results of the assets held-for-sale as of June 30, 2011 and the assets sold during the six months ended June 30, 2011 and 2010, are included in discontinued operations for all periods presented:

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Operating Results:
Revenues	$	325		$	5,259		$	684		$	7,396
Operating expenses		(426	)		(3,373	)		(2,370	)		(4,613	)
Marketing, general and administrative		(4	)		-			(4	)		-
Interest expense		(1	)		(962	)		(48	)		(1,914	)
Depreciation and amortization		(6	)		(199	)		(22	)		(340	)
Equity in net income from unconsolidated joint venture		-			2,765			-			5,551
Net income (loss) from operations		(112	)		3,490			(1,760	)		6,080
Net gains from disposals		1,437			271			2,374			1,312
Net income (loss) from discontinued operations	$	1,325		$	3,761		$	614		$	7,392

Subsequent to June 30, 2011, the Company entered into an agreement of sale on one property for approximately $375 with a total carrying value of $376 as of June 30, 2011, and net loss of $25 for the six months ended June 30, 2011.

Discontinued operations have not been segregated in the Condensed Consolidated Statements of Cash Flows.

5. Investments in Joint Ventures

At June 30, 2011 and December 31, 2010, the carrying values of the Company’s joint venture investments were as follows:

				Carrying Value
	Ownership Interest			June 30, 2011		December 31, 2010
Unconsolidated Joint Ventures:
200 Franklin Square Drive, Somerset, New Jersey		25.0	%	$	622	$	746
Citizens Portfolio	various (1)				782		2,904
Total				$	1,404	$	3,650

(1)

The Company has a 99% ownership interest in 52 properties and sold its 1% ownership interest in two properties in January 2011.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

For the three and six months ended June 30, 2011 and 2010, the Company’s pro rata share of net income (loss) of the joint ventures were as follows:

	Three Months Ended						Six Months Ended
Joint Ventures	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
200 Franklin Square Drive, Somerset, New Jersey	$	31		$	31		$	61		$	61
2 Herald Square, New York, New York (1)		-			1,263			-			2,526
885 Third Avenue, New York, New York (2)		-			1,501			-			3,024
Citizens Portfolio		(737	)		(685	)		(1,454	)		(1,342	)
Whiteface, Lake Placid, New York (3)		-			(362	)		-			(1,405	)
Total before discontinued operations		(706	)		1,748			(1,393	)		2,864
Less discontinued operations		-			(2,765	)		-			(5,551	)
Total	$	(706	)	$	(1,017	)	$	(1,393	)	$	(2,687	)

(1)

In December 2010, the Company sold its 45% interest for a loss of $11,885 which is included in discontinued operations.

(2)

In December 2010, the Company sold its 45% interest for a loss of $15,407 which is included in discontinued operations.

(3)

In July 2010, the Company purchased the remaining 60% interest from the joint venture partner. In connection with the acquisition, the Company controls 100% of the joint venture's interest and has consolidated its accounts.

6. Collateralized Debt Obligations

The Company’s loans and other investments serve as collateral for the Company’s CDO securities, and the income generated from these investments is used to fund interest obligations of the Company’s CDO securities and the remaining income, if any, is retained by the Company. The CDO indentures contain minimum interest coverage and asset overcollateralization covenants that must be satisfied in order for the Company to receive cash flow on the interests retained in its CDOs and to receive the subordinate collateral management fee earned. If some or all of the Company’s CDOs fail these covenants, all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO securities, and the Company may not receive some or all residual payments or the subordinate collateral management fee until the applicable CDO regained compliance with such tests. As of July 2011, the most recent distribution date, the Company’s 2005 and 2006 CDOs were in compliance with their interest coverage and asset overcollateralization covenants; however the compliance margin was narrow and relatively small declines in collateral performance and credit metrics could cause the CDOs to fall out of compliance. The Company expects that the overcollateralization test for the 2005 CDO will fail at the October 2011 distribution date. The Company’s 2005 CDO failed its overcollateralization test at the April 2011 and January 2011 distribution dates and its 2007 CDO failed its overcollateralization test at the August 2011, May 2011 and February 2011 distribution dates.

During the six months ended June 30, 2011 and 2010, the Company repurchased, at a discount, $48,259 and $19,000, respectively, of notes previously issued by one of the Company’s three CDOs. The Company recorded a net gain on the early extinguishment of debt of $14,526 and $7,740, for the six months ended June 30, 2011 and 2010, respectively.

7. Debt Obligations

Mortgage and Mezzanine Loans

Certain real estate assets are subject to mortgage and mezzanine liens. As of June 30, 2011, 941 (including 52 properties held by an unconsolidated joint venture) of the Company’s real estate investments were encumbered with mortgage and mezzanine loans with a cumulative outstanding balance of $2,167,576. In September 2011, pursuant to the Settlement Agreement with respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the mortgage notes payable and the related collateral will be transitioned to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions and an arrangement for the Company’s continued management of the assets on behalf of the mezzanine lenders for a fixed fee plus incentive fees.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

The Company’s mortgage notes payable typically require that specified loan-to-value and debt service coverage ratios be maintained with respect to the financed properties before the Company can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not satisfied, in addition to other conditions that the Company may have to observe, the Company’s ability to release properties from the financing may be restricted and the lender may be able to “trap” portfolio cash flow until the required ratios are met on an ongoing basis. As of June 30, 2011 and December 31, 2010, the Company was in covenant compliance on all of its mortgage and mezzanine loans, except that, as of June 30, 2011 and December 31, 2010, the Company was out of debt service coverage compliance under two of its mortgage note financings. Such non-compliance does not constitute an event of default under the applicable loan agreements. Under one of the loans, the lender has the ability to restrict distributions which are limited to budgeted property operating expenses; under the other loan, the lender has the right to replace the management of the property. The Company also was not in compliance with the tangible net worth covenant under its loan agreement with PB Capital Corporation, or the PB Loan Agreement, and such non-compliance may permit the lender to exercise remedies against the mortgage collateral on a non-recourse basis. In September 2011, pursuant to the Settlement Agreement, the PB Loan Agreement and the related collateral will be transitioned to the mezzanine lenders. Accordingly, as a result of the execution of the Settlement Agreement, any acceleration of the PB Loan Agreement loan is not expected to have an adverse effect on the Company.

Goldman Mortgage Loan

On April 1, 2008, certain subsidiaries of the Company, collectively, the Goldman Loan Borrowers, entered into a mortgage loan agreement with GSMC, Citicorp and SL Green in connection with a mortgage loan in the amount of $250,000, which is secured by certain properties owned or ground leased by the Goldman Loan Borrowers. The Goldman Mortgage Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mortgage Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mortgage Loan. The Goldman Mortgage Loan allows for prepayment under the terms of the agreement as long as simultaneously therewith a proportionate prepayment of the Goldman Mezzanine Loan (discussed below) shall also be made on such date. In August 2008, an amendment to the loan agreement described below was entered into for the Goldman Mortgage Loan in conjunction with the bifurcation of the Goldman Mezzanine Loan into two separate mezzanine loans. Under this loan agreement amendment, the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The Company has accrued interest of $661 and $256 and borrowings of $240,523 and $240,523 as of June 30, 2011 and December 31, 2010, respectively.

In March 2010, the Company extended the maturity date of the Goldman Mortgage Loan to March 2011, and amended certain terms of the loan agreement, including, among others, (i) a prohibition on distributions from the Goldman Loan Borrowers to the Company, other than to cover direct costs related to executing the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Realty, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Goldman Mortgage Loan extension term, and (iii) within 90 days after the first day of the Goldman Mortgage Loan extension term, delivery by the Goldman Loan Borrowers to GSMC, Citicorp and SL Green of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Goldman Mortgage Loan. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the Company entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions fail. On May 9, 2011, the Company announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.

Notwithstanding the maturity and non-repayment of the loans, the Company maintained active communications with the lenders and in September 2011, the Company entered into the Settlement Agreement for an orderly transition of substantially all of Gramercy Realty’s assets to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of Gramercy Realty’s assets on behalf of such mezzanine lenders for a fixed fee plus incentive fees. In July 2011, the Company’s Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. Subsequent to the execution of the Settlement Agreement, the business of Gramercy Realty will change from being primarily an owner of commercial properties to being primarily a third party manager of commercial properties. The scale of Gramercy Realty’s revenues will substantially decline as a substantial portion of net revenues from property operations will be replaced with fee revenues of a substantially smaller scale. Additionally, as assets are transferred, its total assets and liabilities are expected to decline substantially. The transition of Gramercy Realty’s business and the effects of these changes on the Company’s Consolidated Financial Statements are expected to be completed by December 31, 2011.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Goldman Senior and Junior Mezzanine Loans

On April 1, 2008, certain subsidiaries of the Company, collectively, the Mezzanine Borrowers, entered into a mezzanine loan agreement with GSMC, Citicorp and SL Green in connection with a mezzanine loan in the amount of $600,000, or the Goldman Mezzanine Loan, which is secured by pledges of certain equity interests owned by the Mezzanine Borrowers and any amounts receivable by the Mezzanine Borrowers whether by way of distributions or other sources. The Goldman Mezzanine Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mezzanine Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mezzanine Loan. The Goldman Mezzanine Loan allows for prepayment under the terms of the agreement as long as simultaneously therewith a proportionate prepayment of the Goldman Mortgage Loan shall also be made on such date. In addition, under certain circumstances the Goldman Mezzanine Loan is cross defaulted with events of default under the Goldman Mortgage Loan and with other mortgage loans pursuant to which, an indirect wholly-owned subsidiary of the Company, is the mortgagor. In August 2008, the Goldman Mezzanine Loan was bifurcated into two separate mezzanine loans (the Junior Mezzanine Loan and the Senior Mezzanine Loan) by the lenders, and the Senior Mezzanine Loan was assigned to KBS. Additional loan agreement amendments were entered into for the Goldman Mezzanine Loan and Goldman Mortgage Loan. Under these loan agreement amendments, the Junior Mezzanine Loan bears interest at 6.00% over LIBOR, the Senior Mezzanine Loan bears interest at 5.20% over LIBOR and the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The weighted average of these interest rate spreads is equal to the combined weighted average of the interest rates spreads on the initial loan. The Goldman Mezzanine Loans encumber all properties held by Gramercy Realty. The Company has accrued interest of $15,547 and $1,454 and borrowings of $549,456 and $549,713 as of June 30, 2011 and December 31, 2010, respectively.

In March 2010, the Company extended the maturity date of the Goldman Mezzanine Loans to March 2011, and amended certain terms of the Senior Mezzanine Loan agreement and the Junior Mezzanine Loan agreement, including, among others, with respect to the Senior Mezzanine Loan agreement, (i) a prohibition on distributions from the Senior Mezzanine Loan borrowers to the Company, other than to cover direct costs related to executing the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Realty, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Senior Mezzanine Loan extension term and agreement, upon request, to grant a security interest in that account to KBS, and (iii) within 90 days after the first day of the Senior Mezzanine Loan extension term, delivery by the Senior Mezzanine Loan borrowers to KBS of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Senior Mezzanine Loan, and with respect to the Junior Mezzanine Loan agreement, (i) a prohibition on distributions from the Junior Mezzanine Loan borrower to the Company, other than to cover direct costs related to executing the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Realty, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Junior Mezzanine Loan extension term and agreement, upon request, to grant a security interest in that account to GSMC, Citicorp and SL Green, and (iii) within 90 days after the first day of the Junior Mezzanine Loan extension term, delivery by the Junior Mezzanine Loan borrower to GSMC, Citicorp and SL Green of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Junior Mezzanine Loan. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the Company entered into series of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions fail. On May 9, 2011, the Company announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

The following is a summary of first mortgage loans as of June 30, 2011:

	Encumbered Properties (1)		Balance			Interest Rate	Maturity Date
Fixed-rate mortgages		473	$	1,148,206	(2)	5.06% to 10.29%	January 2012 to August 2030
Variable-rate mortgages		236		460,036		1.84% to 6.19%	May 2011 (3) to April 2013
Total mortgage notes payable		709		1,608,242
Above- / below-market interest		-		9,878
Balance, June 30, 2011		709	$	1,618,120

(1)

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

(2)	Includes $84,990 of debt that is collateralized by $90,524 of pledged treasury securities, net of discounts and premiums.

(3)	Goldman Mortgage Loan default date.

Combined aggregate principal maturities of the Company’s consolidated CDOs and mortgage loans (including the Goldman Mortgage Loan and Goldman Mezzanine Loans) as of June 30, 2011 are as follows:

	CDOs		Mortgage and Mezzanine Loans (1)		Interest Payments		Total
2011 (July 1 - December 31)	$	-	$	803,672	$	76,047	$	879,719
2012		-		80,736		146,238		226,974
2013		-		602,909		131,011		733,920
2014		-		12,884		108,175		121,059
2015		-		47,650		103,794		151,444
Thereafter		2,580,266		609,847		212,539		3,402,652
Above- / below-market interest		-		9,878		-		9,878
Total	$	2,580,266	$	2,167,576	$	777,804	$	5,525,646

(1)

8. Related Party Transactions

An affiliate of SL Green provides special servicing services with respect to a limited number of loans owned by the Company that are secured by properties in New York City, or in which the Company and SL Green are co-investors. For the three and six months ended June 30, 2011, the Company incurred expenses of $42 and $83, respectively, pursuant to the special servicing arrangement. For the three and six months ended June 30, 2010, the Company incurred expenses of $123 and $148, respectively, pursuant to the special servicing arrangement.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Commencing in May 2005, the Company is party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for its corporate offices at 420 Lexington Avenue, New York, New York. The lease is for approximately 7,300 square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in year ten. In May and June 2009, the Company amended its lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2,260 square feet. The additional premises is leased on a co-terminus basis with the remainder of its leased premises and carries rents of approximately $103 per annum during the initial year and $123 per annum during the final lease year. For the three and six months ended June 30, 2011, the Company paid $77 and $154 under this lease, respectively. For the three and six months ended June 30, 2010, the Company paid $75 and $151 under this lease, respectively.

In March 2006, the Company closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green was an equity holder. The mezzanine loan was repaid in full on May 9, 2006, when the Company originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint venture. The whole loan is secured by office and industrial properties in northern New Jersey and has a book value of $24,478 and $24,821 as of June 30, 2011 and December 31, 2010, respectively.

In January 2007, the Company originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a portfolio of multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an office property. On March 8, 2007, the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event the Company’s loan became secured by a first mortgage lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and one-month LIBOR plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from the Company and held a 15.15% pari-passu interest in the mezzanine loan and the whole loan. The investment in the mezzanine loan was repaid in full in September 2007. In September 2010, the whole loan was repaid at a discount. The Company received $56,093 and forgave the remaining balance outstanding.

In April 2007, the Company purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34th Street in New York, New York. The acquisition was financed with $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. The Company sold its 45% interest in December 2010 to a wholly-owned subsidiary of SL Green for net proceeds of $25,350, resulting in a loss of $11,885. The Company recorded its pro rata share of net income of $1,263 and $2,526 for the three and six months ended June 30, 2010.

In July 2007, the Company purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. The Company sold its 45% interest in December 2010 to a wholly-owned subsidiary of SL Green for net proceeds of $38,911, resulting in a loss of $15,407. The Company recorded its pro rata share of net income of $1,501 and $3,024 for the three and six months ended June 30, 2010.

In September 2007, the Company acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter, the Company, along with SL Green, sold all of its interests in the loan to an unaffiliated third party. Additionally, the Company acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same properties as the preceding senior mezzanine loan. Immediately thereafter, the Company participated 50% of its interest in the loan back to SL Green. As of June 30, 2011 and December 31, 2010, the loan has a book value of $0. In October 2007, the Company acquired a 50% pari-passu interest in $57,795 of two additional tranches in the senior mezzanine loan from an unaffiliated third party. At closing, an affiliate of SL Green simultaneously acquired the other 50% pari-passu interest in the two tranches. As of June 30, 2011 and December 31, 2010, the loan has a book value of $0. The Company held a contingent interest in the property which was sold to SL Green in December 2010 for $2,016.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

In December 2007, the Company acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter, the Company participated 50% of the Company’s interest in the loan to an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%. In December 2010, the Company subsequently purchased an affiliate of SL Green’s full participation in the senior mezzanine loan at a discount. As of June 30, 2011 and December 31, 2010, the original loan has a book value of $5,224 and $5,224, and the subsequently purchased loan has a book value of $14,309 and $13,586, respectively.

In August 2008, the Company closed on the purchase from an SL Green affiliate of a $9,375 pari-passu participation interest in a $18,750 first mortgage. The loan is secured by a retail shopping center located in Staten Island, New York. The investment bears interest at a fixed rate of 6.50%. In December 2010, the Company purchased, at a discount, the remaining 50% interest in the loan from an SL Green affiliate for $9,420. As of June 30, 2011 and December 31, 2010, the loan has a book value of $19,442 and $19,367, respectively.

In September 2008, the Company closed on the purchase from an SL Green affiliate of a $30,000 interest in a $135,000 mezzanine loan. The loan is secured by the borrower’s interests in a retail condominium located New York, New York. The investment bears interest at an effective spread to one-month LIBOR of 10.00%. As of December 31, 2010, the loan had a book value of $27,778. In December 2010, the Company sold its contingent interest to SL Green for $300. In March 2011, the loan was paid in full by the borrower.

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

9. Fair Value of Financial Instruments

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

The following table presents the carrying value in the financial statements and approximate fair value of other financial instruments at June 30, 2011 and December 31, 2010:

	June 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Government securities	$	90,524	$	94,999	$	92,918	$	97,247
Lending investments	$	1,102,114	$	1,111,353	$	1,123,528	$	1,117,743
CMBS (1)	$	897,187	$	897,187	$	1,005,167	$	900,815
Derivative instruments	$	1,912	$	1,912	$	1,636	$	1,636
Financial liabilities:
Mortgage note payable and senior and junior mezzanine loans	$	2,167,576	$	1,514,599	$	2,190,384	$	1,679,029
Collateralized debt obligations	$	2,580,266	$	1,728,598	$	2,682,321	$	1,704,338
Derivative instruments	$	155,921	$	155,921	$	157,932	$	157,932

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

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

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

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Government Securities: The Company maintains a portfolio of treasury securities that are pledged to provide principal and interest payments for mortgage debt previously collateralized by properties in the Company’s real estate portfolio. These securities are presented in the Condensed Consolidated Financial Statements on a held-to-maturity basis and not at fair value. The fair values were based upon valuations obtained from dealers of those securities.

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

CMBS held-to-maturity: These investments are presented in the Condensed Consolidated Financial Statements on a held-to-maturity basis and not at fair value. The fair values were based upon valuations obtained from dealers of those securities, and internal models.

CMBS available-for-sale: These investments are presented in the Condensed Consolidated Financial Statements at fair value, not held-to-maturity basis. The fair values were based upon valuations obtained from dealers of those securities, and internal models.

Mortgage note payable and senior and junior mezzanine loans: These obligations are presented in the Condensed Consolidated Financial Statements based on the actual balance outstanding and not at fair value. The fair value was estimated using discounted cash flows methodology, using discount rates that best reflect current market interest rates for financing with similar characteristics and credit quality.

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

Derivative instruments: The Company’s derivative instruments, which are primarily comprised of interest rate swap agreements, are carried at fair value in the Condensed Consolidated Financial Statements based upon third party valuations.

Disclosure about fair value of financial instruments is based on pertinent information available to the Company at June 30, 2011 and December 31, 2010. Although the Company is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since June 30, 2011 and December 31, 2010 and current estimates of fair value may differ significantly from the amounts presented herein.

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

Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Fair Value on a Recurring Basis

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

At June 30, 2011	Total		Level I		Level II		Level III
Financial Assets:
Derivative instruments:
Interest rate caps	$	1,912	$	-	$	-	$	1,912
Interest rate swaps		-		-		-		-
	$	1,912	$	-	$	-	$	1,912

CMBS available-for-sale:
Investment grade	$	463,296	$	-	$	-	$	463,296
Non-investment grade		433,891		-		-		433,891
	$	897,187	$	-	$	-	$	897,187

Financial Liabilities:
Derivative instruments:
Interest rate caps	$	-	$	-	$	-	$	-
Interest rate swaps	$	155,921		-		-	$	155,921
	$	155,921	$	-	$	-	$	155,921

At December 31, 2010	Total		Level I		Level II		Level III
Financial Assets:
Derivative instruments:
Interest rate caps	$	1,636	$	-	$	-	$	1,636
Interest rate swaps		-		-		-		-
	$	1,636	$	-	$	-	$	1,636

CMBS available-for-sale:
Investment grade	$	20,607	$	-	$	-	$	20,607
Non-investment grade		11,282		-		-		11,282
	$	31,889	$	-	$	-	$	31,889

Financial Liabilities:
Derivative instruments:
Interest rate caps	$	-	$	-	$	-	$	-
Interest rate swaps		157,932		-		-		157,932
	$	157,932	$	-	$	-	$	157,932

Derivative instruments: Interest rate caps and swaps were valued using advice from a third party derivative specialist, based on a combination of observable market-based inputs, such as interest rate curves, and unobservable inputs such as credit valuation adjustments due to the risk of non-performance by both the Company and its counterparties. See Note 12 for additional details on the Company’s interest rate caps and swaps.

Derivatives were classified as Level III due to the significance of the credit valuation allowance which is based upon less observable inputs.

Total gains and losses from derivatives for the three and six months ended June 30, 2011 are $13,342 and $1,500, respectively, and are included in Accumulated Other Comprehensive Loss. During the six months ended June 30, 2011, the Company entered into two interest rate caps for a total purchase price of $1,182.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

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

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

	CMBS available for sale - investment grade			CMBS available for sale -non- investment grade			Derivative instruments

Balance as of December 31, 2010	$	20,607		$	11,282		$	1,636
Transfers from securites held to maturity		461,602			515,763			-
Proceeds from sale of CMBS investments		(44,017	)		(21,567	)		-
Purchases of CMBS investments		17,942			-			-
Purchases of derivative instruments		-			-			1,182
Change in CMBS investment status		(3,850	)		3,850			-
Amortization of discounts for securities available-for-sale in prior quarter		2,533			1,756			-
Adjustments to fair value:
Included in other comprehensive income		3,280			(81,083	)		(906	)
Gain from sales of CMBS investmemts		5,199			9,927			-
Other-than-temporary impairments		-			(6,037	)		-

Balance as of June 30, 2011	$	463,296		$	433,891		$	1,912

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

	Derivative instruments - interest rate swaps

Balance as of December 31, 2010	$	157,932
Purchases of derivative instruments		-
Adjustments to fair value:
Included in other comprehensive income		(2,011	)

Balance as of June 30, 2011	$	155,921

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Fair Value on a Non-Recurring Basis

The Company uses fair value measurements on a non-recurring basis in its assessment of assets classified as loans and other lending investments, which are reported at cost and have been written down to fair value as a result of valuation allowances established for loan losses, and real estate, which are reported at cost and has been impaired to the lower of cost or fair value as a result of an analysis of the properties that serve as collateral for the Goldman Mezzanine Loans. The following table shows the fair value hierarchy for those assets measured at fair value on a non-recurring basis based upon the lowest level of significant input to the valuations for which a non-recurring change in fair value has been recorded during the six months ended June 30, 2011:

At June 30, 2011	Total		Level I		Level II		Level III
Assets:
Lending investments:
Whole loans	$	103,024	$	-	$	-	$	103,024
Subordinate interests in whole loans		1,225		-		-		1,225
Mezzanine loans		3,284		-		-		3,284
Preferred equity		2,291		-		-		2,291
	$	109,824	$	-	$	-	$	109,824

At December 31, 2010	Total		Level I		Level II		Level III
Assets:
Real estate investments:
Office	$	1,097,535	$	-	$	-	$	1,097,535
Branch		484,629		-		-		484,629
Land		-		-		-		-
	$	1,582,164	$	-	$	-	$	1,582,164

Lending investments:
Whole loans	$	212,633	$	-	$	-	$	212,633
Subordinate interests in whole loans		-		-		-		-
Mezzanine loans		22,337		-		-		22,337
Preferred equity		-		-		-		-
	$	234,970	$	-	$	-	$	234,970

The total change in fair value of assets for which a fair value adjustment has been included in the Consolidated Statements of Operations for the three and six months ended June 30, 2011 and June 30, 2010 were $18,783 and $36,283 and $13,230 and $54,390, respectively.

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

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

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

10. Stockholders’ Equity

The Company’s authorized capital stock consists of 125.0 million shares, $0.001 par value, of which the Company has authorized the issuance of up to 100.0 million shares of common stock, $0.001 par value per share, and 25.0 million shares of preferred stock, par value $0.001 per share. As of June 30, 2011, 49,999,739 shares of common stock and 3,525,822 shares of preferred stock were issued and outstanding.

Preferred Stock

Beginning with the fourth quarter of 2008, the Company’s board of directors elected not to pay the quarterly Series A preferred stock dividends of $0.50781 per share. As of June 30, 2011 and December 31, 2010, the Company accrued Series A preferred stock dividends of $19,695 and $16,114, respectively. As a result, the Company has accrued dividends for over six quarters which pursuant to the terms of its charter, permits the Series A preferred stockholders to elect an additional director to the board of directors. The Company may, or upon a properly submitted request of the holders of the Series A preferred stock representing 20% or more of the liquidation value of the Series A preferred stock, call a special meeting of our stockholders to elect such additional director in accordance with the provisions of the bylaws and other procedures established by the Company’s board of directors relating to election of directors.

Earnings per Share

Earnings per share for the three months ended June 30, 2011 and 2010 are computed as follows:

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Numerator - Income (loss)
Net income (loss) from continuing operations (1)	$	15,937		$	5,192		$	23,397		$	(20,871	)
Net income (loss) from discontinued operations (1)		1,325			3,860			614			7,491
Net Income (loss)		17,262			9,052			24,011			(13,380	)
Preferred stock dividends		(1,790	)		(2,336	)		(3,580	)		(4,672	)
Numerator for basic income per share - Net income (loss) available to common stockholders:		15,472			6,716			20,431			(18,052	)
Effect of dilutive securities		-			-			-			-
Diluted Earnings:
Net income (loss) available to common stockholders	$	15,472		$	6,716		$	20,431		$	(18,052	)
Denominator-Weighted Average shares:
Denominator for basic income per share - weighted average shares		49,998,728			49,905,648			49,995,429			49,902,248
Effect of dilutive securities
Stock based compensation plans		233,885			203,288			261,291			-
Phantom stock units		460,233			323,324			460,233			-
Diluted shares		50,692,846			50,432,260			50,716,953			49,902,248

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

Diluted income (loss) per share assumes the conversion of all common share equivalents into an equivalent number of common shares if the effect is not anti-dilutive. For the six months ended June 30, 2010, 230,629 share options and 323,324 phantom share units, respectively, were computed using the treasury share method, which due to the net loss were anti-dilutive.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) for the six months ended June 30, 2011 and 2010 are comprised of the following:

	As of June 30,
	2011			2010
Net realized and unrealized loss on held-to-maturity securities	$	-		$	(2,983	)
Net realized and unrealized loss on interest rate swap and cap agreements accounted for as cash flow hedges		(161,268	)		(153,713	)
Net unrealized loss on FV adjustment of available-for-sale securities		(75,821	)		-
Total accumulated other comprehensive loss	$	(237,089	)	$	(156,696	)

11. Commitments and Contingencies

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

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

As of June 30, 2011, the Company leased certain of its commercial properties from third parties with expiration dates extending to the year 2085 and has various ground leases with expiration dates extending through 2101. These lease obligations generally contain rent increases and renewal options.

Future minimum lease payments under non-cancelable operating leases as of June 30, 2011 are as follows:

	Operating Leases
2011 (July 1 - December 31)	$	10,695
2012		21,246
2013		20,739
2014		20,214
2015		19,384
Thereafter		158,325
Total minimum lease payments	$	250,603

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

The Company, through certain of its subsidiaries, may be required in its role in connection with its CDOs, to repurchase loans that it contributed to its CDOs in the event of breaches of certain representations or warranties provided at the time the CDOs were formed and the loans contributed. These obligations do not relate to the credit performance of the loans or other collateral contributed to the CDOs, but only to breaches of specific representations and warranties. Since inception, the Company has not been required to make any repurchases.

Certain real estate assets are pledged as collateral for two mortgage loans held by two of its CDOs. One borrowing of $62,379 is also guaranteed by the Company. In connection with the Settlement Agreement, the Company was released under the guarantee in September 2011.

12. Financial Instruments: Derivatives and Hedging

The Company recognizes all derivatives on the Condensed Consolidated Balance Sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. Derivative accounting may increase or decrease reported net income and stockholders’ equity prospectively, depending on future levels of LIBOR interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term.

The following table summarizes the notional and fair value of the Company’s derivative financial instruments at June 30, 2011. The notional value is an indication of the extent of the Company’s involvement in this instrument at that time, but does not represent exposure to credit, interest rate or market risks:

	Benchmark Rate	Notional Value		Strike Rate			Effective Date	Expiration Date	Fair Value
Assets of Non-VIEs:
Interest Rate Cap	3 month LIBOR	$	38,500		6.00	%	Jul-10	Jul-12	$	-

Assets of Consolidated VIEs:
Interest Rate Cap	3 month LIBOR		10,721		4.73	%	Dec-10	Feb-15		33
Interest Rate Cap	3 month LIBOR		8,877		5.04	%	Oct-10	Feb-16		64
Interest Rate Cap	3 month LIBOR		47,000		7.95	%	Jun-11	Feb-17		200
Interest Rate Cap	3 month LIBOR		23,000		4.96	%	Jun-10	Apr-17		215
Interest Rate Cap	3 month LIBOR		48,945		4.80	%	Mar-10	Jul-17		749
Interest Rate Cap	3 month LIBOR		49,620		4.92	%	Jun-11	Jul-17		651
			188,163							1,912
Liabilities of Consolidated VIEs:
Interest Rate Swap	3 month LIBOR		12,000		9.85	%	Aug-06	Aug-11		(71	)
Interest Rate Swap	3 month LIBOR		4,700		3.17	%	Apr-08	Apr-12		(107	)
Interest Rate Swap	3 month LIBOR		10,000		3.92	%	Oct-08	Oct-13		(691	)
Interest Rate Swap	3 month LIBOR		17,500		3.92	%	Oct-08	Oct-13		(1,209	)
Interest Rate Swap	1 month LIBOR		8,904		4.26	%	Aug-08	Jan-15		(851	)
Interest Rate Swap	3 month LIBOR		14,650		4.43	%	Nov-07	Jul-15		(1,557	)
Interest Rate Swap	3 month LIBOR		24,143		5.11	%	Feb-08	Jan-17		(3,484	)
Interest Rate Swap	3 month LIBOR		280,498		5.41	%	Aug-07	May-17		(36,489	)
Interest Rate Swap	3 month LIBOR		16,412		5.20	%	Feb-08	May-17		(2,472	)
Interest Rate Swap	3 month LIBOR		699,442		5.33	%	Aug-07	Jan-18		(108,990	)
			1,088,249							(155,921	)
Total		$	1,314,912						$	(154,009	)

The Company is hedging exposure to variability in future interest payments on its debt facilities. At June 30, 2011, derivative instruments were reported at their fair value as a net liability of $154,009. Offsetting adjustments are represented as deferred gains in Accumulated Other Comprehensive Loss of $1,500, which includes the amortization of gain or (loss) on terminated hedges of $100 for the three months ended June 30, 2011. The Company anticipates recognizing approximately $401 in amortization over the next 12 months.

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

For the three and six months ended June 30, 2011, the Company recognized a decrease to interest expense of $48 and $103 attributable to any ineffective component of its derivative instruments designated as cash flow hedges. Currently, all derivative instruments are designated as cash flow hedging instruments. Over time, the realized and unrealized gains and losses held in Accumulated Other Comprehensive Income will be reclassified into earnings in the same periods in which the hedged interest payments affect earnings.

13. Income Taxes

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

Beginning with the third quarter of 2008, the Company’s board of directors elected to not pay dividend to common stockholders beginning with its taxable year ended December 31, 2004. The Company may elect to pay dividends on its common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. The board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividend has been accrued. In accordance with the provisions of the Company’s charter, the Company may not pay any dividends on its common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full.

For the three and six months ended June 30, 2011, the Company recorded $3 and $73 of income tax expense, respectively. For the three and six months ended June 30, 2010, the Company recorded $66 and $104 of income tax expense respectively. Tax expense for the six months ended June 30, 2011 and 2010 is comprised entirely of state and local taxes.

14. Segment Reporting

The Company has determined that it has two reportable operating segments: Realty and Finance. The reportable segments were determined based on the management approach, which looks to the Company’s internal organizational structure. These two lines of business require different support infrastructures.

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

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

	Realty (1)			Finance			Corporate/ Other (2)			Total Company
Three months ended June 30, 2011
Total revenues(3)	$	102,597		$	60,100		$	-		$	162,697
Earnings (loss) from unconsolidated joint ventures		(737	)		31			-			(706	)
Total operating and interest expense (4)		(101,610	)		(36,749	)		(7,695	)		(146,054	)
Net income (loss) from continuing operations (5)	$	250		$	23,382		$	(7,695	)	$	15,937

Three months ended June 30, 2010
Total revenues (3)	$	106,213		$	45,455		$	-		$	151,668
Earnings (loss) from unconsolidated joint ventures		(685	)		(332	)		-			(1,017	)
Total operating and interest expense (4)		(99,821	)		(35,730	)		(9,829	)		(145,380	)
Net income (loss) from continuing operations (5)	$	5,707		$	9,393		$	(9,829	)	$	5,271

	Realty (1)			Finance			Corporate/ Other (2)			Total Company
Six months ended June 30, 2011
Total revenues(3)	$	205,619		$	105,727		$	-		$	311,346
Earnings (loss) from unconsolidated joint ventures		(1,454	)		61			-			(1,393	)
Total operating and interest expense(4)		(198,388	)		(74,057	)		(14,111	)		(286,556	)
Net income (loss) from continuing operations (5)	$	5,777		$	31,731		$	(14,111	)	$	23,397

Six months ended June 30, 2010
Total revenues(3)	$	214,209		$	90,444		$	-		$	304,653
Earnings (loss) from unconsolidated joint ventures		(1,342	)		(1,345	)		-			(2,687	)
Total operating and interest expense (4)		(202,729	)		(102,668	)		(17,317	)		(322,714	)
Net income (loss) from continuing operations (5)	$	10,138		$	(13,569	)	$	(17,317	)	$	(20,748	)

Total Assets:
June 30, 2011	$	2,786,497		$	3,430,828		$	(938,602	)	$	5,278,723
December 31, 2010	$	2,834,035		$	3,558,472		$	(900,514	)	$	5,491,993

(1)

As a result of the Settlement Agreement that the Company entered into in September 2011, for an orderly transition of substantially all of Gramercy Realty’s assets to Gramercy Realty’s senior mezzanine lenders, the segment will significantly change in future periods. For more information about the Settlement Agreement see Note 16.

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

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

(4)

Total operating and interest expense includes provision for loan losses for the Finance business and operating costs on commercial property assets for the Realty business, and interest expense and loss on early extinguishment of debt, specifically related to each segment. General and administrative expense is included in Corporate/Other for all periods. Depreciation and amortization of $18,626 and $37,511 and $ 26,595 and $54,395 for the three and six months ended June 30, 2011 and 2010, respectively, is included in the amounts presented above.

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

Gramercy Capital Corp.

Notes to Condensed Consolidated Financial Statements

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

June 30, 2011

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

The following table represents non-cash activities recognized in other comprehensive income for the six months ended June 30, 2011 and 2010:

	2011			2010
Deferred losses and other non-cash activity related to derivatives	$	1,500		$	(61,581	)

Deferred gains related to securities available-for -sale	$	(77,804	)	$	923

16. Subsequent Events

In July 2011, Gramercy Realty’s Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. In connection with the deed in lieu, the Company was relieved of its obligation to repay the $171,938 mortgage loan secured by the Dana portfolio as well as contractual and default interest.

On September 1, 2011, the Company entered into the Settlement Agreement, for an orderly transition of substantially all of Gramercy Realty’s assets to KBS, the senior mezzanine lender, of the Goldman Mortgage Loan and the Goldman Mezzanine Loans. The Settlement Agreement provides, among other things, for (i) the transfer of beneficial ownership of the entities owning substantially all of the properties comprising the Company’s Gramercy Realty division to KBS or another entity as directed by KBS by December 15, 2011 (unless a stay or other injunctive action prevents the transfer of the equity interests on that date), (ii) certain releases, terminations and satisfactions of obligations of the Company and its affiliates in connection with the Loans, including releases of any guaranties delivered to the Lenders by the Company with respect to the Loans, and (iii) certain releases of the Lenders and their affiliates in connection with the Loans. The Company will retain 58 properties comprising 758,231 square feet encumbered by $31,873 in first lien mortgage debt held by a Company-affiliated CDO. The initial transfer of the entities owning approximately 317 properties to KBS occurred on September 1, 2011. The Company expects additional transfers to KBS to occur over the next several months as and when certain third-party conditions are satisfied. Assuming no stay or other injunctive action is then in place to prevent the same, the Settlement Agreement obligates KBS to acquire from the Company any and all remaining Gramercy Realty entities on December 15, 2011. The Company will continue to operate the remaining 555 properties until they are transferred to KBS only to the extent that sufficient cash flow is generated by the properties. KBS may elect to fund all or a portion of any shortfall. The Company has no obligation to contribute any capital or provide other financial support to the remaining properties.

The Settlement Agreement also provides for the Company’s continued management of the Gramercy Realty assets on behalf of the Lenders until December 31, 2013, for a fixed fee of $10,000 annually, the reimbursement of certain costs and incentive fees equal to 10.0% of the excess of the equity value, if any, of the transferred collateral over $375,000 plus all new capital invested into the transferred collateral by KBS, its affiliates and/or joint venture partners (the ‘‘Threshold Value Participation’’) and 12.5% of the excess equity value, if any, of the transferred collateral over $468,500 plus all new capital invested into the transferred collateral by KBS, its affiliates and/or joint venture partners (the ‘‘Excess Value Participation’’). The minimum amount of the Threshold Value Participation equals $3,500. The Threshold Value Participation and the Excess Value Participation will be valued and paid following the earlier of December 13, 2013, subject to extension to no later than December 31, 2015, or the sale by KBS of at least 90% (by value) of the transferred collateral. The Interim Management Agreement may be terminated by either party without Cause 90 days following written notice; however, any Company notice of termination cannot be effective until December 31, 2011 at the earliest.

KBS and the Company have agreed to promptly commence and diligently seek to negotiate a full and complete management services agreement by no later than March 31, 2012. If the parties do not execute a mutually acceptable asset management services agreement prior to March 31, 2012, the Interim Management Agreement upon the terms and conditions set forth in the Settlement Agreement shall automatically terminate on June 30, 2012 without liability or a penalty of any kind, except for the Company’s loss of the Excess Value Participation.

In July 2011, a commercial office building owned by the Company was financed with a first mortgage by the Company’s 2006 CDO, generating unrestricted cash proceeds of approximately $16,000.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except for share, per share data and Overview section)

Overview

Gramercy Capital Corp. is a self-managed, integrated commercial real estate finance and property management and investment company. Our commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination, acquisition and portfolio management of whole loans, bridge loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate related securities. Our property management and investment business, which operates under the name Gramercy Realty, historically focused on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. Neither Gramercy Finance nor Gramercy Realty is a separate legal entity, but are divisions through which our commercial real estate finance and property investment businesses are conducted.

We conduct substantially all of our operations through our operating partnership, GKK Capital LP, or our Operating Partnership. We are the sole general partner of our Operating Partnership. Our Operating Partnership conducts our finance business primarily through two private real estate investment trusts, or REITs, Gramercy Investment Trust and Gramercy Investment Trust II; and our commercial real estate investment and property management business through various wholly owned entities.

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and generally will not be subject to U.S. federal income taxes to the extent we distribute our taxable income, if any, to our stockholders. We have in the past established, and may in the future establish taxable REIT subsidiaries, or TRSs, to effect various taxable transactions. Those TRSs would incur U.S. federal, state and local taxes on the taxable income from their activities. Unless the context requires otherwise, all references to “we,” “our” and “us” mean Gramercy Capital Corp., a Maryland Corporation, and one or more of its subsidiaries, including our Operating Partnership.

During 2011, we remained focused on improving our consolidated balance sheet by reducing leverage, generating liquidity from existing assets, actively managing portfolio credit, accretively re-investing repayments in loan and CMBS investments and renewing expiring leases. We also sought to extend or restructure Gramercy Realty’s $240.5 million mortgage loan with Goldman Sachs Commercial Mortgage Capital, L.P., or GSMC, Citicorp North America, Inc., or Citicorp, and SL Green Realty Corp., or SL Green, or the Goldman Mortgage Loan, and Gramercy Realty’s $549.7 million senior and junior mezzanine loans with KBS Real Estate Investment Trust, Inc., or KBS, GSMC, Citicorp and SL Green, or the Goldman Mezzanine Loans. The Goldman Mortgage Loan is collateralized by approximately 195 properties held by Gramercy Realty and the Goldman Mezzanine Loans are collateralized by the equity interest in substantially all of the entities comprising our Gramercy Realty division, including its cash and cash equivalents totaling $34.5 million of our unrestricted cash as of June 30, 2011. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, we entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions fail. On May 9, 2011, we announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.

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

Subsequent to the execution of the Settlement Agreement, the business of Gramercy Realty will change from being primarily an owner of commercial properties to being primarily a third-party manager of commercial properties. The scale of Gramercy Realty’s revenues will substantially decline as a substantial portion of net revenues from property operations will be replaced with fee revenues of a substantially smaller scale. Additionally, as assets are transferred to the mezzanine lenders, our total assets and liabilities are expected to decline substantially. If the transfer had happened as of June 30, 2011, our assets would have declined from approximately $5.3 billion to approximately $2.6 billion and our liabilities would have declined from approximately $5.8 billion to approximately $2.8 billion. Our Condensed Consolidated Financial Statements would have reflected a significant liquidity, including cash and cash equivalents of approximately $132.5 million and we would have no recourse debt obligations outstanding. We anticipate all transfers to be completed by December 15, 2011. After all transfers are complete, we expect to own a portfolio of commercial real estate with an aggregate book value of approximately $121.5 million, in addition to approximately $1.2 billion of loan investments, approximately $897.2 million of CMBS, and approximately $413.4 million in other assets, based on our Consolidated Balance Sheet as of June 30, 2011.

During 2010, we recorded impairment charges totaling $912.1 million in continuing operations to reduce the carrying value of 692 properties to estimated fair value. All of the impaired properties are part of the Gramercy Realty portfolio and serve as collateral for the Goldman Mezzanine Loans. Substantially all of the impaired properties will be transferred to the mezzanine lenders pursuant to the Settlement Agreement. As a result of recording these impairments, our total stockholders’ equity, or book equity, is negative $549.3 million and $493.9 million as of June 30, 2011 and December 31, 2010, respectively. The carrying value of liabilities associated with the impaired properties have not been adjusted and remained outstanding as of June 30, 2011 and December 31, 2010, respectively. As of June 30, 2011, the liabilities of the impaired properties exceed the carrying value of the assets and accordingly, the subsequent transfer of assets and liabilities pursuant to the Settlement Agreement will generate gains as the carrying values of such liabilities are reduced to $0, which in turn will reduce our negative book equity balance. After all transfers under the Settlement Agreement are complete, which we anticipate will occur by December 15, 2011, we expect that stockholders’ equity will remain negative, however, such negative balance will be substantially lower than the negative $549.3 million balance presented on the June 30, 2011 balance sheet.

In September 2011, we entered into an asset management arrangement upon the terms and conditions set forth in the Settlement Agreement, or the Interim Management Agreement, to provide for our continued management of Gramercy Realty’s assets through December 31, 2013 for a fixed fee of $10.0 million annually, the reimbursement of certain costs and incentive fees equal to 10.0% of the excess of the equity value, if any, of the transferred collateral over $375.0 million plus all new capital invested into the transferred collateral by KBS, its affiliates and/or joint venture partners, or the Threshold Value Participation, and 12.5% of the excess equity value, if any, of the transferred collateral over $468.5 million plus all new capital invested into the transferred collateral by KBS, its affiliates and/or joint venture partners, or the Excess Value Participation. The minimum amount of the Threshold Value Participation equals $3.5 million. The Threshold Value Participation and the Excess Value Participation will be valued and paid following the earlier of December 13, 2013, subject to extension to no later than December 31, 2015, or the sale by KBS of at least 90% (by value) of the transferred collateral. Under the terms of the Interim Management Agreement, we do not forfeit our incentive fee rights unless we resign as manager or are terminated as manager for cause and, with respect to the Excess Value Participation, in the event of a Failure to Agree Termination (as defined below). The Interim Management Agreement may be terminated by either party without cause 90 days following written notice; however, any notice of termination given by us cannot be effective until December 31, 2011 at the earliest. Notwithstanding the foregoing, we have agreed with KBS to promptly commence and diligently seek to negotiate a full and complete management services agreement by no later than March 31, 2012. If the parties do not execute a mutually acceptable asset management services agreement prior to March 31, 2012, a Failure to Agree Termination shall be effectuated and the Interim Management Agreement shall automatically terminate on June 30, 2012, without liability or a penalty of any kind, except for our loss of the Excess Value Participation.

We rely on the credit and equity markets to finance and grow our business. Despite signs of improvement in 2011, market conditions remained difficult for us with limited, if any, availability of new debt or equity capital. Our stock price remained low and we currently have limited, if any access to the public or private equity capital markets. In this environment, we have sought to raise capital or maintain liquidity through other means, such as modifying debt arrangements, selling assets and aggressively managing our loan portfolio to encourage repayments, as well as reducing capital and overhead expenses and as a result, have engaged in limited new investment activity, other than reinvestment of available restricted cash within our CDOs.

We may need to modify our strategies, businesses or operations, and we may incur increased capital requirements and constraints to compete in a changed business environment. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects.

Notwithstanding the challenges which confront us and continued volatility within the capital markets, our board of directors remains committed to identifying and pursuing strategies and transactions that could preserve or improve our cash flows from our CDOs, increase our net asset value per share of common stock, improve our future access to capital or otherwise potentially create value for our stockholders. In considering these alternatives (which could include additional repurchases or issuances of our debt or equity securities or strategic sales of our company and our assets), we expect our board of directors will carefully consider the potential impact of any such transaction on our liquidity position before deciding to pursue it. We expect our board of directors will only authorize us to take any of these actions if they can be accomplished on terms our board of directors finds attractive. Accordingly, there is a substantial possibility that not all such actions can or will be implemented.

In early June 2011, our board of directors created a special committee to evaluate strategic alternatives of our Company following the anticipated disposition of Gramercy Realty’s assets. The committee is authorized to engage a financial advisor to assist in this process.

Our property management and investment business, which operates under the name Gramercy Realty, historically focused on the acquisition and management of commercial properties leased primarily to regulated financial institutions and affiliated users throughout the United States. Our commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination, acquisition and portfolio management of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage-backed securities, or CMBS, and other real estate-related securities. Neither Gramercy Realty nor Gramercy Finance is a separate legal entity but are divisions through which our property management and investment and commercial real estate finance businesses are conducted.

The aggregate carrying values, allocated by product type and weighted average coupons of Gramercy Finance’s loans, and other lending investments and CMBS investments as of June 30, 2011 and December 31, 2010, were as follows:

						Allocation by						Fixed Rate Average						Floating Rate Average
	Carrying Value (1)					Investment Type						Yield						Spread over LIBOR (2)
	2011			2010		2011			2010			2011			2010			2011		2010
Whole loans, floating rate	$	626,177	$	659,095			56.8	%		58.7	%		-			-		363 bps		330 bps
Whole loans, fixed rate		201,696			132,268		18.3	%		11.8	%		8.34	%		7.16	%		-		-
Subordinate interests in whole loans, floating rate		26,515			75,066		2.4	%		6.7	%		-			-		585 bps		297 bps
Subordinate interests in whole loans, fixed rate		128,067			46,468		11.6	%		4.1	%		8.92	%		6.01	%		-		-
Mezzanine loans, floating rate		61,632			152,349		5.6	%		13.5	%		-			-		734 bps		754 bps
Mezzanine loans, fixed rate		50,512			48,828		4.6	%		4.3	%		12.78	%		12.69	%		-		-
Preferred equity, floating rate		5,224			5,224		0.5	%		0.5	%		-			-		350 bps		350 bps
Preferred equity, fixed rate		2,291			4,230		0.2	%		0.4	%		7.22	%		7.25	%		-		-
Subtotal/ Weighted average		1,102,114			1,123,528		100.0	%		100.0	%		9.11	%		8.09	%	402 bps		400 bps
CMBS, floating rate		48,790			50,798		5.4	%		5.1	%		-			-		404 bps		394 bps
CMBS, fixed rate		848,397			954,369		94.6	%		94.9	%		7.41	%		8.37	%		-		-
Subtotal/ Weighted average		897,187			1,005,167		100.0	%		100.0	%		7.41	%		8.37	%	404 bps		394 bps
Total	$	1,999,301		$	2,128,695		100.0	%		100.0	%		7.94	%		8.32	%	402 bps		400 bps

(1)	Loans and other lending investments and CMBS investments are presented net of unamortized fees, discounts, unfunded commitments, reserves for loan losses, impairments and other adjustments.

(2)	Spreads over an index other than 30 day-LIBOR have been adjusted to a LIBOR based equivalent. In some cases, LIBOR is floored, giving rise to higher current effective spreads.

The period during which we are permitted to reinvest principal payments on the underlying assets into qualifying replacement collateral for our 2005 CDO and 2006 CDO has expired in July 2010 and July 2011, respectively, and will expire for our 2007 CDO in August 2012. In the past, our ability to reinvest has been instrumental in maintaining compliance with the overcollateralization and interest coverage tests for our CDOs. Following the conclusion of each CDO’s reinvestment period, our ability to maintain compliance with such tests for that CDO will be negatively impacted.

As of June 30, 2011, Gramercy Finance also held interests in one credit tenant net lease investments, or CTL investment and seven interests in real estate acquired through foreclosures.

As of June 30, 2011, Gramercy Realty owned a portfolio comprised of 620 bank branches, 320 office buildings and one land parcel, of which 52 bank branches were owned through an unconsolidated joint venture. Gramercy Realty’s consolidated properties aggregated approximately 25.3 million rentable square feet and its unconsolidated properties aggregated approximately 237 thousand rentable square feet. As of June 30, 2011, the occupancy of Gramercy Realty’s consolidated properties was 82.0% and the occupancy for its unconsolidated properties was 100%. Gramercy Realty’s two largest tenants are Bank of America and Wells Fargo Bank and as of June 30, 2011, they represented approximately 41.1% and 15.5%, respectively, of the rental income of Gramercy Realty’s portfolio and occupied approximately 42.7% and 16.6%, respectively, of its total rentable square feet.

Summarized in the table below are our key property portfolio statistics as of June 30, 2011 and December 31, 2010:

	Number of Properties					Rentable Square feet				Occupancy
Properties (1)	June 30, 2011			December31, 2010		June 30, 2011		December 31, 2010		June 30, 2011			December 31, 2010
Branches		568			571		3,669,601		3,689,190		84.2	%		84.4	%
Office Buildings		320			321		21,592,250		21,613,441		81.6	%		82.3	%
Land		1			2		-		-		-			-
Total		889	(2)		894		25,261,851		25,302,631		82.0	%		82.6	%

(1)

Excludes investments in unconsolidated joint ventures. Approximately 872 properties, of which 52 properties are held by an unconsolidated joint venture, comprising of approximately 20,935,656 rentable square feet, of which approximately 251,349 rentable square feet are held owned through an unconsolidated joint venture, or the Lender Portfolio, are expected to be subject to the Settlement Agreement and ownership will be transferred to Gramercy Realty’s mezzanine lenders, in exchange for a mutual release of claims among us and the mortgage and mezzanine lenders and, subject to certain termination provisions, our continued management of the properties on behalf of the mezzanine lenders for a fixed fee plus incentive fees. In addition, our Dana portfolio, which consists of 15 properties comprising of approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. We will continue to manage the Lender Portfolio.

(2)	As of June 30, 2011, includes the sale of five properties.

Liquidity

Liquidity is a measurement of the ability to meet cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay dividends and other general business needs. In addition to cash on hand, our primary sources of funds for short-term liquidity (within the next 12 months) requirements, including working capital, distributions, if any, debt service and additional investments, if any, consists of (i) cash flow from operations; (ii) proceeds and management fees from our existing CDOs; (iii) proceeds from principal and interest payments and rents on our investments; (iv) proceeds from potential loan and asset sales; (v) proceeds from the Interim Management Agreement and, to a lesser extent; (vi) new financings or additional securitization or CDO offerings and; (vii) proceeds from additional common or preferred equity offerings. We believe these sources of financing will be sufficient to meet our short term liquidity requirements. We do not anticipate having the ability in the near term to access new equity or debt capital through new warehouse lines, CDO issuances, term or credit facilities or trust preferred issuances, although we continue to explore capital raising options. In the event we are not able to successfully secure financing, we will rely primarily on cash on hand, cash flows from operations, principal, interest and lease payments on our investments, management fees, and proceeds from asset and loan sales to satisfy our liquidity requirements. If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset and loan sales in a timely manner or to receive anticipated proceeds from them or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations, and ability to make distributions to our stockholders.

Substantially all of our loan and other investments and CMBS are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO bonds and the remaining income, if any, is retained by us. Our CDO bonds contain minimum interest coverage and asset overcollateralization covenants that must be met in order for us to receive cash flow on the interests retained by us in the CDOs and to receive the subordinate collateral management fee earned. If we fail these covenants in some or all of the CDOs, all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO bonds and we may not receive some or all residual payments or the subordinate collateral management fee until that CDO regained compliance with such tests. As of July 2011 the most recent distribution date, our 2005 and 2006 CDOs were in compliance with their interest coverage and asset overcollateralization covenants, however the compliance margin was narrow and relatively small declines in collateral performance and credit metrics could cause the CDOs to fall out of compliance. We expect that the overcollateralization test for our 2005 CDO will fail at the October 2011 distribution date. Our 2005 CDO failed its overcollateralization test at the April 2011 and January 2011 distribution dates and our 2007 CDO failed its overcollateralization test at the August 2011, May 2011 and February 2011 distribution dates. The chart below is a summary of our CDO compliance tests as of the most recent distribution date (July 25, 2011 for our 2005 and 2006 CDOs and August 19, 2011 for our 2007 CDO):

Cash Flow Triggers	CDO 2005-1			CDO 2006-1			CDO 2007-1
Overcollateralization (1)
Current		118.96	%		109.21	%		87.26	%
Limit		117.85	%		105.15	%		102.05	%
Compliance margin		1.11	%		4.06	%		-14.79	%
Pass/Fail	Pass			Pass			Fail
Interest Coverage (2)
Current		650.49	%		695.19	%		N/A
Limit		132.85	%		105.15	%		N/A
Compliance margin		517.64	%		590.04	%		N/A
Pass/Fail	Pass			Pass				N/A

(1)

The overcollateralization ratio divides the total principal balance of all collateral in the CDO by the total bonds outstanding for the classes senior to those retained by us. To the extent an asset is considered a defaulted security, the asset’s principal balance is multiplied by the asset’s recovery rate which is determined by the rating agencies.

(2)

The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by us.

In the event of a breach of our CDO covenants that we could not cure in the near term, we would be required to fund our non-CDO expenses, with (i) cash on hand, (ii) income from any CDO not in default, (iii) income from our real property and unencumbered loan assets, (iv) management fees, (v) sale of assets, or (vi) accessing the equity or debt capital markets, if available.

The following discussion related to our Condensed Consolidated Financial Statements should be read in conjunction with our Condensed Consolidated Financial Statements appearing in Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Policies

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

Refer to our 2010 Annual Report on Form 10-K for a discussion of our critical accounting policies, which include variable interest entities, or VIEs, real estate and CTL investments, leasehold interests, investments in unconsolidated joint ventures, assets held-for-sale, commercial mortgage-backed securities, pledged government securities, tenant and other receivables, intangible assets, deferred costs, revenue recognition, reserve for loan losses, rent expense, stock-based compensation plans, incentive distribution (Class B Limited Partner Interest), derivative instruments and income taxes. There have been no changes to these policies in 2011 except as disclosed below.

Variable Interest Entities

Consolidated VIEs

As of June 30, 2011, the Condensed Consolidated Balance Sheet includes $2,253,465 of assets and $2,744,413 of liabilities related to three consolidated VIEs. Due to the non-recourse nature of these VIEs and other factors discussed below, our net exposure to loss from investments in these entities is limited to its beneficial interests in these VIEs.

Collateralized Debt Obligations

We currently consolidate three CDOs, which are VIEs. These CDOs invest in commercial real estate debt instruments, the majority of which we originated within the CDOs, and are financed by the debt and equity issued. We are named as collateral manager of all three CDOs. As a result of consolidation, our subordinate debt and equity ownership interests in these CDOs have been eliminated, and the Condensed Consolidated Balance Sheet reflects both the assets held and debt issued by these CDOs to third parties. Similarly, the operating results and cash flows include the gross amounts related to the assets and liabilities of the CDOs, as opposed to our net economic interests in these CDOs.

Our interest in the assets held by these CDOs is restricted by the structural provisions of these entities, and the recovery of these assets will be limited by the CDOs’ distribution provisions, which are subject to change due to non-compliance with covenants. The liabilities of the CDO trusts are non-recourse, and can generally only be satisfied from the respective asset pool of each CDO.

We are not obligated to provide any financial support to these CDOs. As of June 30, 2011, we have no exposure to loss as a result of the investment in these CDOs. Since we are the collateral manager of the three CDOs and can make decisions related to the collateral that would most significantly impact the economic outcome of the CDOs, we have concluded that we are the primary beneficiary of the CDOs.

Unconsolidated VIEs

Investment in Commercial Mortgage-Backed Securities

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

We are not obligated to provide, nor have we provided, any financial support to these entities. The majority of our securities portfolio, with an aggregate face amount of $1,168,403, is financed by our CDOs, and our exposure to loss is therefore limited to our interests in these consolidated entities described above. We have not consolidated the aforementioned CMBS investments due to the determination that based on the structural provisions and nature of each investment, we do not directly control the activities that most significantly impact the VIEs’ economic performance.

We further analyzed our investment in controlling class CMBS to determine if we are the primary beneficiary. At June 30, 2011, we owned securities of a controlling non-investment grade CMBS investment, GS Mortgage Securities Trust 2007-GKK1, or the Trust, with a carrying value of $0. The total par amounts of CMBS issued by the Trust was $633,654.

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

At June 30, 2011, our maximum exposure to loss as a result of its investment in the Trust totaled $0 which equals the book value of this investment as of June 30, 2011.

Stock-Based Compensation Plans

The fair value of each stock option granted is estimated on the date of grant for options issued to employees, and quarterly for options issued to non-employees, using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2011 and 2010:

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

Results of Operations

Comparison of the three months ended June 30, 2011 to the three months ended June 30, 2010

Revenues

	2011			2010			Change
Rental revenue	$	74,350		$	76,654		$	(2,304	)
Investment income		39,748			43,808			(4,060	)
Operating expense reimbursement		29,058			29,120			(62	)
Other income		19,541			2,086			17,455
Total revenues	$	162,697		$	151,668		$	11,029
Equity in net loss of joint ventures	$	(706	)	$	(1,017	)	$	311
Gain on extinguishment of debt	$	10,870		$	-		$	10,870

Rental revenue for the three months ended June 30, 2011 is primarily comprised of revenue earned on properties within our Gramercy Realty division. The decrease in rental revenue of $2,304 is primarily due to due to the non-renewal of nine leases and renewal of 37 leases at lower annual rents within our Wells Fargo portfolio resulting a decrease of $1,525, terminations and lease expiration within our Dana portfolio of $782, the termination of space within our Charlotte Office Building by Bank of America resulting is a decrease in rental income of $538, and terminations and expiration by 3rd party tenants within our Bank of America portfolio totaling $597. These reductions are partially offset by an increase of $1,060 from properties that we foreclosed on or acquired controlling interest in since July 2010.

Investment income is generated on our whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS. For the three months ended June 30, 2011 and 2010, $26,129 and $25,200, respectively, were earned on fixed rate investments while the remaining $13,619 and $18,608, respectively, were earned on floating rate investments. The decrease of $4,060 over the prior period is primarily due to the payoff of six loans accounting for a $5,342 decrease in investment income, $1,232 due to the suspensions and reversals of interest income accruals, and a $984 decrease due to loans foreclosed upon. These decreases were partially offset by $4,326 increase in investments income on new loan and lending investments since March 2010.

Operating expense reimbursement was $29,058 for the three months ended June 30, 2011 and $29,120 for the three months ended June 30, 2009, a decrease of $62. The decrease is due to lower operating expenses within our Bank of America and Dana portfolios resulting in lower reimbursement income of $271, lower real estate taxes reimbursement of $149 on our Bank of America portfolio due to appeals of assessed values. These reductions are offset by increased operating expenses on Wells Fargo portfolio, 101 Independence office building and other portfolios resulting in increased reimbursement of $361.

Other income of $19,541 for the three months ended June 30, 2011 is primarily composed of gains on the sale of investments totaling $17,281, revenues from properties we foreclosed on or acquired a controlling interest in since July 2010 of $1,053 and $704 of interest on restricted cash balances and other cash balances held by us. For the three months ended June 30, 2010, other income is primarily composed of revenues from our foreclosed properties of $736, and $732 of interest on restricted cash balances and other cash balances held by us.

The net loss on investments in unconsolidated joint ventures of $706 for the three months ended June 30, 2011 represents our proportionate share of the loss generated by our joint venture interests including $1,164 of real estate-related depreciation and amortization, which when added back, results in a contribution to Funds from Operations, or FFO, of $458. The net loss on investments in unconsolidated joint ventures of $1,017 for the three months ended June 30, 2010 represents our proportionate share of income generated by our joint venture interests including $1,148 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $131. Our use of FFO as an important non-GAAP financial measure is discussed in more detail below.

During the three months ended June 30, 2011, we repurchased, at a discount $37,859 notes issued by our three CDOs, generating net gains on early extinguishment of debt of $10,870. During same period in 2010, we did not purchase any notes issued by our three CDOs and did not generate any gain on extinguishment of debt.

Expenses

	2011		2010		Change
Property operating expenses	$	49,091	$	45,102	$	3,989
Interest expense		56,690		48,476		8,214
Depreciation and amortization		18,626		26,399		(7,773	)
Management, general and administrative		7,694		9,830		(2,136	)
Impairment on loans held-for-sale and CMBS		6,037		2,277		3,760
Provision for loan loss		18,783		13,230		5,553
Provision for taxes		3		66		(63	)
Total expenses	$	156,924	$	145,380	$	11,544

Property operating expenses for the three months ended June 30, 2011 is primarily comprised of expenses incurred on our portfolio of properties owned by our Gramercy Realty division. These expenses increased $3,989 from the $45,102 recorded in the three months ended June 30, 2010 to $49,091 recorded in the three months ended June 30, 2011. The increase is primarily attributable to expenses totaling $2,357 from properties we foreclosed on or acquired a controlling interest in since July 2010, an increase in non-cash impairment charges related to sub-leased properties of $691, $343 of costs incurred related to nine vacant Wells Fargo properties, $636 of additional real estate tax assessments, and $820 of increased repair and maintenance costs. These increases are offset by $664 of savings resulting from real estate tax assessment appeals and $427 reduction in property management costs.

Interest expense was $56,690 for the three months ended June 30, 2011 compared to $48,476 for the three months ended June 30, 2010. The increase of $8,214 is primarily attributed to increased interest rates on our Goldman Mortgage Loan, Goldman Mezzanine Loans totaling $8,861, and higher interest within our CDOs of $466 as a result of our derivatives. These increases were partially offset by $802 reduction of interest expense due to the redemption of the $52,500 Junior Subordinated Notes, and reduced interest of $605 in our Gramercy Realty portfolio due to the amortization of the outstanding principal balances.

We recorded depreciation and amortization expenses of $18,626 for the three months ended June 30, 2011, compared to $26,399 for the three months ended June 30, 2010. The decrease of $7,773 is primarily due to reduced depreciation and amortization of $8,090 on our Realty assets resulting from the recording an impairment on our Gramercy Realty portfolio of $909,805 in December 2010. These reductions are offset by additional depreciation and amortization of $382 on property we foreclosure on or acquired controlling interest since July 2010.

Management, general and administrative expenses were $7,694 for the three months ended June 30, 2011, compared to $9,830 for the same period in 2010. The decrease of $2,136 includes $1,410 of lower salaries and benefits due to reduced and reassigned staff and lower legal and professional fees $1,390. These savings were offset by increased audit and tax fees of $446 and insurance expense of $239.

During the three months ended June 30, 2011 and June 30, 2010, we recorded impairment charges of $6,037 and $2,277, respectively. During the three months ended June 30, 2011, we recorded impairment charges of $6,037 other-than-temporary impairment on one CMBS investment. During the three months ended June 30, 2010, we recorded impairment charges of $2,000 on one loan classified as held-for-sale to reduce the carrying values to its fair value based upon the anticipated selling prices and $277 on the disposition of two CMBS investments.

Provision for loan loss was $18,783 for the three months ended June 30, 2011, compared to $13,230 for the three months ended June 30, 2010, an increase of $5,553. The provision was based upon periodic credit reviews of our loan portfolio.

Provision for taxes was $3 for the three months ended June 30, 2011, compared to $66 for the three months ended June 30, 2010.

Comparison of the six months ended June 30, 2011 to the six months ended June 30, 2010

Revenues

	2011			2010			Change
Rental revenue	$	149,909		$	154,651		$	(4,742	)
Investment income		80,259			88,059			(7,800	)
Operating expense reimbursement		57,316			57,988			(672	)
Gain on sales and other income		23,862			3,955			19,907
Total revenues	$	311,346		$	304,653		$	6,693
Equity in net income of joint ventures	$	(1,393	)	$	(2,687	)	$	1,294
Gain on extinguishment of debt	$	14,526		$	7,740		$	6,786

Rental revenue for the six months ended June 30, 2011 and 2010 were $149,909 and $154,651, respectively. The decrease of $4,742 is related to the non-renewal of nine leases and renewal of 37 leases at lower annual rents within our Wells Fargo portfolio resulting in a decrease of $3,014, decreased amortization of market lease intangibles of $1,278, lease terminations reducing rental income by $3,824 within our Bank of America portfolio. These are offset by $1,372 of additional rental income in our Dana portfolio, Charlotte Office Building, Jersey City Office Building and Wells Fargo bank branch portfolios, and $2,130 from properties that we foreclosed on or acquired a controlling interest in since July 2010.

Investment income is generated on our whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity interests and CMBS. For the six months ended June 30, 2011 and 2010, $51,542 and $38,725, respectively, were earned on fixed rate investments while the remaining $28,717 and $49,334, respectively, were earned on floating rate investments. The decrease of $7,800 over the prior period is primarily due to the payoff of six loans accounting for a $8,822 decrease in investment income, $5,039 due to the suspensions and reversals of interest income accruals, and a $1,983 decrease to loans foreclosed upon. These decreases were partially offset by $8,831 increase in investments income on new loan and lending investments since March 2010.

Operating expense reimbursement of $57,316 for the six months ended June 30, 2011 and $57,988 for the six months ended June 30, 2010, a decrease of $672. The decrease is due to lower real estate taxes reimbursement of $355 on our Bank of America portfolio due to appeals of assessed values and decreased reimbursement rate in the Dana portfolio resulting in a decrease of $694. These reductions are offset by increased reimbursement rate in the 101 Independence portfolio of $254, increased operating expenses on Bank of America portfolio resulting in increased reimbursement of $260.

Other income of $23,862 for the six months ended June 30, 2011 is primarily composed of gains on the sale of investments totaling $18,738, revenues from properties we foreclosed on or acquired a controlling interest in of $2,856, and $1,665 of interest on restricted cash balances and other cash balances held by us. For the six months ended June 30, 2010, other income is $3,955 and is primarily composed of revenues from our foreclosed properties of $740, lease termination fees of $783, and $1,679 of interest on restricted cash balances and other cash balances held by us.

The loss on investments in unconsolidated joint ventures of $1,393 for the six months ended June 30, 2011 represents our proportionate share of the loss generated by our joint venture interests including $2,328 of real estate-related depreciation and amortization, which when added back, results in a contribution to FFO of $935. The loss on investments in unconsolidated joint ventures of $2,687 for the six months ended June 30, 2010 represents our proportionate share of the loss generated by our joint venture interests including $2,296 of real estate-related depreciation and amortization, which when added back, results in a deduction to FFO of $391. Our use of FFO as an important non-GAAP financial measure is discussed in more detail below.

During the six months ended June 30, 2011 and 2010, we repurchased at a discount, $48,259 and $19,000 of notes, respectively, issued by our three CDOs, generating net gains on early extinguishment of debt of $14,526 and $7,740, respectively.

Expenses

	2011		2010		Change
Property operating expenses	$	99,787	$	91,219	$	8,568
Interest expense		107,280		98,746		8,534
Depreciation and amortization		37,511		54,076		(16,565	)
Management, general and administrative		14,111		17,316		(3,205	)
Impairment on loans held-for-sale and CMBS		6,037		14,603		(8,566	)
Provision for loan loss		36,283		54,390		(18,107	)
Provision for taxes		73		104		(31	)
Total expenses	$	301,082	$	330,454	$	(29,372	)

Property operating expenses were $99,787 and $91,219 for the six months ended June 30, 2011 and 2010, respectively, and increased $8,568.

The increase is primarily attributable to expenses totaling $5,001 from properties we foreclosed on or acquired controlling interest in since December 2009, $1,420 in professional fees related to negotiating with mezzanine lenders, an increase in non-cash impairment charges related to sub-leased properties of $731, $605 of costs incurred related to nine vacant Wells Fargo properties, $1,007 of additional real estate tax assessments, $1,008 of additional salaries and benefit costs due to reassigned staff, $766 of increased repair and maintenance costs, and $212 of additional rent charges on the Jersey City Office Building . These increases are offset by $1,378 of savings resulting from real estate tax assessment appeals and $1,022 reduction in property management costs.

Interest expense was $107,280 for the six months ended June 30, 2011 compared to $98,746 for the six months ended June 30, 2010. The increase of $8,534 is primarily attributed to increased interest rates on our Goldman Mortgage Loan and Goldman Mezzanine Loans totaling $11,795, and higher interest within our CDOs of $202 as a result of our derivatives. These increases were partially offset by $1,705 reduction of interest expense due the redemption of the $52,500 Junior Subordinated Notes, reduced amortization of financing costs of $202 and reduced interest of $1,298 in our Realty portfolio due to the amortization of the outstanding principal balances.

We recorded depreciation and amortization expenses of $37,511 for the six months ended June 30, 2011 and $54,076 for the six months ended June 30, 2010. The decrease of $16,565 compared to the comparable period in the prior year is primarily attributable to due reduced depreciation and amortization of $17,063 on our Realty assets resulting from the recording an impairment on our Realty portfolio of $909,805 in December 2010. These reductions are offset by additional depreciation and amortization of $727 on property we foreclosure on or acquired a controlling interest since December 2010.

Management, general and administrative expenses were $14,111 for the six months ended June 30, 2011, compared to $17,316 for the same period in 2010. The decrease of $3,205 includes $2,531 of lower salaries and benefits due to reduced and reassigned staff and lower legal and professional fees $1,368. These savings were offset by increased audit and tax fees of $575 and insurance expense of $249.

During the six months ended June 30, 2011 and 2010, we recorded impairment charges totaling $6,037 and $14,603, respectively. During the six months ended June 30, 2011, we recorded impairment charges of $6,037 other-than-temporary impairment on one CMBS investment. During the six months ended June 30, 2010, we recorded impairment charges consisting of $12,326 of other-than-temporary impairments due to adverse change in expected cash flows related to credit losses for six CMBS investments, a $2,000 impairment on one loan classified as held-for-sale as of June 30, 2010, and an impairment of $277 on the disposition of two CMBS investments.

Liquidity and Capital Resources

Liquidity is a measurement of the ability to meet cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay dividends, if any, and other general business needs. In addition to cash on hand, our primary sources of funds for short-term liquidity requirements, including working capital, distributions, if any, debt service and additional investments, if any, consist of: (i) cash flow from operations; (ii) proceeds and management fees from our existing CDOs; (iii) proceeds from principal and interest payments and rents on our investments; (iv) proceeds from potential loan and asset sales; (v) proceeds from the Interim Management Agreement and, to a lesser extent; (vi) new financings or additional securitizations or CDO offerings and; (vii) proceeds from additional common or preferred equity offerings. We believe these sources of financing will be sufficient to meet our short-term liquidity requirements. We do not anticipate having the ability in the near-term to access equity or debt capital through new warehouse lines, CDO issuances, term or credit facilities or trust preferred issuances, although we continue to explore capital raising options. In the event we are not able to successfully secure financing, we will rely primarily on cash on hand, cash flows from operations, principal, interest and lease payments on our investments, management fees, and proceeds from asset and loan sales to satisfy our liquidity requirements. If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset and loan sales in a timely manner or to receive anticipated proceeds from them or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations, our ability to make distributions to our stockholders.

Our ability to fund our short-term liquidity needs, including debt service and general operations (including employment related benefit expenses) through cash flow from operations can be evaluated through the Condensed Consolidated Statement of Cash Flows provided in our financial statements.

Beginning with the third quarter of 2008 our board of directors elected not to pay a dividend on our common stock. Additionally our board of directors elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. As of June 30, 2011 and December 31, 2010, we accrued $19,695 and $16,114, respectively, for the Series A preferred stock dividends. As a result, we have accrued dividends for over six quarters which pursuant to the terms of our charter permits the Series A preferred stockholders to elect an additional director to our board of directors. We may, or upon a properly submitted request of the holders of the Series A preferred stock representing 20% or more of the liquidation value of the Series A preferred stock shall, call a special meeting of our stockholders to elect such additional director in accordance with the provisions of our bylaws and other procedures established by our board of directors. In accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full. We do not know when or if we will pay future dividends, including accumulated and unpaid dividends on the Series A preferred stock.

Our ability to meet our long-term liquidity (beyond the next 12 months) and capital resource requirements will be subject to obtaining additional debt financing and equity capital. Our inability to renew, replace or expand our sources of financing on substantially similar terms, or any at all may have an adverse effect on our business and results of operations. Any indebtedness we incur will likely be subject to continuing or more restrictive covenants and we will likely be required to make continuing representations and warranties in connection with such debt.

As of the date of this filing, we expect that our cash on hand and cash flow from operations will be sufficient to satisfy our current and our anticipated liquidity needs as well as our recourse liabilities.

Our current and future borrowings may require us, among other restrictive covenants, to keep uninvested cash on hand, to maintain a certain portion of our assets free from liens and to secure such borrowings with assets. These conditions could limit our ability to do further borrowings. We were in compliance with all such covenants as of as of June 30, 2011, except we were not in compliance with the tangible net worth covenant under our loan agreement with PB Capital Corporation, or the PB Loan Agreement, and such non-compliance may permit the lender to exercise remedies against the mortgage collateral on a non-recourse basis. In September 2011, pursuant to the Settlement Agreement, the PB Loan Agreement and the related collateral will be transitioned to the mezzanine lenders. Accordingly, as a result of the execution of the Settlement Agreement, any acceleration of the PB Loan Agreement loan is not expected to have an adverse effect on us. If we are unable to make required payments under such borrowings, breach any representation or warranty in the loan documents or violate any covenant contained in a loan document, lenders may accelerate the maturity of our debt. If we are unable to retire our borrowings in such a situation, (i) we may need to prematurely sell the assets securing such debt, (ii) the lenders could accelerate the debt and foreclose on our assets pledged as collateral to such lenders, (iii) such lenders could force us into bankruptcy, (iv) such lenders could force us to take other actions to protect the value of their collateral and/or (v) our other debt financings could become immediately due and payable. Any such event would have a material adverse effect on our liquidity, the value of our common stock, and our ability to make distributions to our stockholders.

The majority of our loan and other investments are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO bonds and the remaining income, if any, is retained by us. Our CDO indentures contain minimum interest coverage and asset overcollateralization covenants that must be met in order for us to receive cash flow on the interests retained by us and to receive the subordinate collateral management fee earned. If some or all of our CDOs fail to comply with the covenants all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO bonds and we may not receive some or all residual payments or the subordinate collateral management fee until that CDO regained compliance with such tests. As of July 2011, our 2005 and 2006 CDOs were in compliance with their interest coverage and asset overcollateralization covenants; however, the compliance margin was narrow and relatively small declines in collateral performance and credit metrics could cause the CDO fall out of compliance. We expect that the overcollateralization test for the 2005 CDO will fail at the October 2011 distribution date. Our 2005 CDO failed its overcollateralization test at the April 2011 and January 2011 distribution dates and our 2007 CDO failed the overcollateralization test at the August 2011, May 2011 and February 2011 distribution dates.

To maintain our qualification as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income, if any. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital for operations. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. However, in accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A Preferred Stock are paid in full.

Cash Flows

Net cash provided by operating activities decreased $16,945 to $29,979 for the six months ended June 30, 2011 compared to cash provided by of $46,924 for same period in 2010. Operating cash flow was generated primarily by net interest income from our commercial real estate finance segment and net rental income from our property investment segment. The decrease in operating cash flow for the six months ended June 30, 2011 compared to the same period in 2010 was primarily due to a decrease in operating assets and liabilities of $31,020. The increase in net income of $37,367 is primarily attributable to the net realized gain on loans of $17,151 and a decrease in provision of loan loss of $18,107.

Net cash provided by investing activities for the six months ended June 30, 2011 was $72,467 compared to net cash used in investing activities of $28,193 during the same period in 2010. The increase in cash flow from investing activities is primarily attributable to proceeds from the sale of held-for-sale securities in the current period.

Net cash used in financing activities for the six months ended June 30, 2011 was $156,343 as compared to net cash used in financing activities of $23,345 during the same period in 2010. The change is primarily attributable to the increase in restricted cash in the current period and the repayments and repurchase of CDOs.

Capitalization

Our authorized capital stock consists of 125.0 million shares, $0.001 par value, of which we have authorized the issuance of up to 100.0 million shares of common stock, $0.001 par value per share, and 25.0 million shares of preferred stock, par value $0.001 per share. As of June 30, 2011, 49,999,739 shares of common stock and 3,525,822 shares of preferred stock were issued and outstanding.

Preferred Stock

Beginning with the fourth quarter of 2008, our board of directors elected not to pay the quarterly Series A preferred stock dividends of $0.50781 per share. As of June 30, 2011 and December 31, 2010, we have accrued Series A preferred stock dividends of $19,695 and $16,114, respectively. As a result, we have accrued dividends for over six quarters which pursuant to the terms of our charter, permits the Series A preferred stockholders to elect an additional director to our board of directors. We may, or upon a properly submitted request of the holders of the Series A preferred stock representing 20% or more of the liquidation value of the Series A preferred stock, shall call a special meeting of our stockholders to elect such additional director in accordance with the provisions of our bylaws and other procedures established by our board of directors relating to election of directors.

Market Capitalization

At June 30, 2011, our CDOs and mortgage loans (including the Goldman Mortgage Loan and the Goldman Mezzanine Loans) represented 95% of our consolidated market capitalization of $4,987,487 (based on a common stock price of $3.03 per share, the closing price of our common stock on the New York Stock Exchange on June 30, 2011). Market capitalization includes our consolidated debt and common and preferred stock.

Indebtedness

The table below summarizes secured and other debt at June 30, 2011 and December 31, 2010:

	June 30, 2011		December 31, 2010
Mortgage notes payable	$	1,618,120	$	1,640,671
Mezzanine notes payable		549,456		549,713
Collateralized debt obligations		2,580,266		2,682,321

Total	$	4,747,842	$	4,872,705

Cost of debt	LIBOR+3.18%		LIBOR+2.47%

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

Mortgage and Mezzanine Loans

Certain real estate assets are subject to mortgage and mezzanine liens. As of June 30, 2011, 941 (including 52 properties held by an unconsolidated joint venture) of our real estate assets were encumbered with mortgages and mezzanine debt with a cumulative outstanding balance of $2,167,576. In September 2011, pursuant to the Settlement Agreement with respect to the Goldman Mortgage Loans and the Goldman Mezzanine Loans, the mortgage notes payable and the related collateral will be transitioned to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among the Company and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for the Company’s continued management of the Lender Portfolio on behalf of the mezzanine lenders for a fixed fee plus incentive fees.

Our mortgage notes payable typically require that specified loan-to-value and debt service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not satisfied, in addition to other conditions that we may have to observe, our ability to release properties from the financing may be restricted and the lender may be able to “trap” portfolio cash flow until the required ratios are met on an ongoing basis. As of June 30, 2011 and December 31, 2010, we were in covenant compliance on all of our mortgage and mezzanine loans, except that, as of June 30, 2011 and December 31, 2010, we were out of debt service coverage compliance under two of our mortgage note financings. Such non-compliance does not constitute an event of default under the applicable loan agreements. Under one of the loans, the lender has the ability to restrict distributions which are limited to budgeted property operating expenses; under the other loan, the lender has the right to replace the management of the property. We also were not in compliance with the tangible net worth covenant under our PB Loan Agreement, and such non-compliance may permit the lender to exercise remedies against the mortgage collateral on a non-recourse basis. In September 2011, pursuant to the Settlement Agreement, the PB Loan Agreement and the related collateral will be transitioned to the mezzanine lenders. Accordingly, as a result of the execution of the Settlement Agreement, any acceleration of the PB Loan Agreement loan is not expected to have an adverse effect on us.

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

Goldman Mortgage Loan

On April 1, 2008, certain of our subsidiaries, collectively, the Goldman Loan Borrowers, entered into the Goldman Mortgage Loan with GSMC, Citicorp and SL Green in connection with a mortgage loan in the amount of $250,000, which is secured by certain properties owned or ground leased by the Goldman Loan Borrowers. The Goldman Mortgage Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mortgage Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mortgage Loan. The Goldman Mortgage Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during the first six months, payable to the lender, as long as simultaneously therewith a proportionate prepayment of the Goldman Mezzanine Loans (discussed below) shall also be made on such date. In August 2008, an amendment to the loan agreement was entered into for the Goldman Mortgage Loan in conjunction with the bifurcation of the Goldman Mezzanine Loan into two separate mezzanine loans. Under this loan agreement amendment, the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. We have accrued interest of $661 and $256 and borrowings of $240,523 and $240,523 as of June 30, 2011 and December 31, 2010, respectively.

In March 2010, we extended the maturity date of the Goldman Mortgage Loan to March 2011, and amended certain terms of the loan agreement, including, among others, (i) a prohibition on distributions from the Goldman Loan Borrowers to us, other than to cover direct costs related to executing the extension and reimbursement of not more than $2,500 per quarter of corporate overhead actually incurred and allocated to Gramercy Realty, (ii) requirement of $5,000 of available cash on deposit in a designated account on the commencement date of the Goldman Mortgage Loan extension term, and (iii) within 90 days after the first day of the Goldman Mortgage Loan extension term, delivery by the Goldman Loan Borrowers to GSMC, Citicorp and SL Green of a comprehensive long-term business plan and restructuring proposal addressing repayment of the Goldman Mortgage Loan. Subsequent to the final maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans, we entered into a series of short term extensions to provide additional time to exchange and consider proposals for an extension, modification, restructuring or refinancing of the Goldman Mortgage Loan and the Goldman Mezzanine Loans and to explore an orderly transition of the collateral to the lenders if such discussions fail. On May 9, 2011, we announced that the scheduled maturity of the Goldman Mortgage Loan and the Goldman Mezzanine Loans occurred without repayment and without an extension or restructuring of the loans by the lenders.

Notwithstanding the maturity and non-repayment of the loans, we maintained active communications with the lenders and in September 2011, we entered into the Settlement Agreement for an orderly transition of substantially all of Gramercy Realty assets to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among us and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for our continued management of the Lender Portfolio on behalf of the mezzanine lenders for a fixed fee plus incentive fees. In July 2011, our Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to our mortgage lender through a deed in lieu of foreclosure. Subsequent to the execution of the Settlement Agreement, the business of Gramercy Realty will change from being primarily an owner of commercial properties to being primarily a third party manager of commercial properties. The scale of Gramercy Realty’s revenues will decline as a substantial portion of net revenues from property operations will be replaced with fee revenues of a substantially smaller scale. Additionally, as assets are transferred, its total assets and liabilities are expected to decline substantially. The transition of Gramercy Realty’s business and the effects of these changes on our Consolidated Financial Statements are expected to be completed by December 31, 2011.

Goldman Senior and Junior Mezzanine Loans

On April 1, 2008, certain of our subsidiaries, collectively, the Mezzanine Borrowers, entered into a mezzanine loan agreement with GSMC, Citicorp and SL Green in connection with a mezzanine loan in the amount of $600,000, or the Goldman Mezzanine Loan, which is secured by pledges of certain equity interests owned by the Mezzanine Borrowers and any amounts receivable by the Mezzanine Borrowers whether by way of distributions or other sources. The Goldman Mezzanine Loan bore interest at 4.35% over one-month LIBOR. The Goldman Mezzanine Loan provides for customary events of default, the occurrence of which could result in an acceleration of all amounts payable under the Goldman Mezzanine Loan. The Goldman Mezzanine Loan allows for prepayment under the terms of the agreement, subject to a 1.00% prepayment fee during the first six months, payable to the lender, as long as simultaneously therewith a proportionate prepayment of the Goldman Mortgage Loan shall also be made on such date. In addition, under certain circumstances the Goldman Mezzanine Loan is cross-defaulted with events of default under the Goldman Mortgage Loan and with other mortgage loans pursuant to which an indirect wholly-owned subsidiary of ours is the mortgagor. In August 2008, the Goldman Mezzanine Loan was bifurcated into two separate mezzanine loans (the Junior Mezzanine Loan and the Senior Mezzanine Loan) by the lenders and the Senior Mezzanine Loan was assigned to KBS. Additional loan agreement amendments were entered into for the Goldman Mezzanine Loan and Goldman Mortgage Loan. Under these loan agreement amendments, the Junior Mezzanine Loan bears interest at 6.00% over LIBOR and the Senior Mezzanine Loan bears interest at 5.20% over LIBOR, and the Goldman Mortgage Loan bears interest at 1.99% over LIBOR. The weighted average of these interest rate spreads is equal to the combined weighted average of the interest rates spreads on the initial loans. The Goldman Mezzanine Loans encumber all properties held by Gramercy Realty. We have accrued interest of $15,547 and $1,454 and borrowings of $549,456 and $549,713 as of June 30, 2011 and December 31, 2010, respectively.

Notwithstanding the maturity and non-repayment of the loans, we maintained active communications with the lenders and in September 2011, we entered into the Settlement Agreement for an orderly transition of substantially all of Gramercy Realty assets to the mezzanine lenders, in exchange for a mutual release of claims among us and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for our continued management of the Lender Portfolio on behalf of the mezzanine lenders for a fixed fee plus incentive fees. In July 2011, our Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure. Subsequent to the execution of the Settlement Agreement, the business of Gramercy Realty will change from being primarily an owner of commercial properties to being primarily a third party manager of commercial properties. The scale of Gramercy Realty’s revenues will decline substantially as a substantial portion of net revenues from property operations will be replaced with fee revenues of a substantially smaller scale. Additionally, as assets are transferred, our total assets and liabilities are expected to decline substantially. The transition of Gramercy Realty’s business and the effects of these changes on our consolidated financial statements are expected to be complete by December 31, 2011.

Collateralized Debt Obligations

Our loans and other investments serve as collateral for our CDO securities, and the income generated from these investments is used to fund interest obligations of our CDO securities and the remaining income, if any, is retained by us. The CDO indentures contain minimum interest coverage and asset overcollateralization covenants that must be satisfied in order for us to receive cash flow on the interests retained by us in our CDOs and to receive the subordinate collateral management fee earned. If some or all of our CDOs fail these covenants, all cash flows from the applicable CDO other than senior collateral management fees would be diverted to repay principal and interest on the most senior outstanding CDO securities, and we may not receive some or all residual payments or the subordinate collateral management fee until the applicable CDO regained compliance with such tests. As of the July 2011 distribution date, our 2005 and 2006 CDOs were in compliance with their interest coverage and asset overcollateralization covenants, however the compliance margin was narrow and relatively small declines in collateral performance and credit metrics could cause the CDOs to fall out of compliance. We expect that the overcollateralization test for the 2005 CDO will fail at the October 2011 distribution date. Our 2005 CDO failed its overcollateralization test at the April 2011 and January 2011 distribution dates and our 2007 CDO failed its overcollateralization test at the August 2011, May 2011 and February 2010 distribution dates.

During the six months ended June 30, 2011 and 2010, we repurchased, at a discount, $48,259 and $19,000, respectively, of notes previously issued by one of our three CDOs. We recorded a net gain on the early extinguishment of debt of $14,526 and $7,740, for the six months ended June 30, 2011 and 2010, respectively.

Contractual Obligations

Combined aggregate principal maturities of our CDOs, mortgage loans (including the Goldman Mortgage Loan and Senior and Junior Mezzanine Loans), unfunded loan commitments and operating leases as of June 30, 2011 are as follows:

	CDOs		Mortgage and Mezzanine Loans (1)		Interest Payments		Unfunded Loan Commitments(2)		Operating Leases		Total
2011 (July 1 - December 31)	$	-	$	803,672	$	76,047	$	3,561	$	10,695	$	893,975
2012		-		80,736		146,238		-		21,246		248,220
2013		-		602,909		131,011		-		20,739		754,659
2014		-		12,884		108,175		-		20,214		141,273
2015		-		47,650		103,794		-		19,384		170,828
Thereafter		2,580,266		609,847		212,539		-		158,325		3,560,977
Above / Below Market Interest		-		9,878		-		-		-		9,878
Total	$	2,580,266	$	2,167,576	$	777,804	$	3,561	$	250,603	$	5,779,810

(1)

Certain of our real estate assets are subject to mortgage liens. As of June 30, 2011, 709 real estate assets were encumbered with 25 mortgages with a cumulative outstanding balance of approximately $1,608,242. As of June 30, 2011, the mortgages’ balance ranged in amount from approximately $382 to $458,391 and had maturity dates ranging from approximately five months to 19 years. As of June 30, 2011, 23 of the loans had fixed interest rates ranging 5.06% to 10.29% and four variable rate loans had interest rates ranging from 1.84% to 10.20%. In September 2011, pursuant to the Settlement Agreement with respect to the Goldman Mortgage Loan and the Goldman Mezzanine Loans, the mortgage notes payable and the related collateral will be transitioned to the mezzanine lenders in full satisfaction of Gramercy Realty’s obligations with respect to Gramercy Realty’s Goldman Mortgage Loan and the Goldman Mezzanine Loans, in exchange for a mutual release of claims among us and the mortgage and mezzanine lenders and, subject to certain termination provisions, an arrangement for our continued management of the Lender Portfolio on behalf of the mezzanine lenders for a fixed fee plus incentive fees. In July 2011, our Dana portfolio, which consists of 15 properties totaling approximately 3.8 million rentable square feet, was transferred to its mortgage lender through a deed in lieu of foreclosure.

(2)	Based on loan budgets and estimates.

Off-Balance-Sheet Arrangements

We have several off-balance-sheet investments, including joint ventures and structured finance investments. These investments all have varying ownership structures. Substantially all of our joint venture arrangements are accounted for under the equity method of accounting as we have the ability to exercise significant influence, but not control over the operating and financial decisions of these joint venture arrangements. Our off-balance-sheet arrangements are discussed in Note 5, “Investments in Unconsolidated Joint Ventures” in the accompanying financial statements.

Dividends

To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, if any, determined before taking into consideration the dividends paid deduction and net capital gains. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, which would only be paid out of available cash, we must first meet both our operating requirements and scheduled debt service on our mortgages and loans payable. We may elect to pay dividends on our common stock in cash or a combination of cash and shares of common stock as permitted under U.S. federal income tax laws governing REIT distribution requirements. Beginning with the third quarter of 2008, our board of directors elected not to pay a dividend on our common stock. Our board of directors also elected not to pay the Series A preferred stock dividend of $0.50781 per share beginning with the fourth quarter of 2008. The unpaid preferred stock dividends have been accrued for eleven quarters as of June 30, 2011. As a result, we have accrued dividends for over six quarters which pursuant to the terms of our charter, permits the Series A preferred stockholders to elect an additional director to our board of directors. We may, or upon a properly submitted request of the holders of the Series A preferred stock representing 20% or more of the liquidation value of the Series A preferred stock shall call a special meeting of our stockholders to elect such additional director in accordance with the provisions of our bylaws and other procedures established by our board of directors relating to election of directors.

However, in accordance with the provisions of our charter, we may not pay any dividends on our common stock until all accrued dividends and the dividend for the then current quarter on the Series A preferred stock are paid in full.

Inflation

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

Further, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors based primarily on our net income as calculated for tax purposes, in each case, our activities and balance sheet are measured with reference to historical costs or fair market value without considering inflation.

Related Party Transactions

An affiliate of SL Green provides special servicing services with respect to a limited number of loans owned by us that are secured by properties in New York City, or in which we and SL Green are co-investors. For the three and six months ended June 30, 2011, we incurred expense of $42 and $83, respectively, pursuant to the special servicing arrangement. For the three and six months ended June 30, 2010, we incurred expense of $123 and $148, respectively, pursuant to the special servicing arrangement.

Commencing in May 2005, we are party to a lease agreement with SLG Graybar Sublease LLC, an affiliate of SL Green, for our corporate offices at 420 Lexington Avenue, New York, New York. The lease is for approximately 7.3 thousand square feet and carries a term of 10 years with rents of approximately $249 per annum for year one rising to $315 per annum in year ten. In May and June 2009, we amended our lease with SLG Graybar Sublease LLC to increase the leased premises by approximately 2.3 thousand square feet. The additional premises is leased on a co-terminus basis with the remainder of our leased premises and carries rents of approximately $103 per annum during the initial year and $123 per annum during the final lease year. For the three and six months ended June 30, 2011, we paid $77 and $154 under this lease, respectively. For the three and six months ended June 30, 2010, we paid $75 and $151 under this lease, respectively.

In March 2006, we closed on the purchase of a $25,000 mezzanine loan, which bears interest at one-month LIBOR plus 8.00%, to a joint venture in which SL Green was an equity holder. The mezzanine loan was repaid in full on May 9, 2006, when we originated a $90,287 whole loan, which bears interest at one-month LIBOR plus 2.75%, to the joint venture. The whole loan is secured by office and industrial properties in northern New Jersey and has a book value of $24,478 and $24,821 as of June 30, 2011 and December 31, 2010, respectively.

In January 2007, we originated two mezzanine loans totaling $200,000. The $150,000 loan was secured by a pledge of cash flow distributions and partial equity interests in a portfolio of multi-family properties and bore interest at one-month LIBOR plus 6.00%. The $50,000 loan was initially secured by cash flow distributions and partial equity interests in an office property. On March 8, 2007, the $50,000 loan was increased by $31,000 when the existing mortgage loan on the property was defeased, upon which event our loan became secured by a first mortgage lien on the property and was reclassified as a whole loan. The whole loan currently bears interest at one-month LIBOR plus 6.00% for the initial funding and one-month LIBOR plus 1.00% for the subsequent funding. At closing, an affiliate of SL Green acquired from us and held a 15.15% pari-passu interest in the mezzanine loan and the whole loan. The investment in the mezzanine loan was repaid in full in September 2007. In September 2010, the whole loan was repaid at a discount. We received $56,093 and we forgave the remaining balance outstanding.

In April 2007, we purchased for $103,200 a 45% TIC interest to acquire the fee interest in a parcel of land located at 2 Herald Square, located along 34th Street in New York, New York. The acquisition was financed with $86,063 10-year fixed rate mortgage loan. The property is subject to a long-term ground lease with an unaffiliated third party for a term of 70 years. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari-passu. We sold our 45% interest in December 2010 to a wholly-owned subsidiary of SL Green for net proceeds of $25,350, resulting in a loss of $11,885. We recorded our pro rata share of net income of $1,263 and $2,526 for the three and six months ended June 30, 2010, respectively.

In July 2007, we purchased for $144,240 an investment in a 45% TIC interest to acquire a 79% fee interest and 21% leasehold interest in the fee position in a parcel of land located at 885 Third Avenue, on which is situated The Lipstick Building. The transaction was financed with a $120,443 10-year fixed rate mortgage loan. The property is subject to a 70-year leasehold ground lease with an unaffiliated third party. The remaining TIC interest is owned by a wholly-owned subsidiary of SL Green. The TIC interests are pari passu. We sold our 45% interest in December 2010 to a wholly-owned subsidiary of SL Green for net proceeds of $38,911, resulting in a loss of $15,407. We recorded our pro rata share of net income of $1,501 and $3,024 for the three and six months ended June 30, 2010, respectively.

In September 2007, we acquired a 50% interest in a $25,000 senior mezzanine loan from SL Green. Immediately thereafter, we, along with SL Green, sold all of our interests in the loan to an unaffiliated third party. Additionally, we acquired from SL Green a 100% interest in a $25,000 junior mezzanine loan associated with the same properties as the preceding senior mezzanine loan. Immediately thereafter, we participated 50% of our interest in the loan back to SL Green. As of June 30, 2011 and December 31, 2010, the loan has a book value of $0. In October 2007, we acquired a 50% pari-passu interest in $57,795 of two additional tranches in the senior mezzanine loan from an unaffiliated third party. At closing, an affiliate of SL Green simultaneously acquired the other 50% pari-passu interest in the two tranches. As of June 30, 2011 and December 31, 2010, the loan has a book value of $0. We held contingent interest in the property which was sold to SL Green in December 2010 for $2,016.

In December 2007, we acquired a 50% interest in a $200,000 senior mezzanine loan from a financial institution. Immediately thereafter, we participated 50% of our interest in the loan to an affiliate of SL Green. The investment was purchased at a discount and bears interest at an effective spread to one-month LIBOR of 6.50%. In December 2010, we subsequently purchased an affiliate of SL Green’s full participation in the senior mezzanine loan at a discount. As of June 30, 2011 and December 31, 2010, the original loan has a book value of $5,224 and $5,224, and the subsequently purchased loan has a book value of $14,309 and $13,586, respectively.

In August 2008, we closed on the purchase from an SL Green affiliate of a $9,375 pari-passu participation interest in a $18,750 first mortgage. The loan is secured by a retail shopping center located in Staten Island, New York. The investment bears interest at a fixed rate of 6.50%. In December 2010, we purchased at a discount, the remaining 50% interest in the loan from an SL Green affiliate for $9,420. As of June 30, 2011 and 2009 the loan has a book value of $19,442 and $19,367, respectively.

In September 2008, we closed on the purchase from an SL Green affiliate of a $30,000 interest in a $135,000 mezzanine loan. The loan is secured by the borrower’s interests in a retail condominium located New York, New York. The investment bears interest at an effective spread to one-month LIBOR of 10.00%. As of December 31, 2010, the loan had a book value of $27,778. In December 2010, we sold the contingent interest to SL Green for $300. In March 2011, the loan was paid in full by the borrower.

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

Funds from Operations

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

FFO for the three and six months ended June 30, 2011 and 2010 are as follows:

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Net income (loss) available to common stockholders	$	15,472		$	6,716		$	20,431		$	(18,052	)
Add:
Depreciation and amortization		20,147			28,228			40,588			57,793
FFO adjustments for unconsolidated joint ventures		1,096			1,080			2,192			2,160
Less:
Non real estate depreciation and amortization		(1,823	)		(1,936	)		(3,630	)		(4,121	)
Gain on sale of real estate		(1,437	)		(350	)		(2,374	)		(1,391	)
Funds from operations	$	33,455		$	33,738		$	57,207		$	36,389

Funds from operations per share - basis	$	0.67		$	0.68		$	1.14		$	0.73

Funds from operations per share - diluted	$	0.66		$	0.67		$	1.13		$	0.73

Cautionary Note Regarding Forward-Looking Information

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

our ability to complete an orderly transition of all or substantially all of the collateral for the Goldman Mortgage Loan and the Goldman Mezzanine Loans pursuant to the Settlement Agreement;

the continuity of the management agreement for the Lender Portfolio;

reduction in cash flows received from our investments, in particular our CDOs and our Gramercy Realty portfolio;

the adequacy of our cash reserves, working capital and other forms of liquidity;

the availability, terms and deployment of short-term and long-term capital;

the performance and financial condition of borrowers, tenants, and corporate customers;

the cost and availability of our financings, which depends in part on our asset quality, the nature of our relationships with our lenders and other capital providers, our business prospects and outlook and general market conditions;

availability of, and ability to retain, qualified personnel and directors;

our ability to satisfy all covenants in our CDOs and specifically compliance with overcollateralization and interest coverage tests;

changes to our management and board of directors;

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

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

the resolution of our non-performing and sub-performing assets and any losses we might recognize in connection with such investments;

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

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

our ability to comply with financial covenants in our debt instruments, but specifically in our loan agreement with PB Capital Corporation;

risks of structured finance investments;

risks of real estate acquisitions;

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

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

our ability to lease-up assumed leasehold interests above the leasehold liability obligation;

demand for office space;

our ability to maintain our current relationships with financial institutions and to establish new relationships with additional financial institutions;

our ability to identify and complete additional property acquisitions;

our ability to profitably dispose of non-core assets;

changes in governmental regulations, tax rates and similar matters;

legislative and regulatory changes (including changes to laws governing the taxation of REITs or the exemptions from registration as an investment company);

environmental and/or safety requirements;

our ability to satisfy complex rules in order for us to qualify as a REIT, for federal income tax purposes and qualify for our exemption under the Investment Company Act, our operating partnership’s ability to satisfy the rules in order for it to qualify as a partnership for federal income tax purposes, and the ability of certain of our subsidiaries to qualify as REITs and certain of our subsidiaries to qualify as taxable REIT subsidiaries for federal income tax purposes, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

the continuing threat of terrorist attacks on the national, regional and local economies; and

other factors discussed under Item IA Risk Factors of this Annual Report on Form 10-K for the year ended December 31, 2010 and those factors that may be contained in any filing we make with the SEC, including Part II, Item 1A of the Quarterly Reports on Form 10-Q.

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

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

Recently Issued Accounting Pronouncements

For a discussion of the impact of new accounting pronouncements on our financial condition or results of operation, see Note 2 of the Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Market risk includes risks that arise from changes in interest rates, credit, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risks to which we will be exposed are real estate, interest rate, and credit risks. These risks are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.

Real Estate Risk

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

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our operating results will depend in large part on differences between the income from our assets and our borrowing costs. Most of our commercial real estate finance assets and borrowings are variable rate instruments that we finance with variable rate debt. The objective of this strategy is to minimize the impact of interest rate changes on the spread between the yield on our assets and our cost of funds. We seek to enter into hedging transactions with respect to all liabilities relating to fixed rate assets. If we were to finance fixed rate assets with variable rate debt and the benchmark for our variable rate debt increased, our net income would decrease. Some of our loans are subject to various interest rate floors. As a result, if interest rates fall below the floor rates, the spread between the yield on our assets and our cost of funds will increase, which will generally increase our returns. Because we generate income on our commercial real estate finance assets principally from the spread between the yields on our assets and the cost of our borrowing and hedging activities, our net income on our commercial real estate finance assets will generally increase if LIBOR increases and decrease if LIBOR decreases. Our real estate assets generate income principally from fixed long-term leases and we are exposed to changes in interest rates primarily from our floating rate borrowing arrangements. We have used interest rate caps to manage our exposure to interest rate changes above 5.25% on $850,000 of borrowings, however, because our borrowing secured by our real estate assets is largely unhedged and because our real estate assets generate income from long-term leases, our net income from our real estate assets will generally decrease if LIBOR increases. The following chart shows a hypothetical 100 basis point increase in interest rates along the entire interest rate curve:

Change in LIBOR	Projected Increase (Decrease) in Net Income
Base case
+100 bps	$	(3,166	)
+200 bps	$	(5,863	)
+300 bps	$	(8,068	)

Our exposure to interest rates will also be affected by our overall corporate leverage, which may vary depending on our mix of assets.

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

In the event of a rapidly rising interest rate environment, our operating cash flow from our real estate assets may be insufficient to cover the corresponding increase in interest expense on our variable rate borrowing secured by our real estate assets.

Credit Risk

Credit risk refers to the ability of each tenant in our portfolio of real estate investments to make contractual lease payments and each individual borrower under our loans and securities investments to make required interest and principal payments on the scheduled due dates. We seek to reduce credit risk of our real estate investments by entering into long-term leases with investment-grade financial services companies and financial institutions and we attempt to reduce credit risk of our loan and securities investments by actively managing our portfolio and the underlying credit quality of the subject collateral. If defaults occur, we employ our asset management resources to mitigate the severity of any losses and seek to optimize the recovery from assets in the event that we foreclose upon them. We seek to control the negotiation and structure of the debt transactions in which we invest, which enhances our ability to mitigate our losses, to negotiate loan documents that afford us appropriate rights and control over our collateral, and to have the right to control the debt that is senior to our position. We generally avoid investments where we cannot secure adequate control rights, unless we believe the default risk is very low and the transaction involves high-quality sponsors. In the event of a significant rising interest rate environment and/or economic downturn, tenant and borrower delinquencies and defaults may increase and result in credit losses that would materially and adversely affect our business, financial condition and results of operations.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Also, we may have investments in certain unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

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

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None

ITEM 1A.

RISK FACTORS

None

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

(REMOVED AND RESERVED)

None

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

INDEX TO EXHIBITS

Exhibit No.		Description

3.1		Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Amendment No. 5 to its Registration Statement on Form S-11/A (No. 333-114673), which was filed with the Commission on July 26, 2004 and declared effective by the Commission on July 27, 2004).

3.2		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K which was filed with the Commission on December 14, 2007).

3.3		Articles Supplementary designating the Company’s 8.125% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.001 per share (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K which was filed with the Commission on April 18, 2007).

4.1		Form of specimen stock certificate evidencing the common stock of the Company, par value $0.001 per share (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K which was filed with the Commission on April 18, 2007).

4.2		Form of stock certificate evidencing the 8.125% Series A Cumulative Redeemable Preferred Stock of the Company, liquidation preference $25.00 per share, par value $0.001 per share (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K which was filed with the Commission on April 18, 2007).

10.1		Letter Agreement, dated April 15, 2011, by and among the Company, as guarantor, GKK Stars Junior Mezz I, LLC, as guarantor, the Borrowers, the Mortgage Lenders, the Mezzanine Lenders, KBS GKK Participation Holdings I, LLC and KBS GKK Participation Holdings II, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K which was filed with the Commission on April 19, 2011).

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

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

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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GRAMERCY CAPITAL CORP.

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

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Gramercy Property Trust Inactive 10-Q2011 Q2 Quarterly report

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