10-K

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

Form 10-K

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

For the fiscal year ended December 31, 2009

Commission File No. 1-31753

CapitalSource Inc.

(Exact name of registrant as specified in its charter)

Delaware	35-2206895
(State of Incorporation)	(I.R.S. Employer Identification No.)

4445 Willard Avenue, 12th Floor
Chevy Chase, MD 20815
(Address of Principal Executive Offices, Including Zip Code)
(800) 370-9431

(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:

(Title of Each Class)	(Name of Exchange on Which Registered)
Common Stock, par value $0.01 per share	New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes  þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes  þ No

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.  þ Yes  o No

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).  o Yes  o No

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

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. (Check one):

þ Large accelerated filer	o Accelerated filer
o Non-accelerated filer	o 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 Act).  o Yes  þ No

The aggregate market value of the Registrant’s Common Stock, par value $0.01 per share, held by nonaffiliates of the Registrant, as of June 30, 2009 was $1,158,905,071.

As of February 22, 2010, the number of shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding was 322,870,525.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of CapitalSource Inc.’s Proxy Statement for the 2010 annual meeting of shareholders, a definitive copy of which will be filed with the SEC within 120 days after the end of the year covered by this Form 10-K, are incorporated by reference herein as portions of Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business		3
Item 1A.	Risk Factors		37
Item 1B.	Unresolved Staff Comments		56
Item 2.	Properties		56
Item 3.	Legal Proceedings		57
Item 4.	Reserved		58
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		58
Item 6.	Selected Financial Data		61
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		64
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		105
	Management Report on Internal Controls Over Financial Reporting		106
	Report of Independent Registered Public Accounting Firm on Internal Controls Over Financial Reporting		107
Item 8.	Financial Statements and Supplementary Data		108
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		195
Item 9A.	Controls and Procedures		195
Item 9B.	Other Information		195
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		197
Item 11.	Executive Compensation		198
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		198
Item 13.	Certain Relationships and Related Transactions, and Director Independence		198
Item 14.	Principal Accountant Fees and Services		198
PART IV
Item 15.	Exhibits and Financial Statement Schedules		199
	Signatures		200
	Index to Exhibits		201
	Certifications

PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K, including the footnotes to our audited consolidated financial statements included herein, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to numerous assumptions, risks, and uncertainties, including certain plans, expectations, goals and projections and statements about our deposit base, loan portfolios and operations, managing our credit book, our expectations regarding future credit performance, charge offs and loan losses, particularly regarding commercial real estate loans, our liquidity, capital position, credit facilities and covenant compliance, our indebtedness, payment obligations and restrictions thereunder and use of proceeds from asset sales, CapitalSource Bank’s capitalization and accessing of financing, our intention to sell assets and monetize the value of our healthcare net lease business, our intent to remain an active lender in the healthcare industry, the expected repayment of our commercial real estate participation interest (“the “A” Participation Interest”), economic and market conditions for our business, the impact of the U.S. economy and government supervision and regulation on our business and earnings, securitization markets, the performance of our loans, loan yields, the impact of accounting pronouncements, our share repurchase plan, taxes and tax audits and examinations, our unfunded commitments, our intention to originate loans at CapitalSource Bank, our portfolio run off and growth, our delinquent, non-accrual and impaired loans, our SPEs, risk management, and our valuation allowance with respect to, and our realization and utilization of, net deferred tax assets, net operating loss carryforwards and built-in losses. All statements contained in this Form 10-K that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “will,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including without limitation: changes in economic or market conditions or investment or lending opportunities may result in increased credit losses and delinquencies in our portfolio and impair our ability to consummate favorable loans; continued or worsening disruptions in economic and credit markets may continue to make it very difficult for us to obtain financing on attractive terms or at all, could prevent us from optimizing the amount of leverage we employ and could adversely affect our liquidity position; movements in interest rates and lending spreads may adversely affect our borrowing strategy; operating CapitalSource Bank under the California and Federal Deposit Insurance Corporation (“FDIC”) regulatory regime could be more costly and restrictive than expected; we may not be successful in maintaining or growing deposits or deploying capital in favorable lending transactions or originating or acquiring assets in accordance with our strategic plan; competitive and other market pressures could adversely affect loan pricing; the nature, extent, and timing of any governmental actions and reforms; the success and timing of other business strategies and asset sales; continued or worsening charge offs, reserves and delinquencies may adversely affect our earnings and financial results; changes in tax laws or regulations could adversely affect our business; hedging activities may result in reported losses not offset by gains reported in our audited consolidated financial statements; and other risk factors reported in our audited consolidated financial statements; and other risk factors described in this Form 10-K and documents filed by us with the SEC. All forward-looking statements included in this Form 10-K are based on information available at the time the statement is made.

We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The information contained in this section should be read in conjunction with our audited consolidated financial statements and related notes and the information contained elsewhere in this Form 10-K, including that set forth under Item 1A, Risk Factors.

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ITEM 1.   BUSINESS

Overview

References to we, us or CapitalSource refer to CapitalSource Inc. together with its subsidiaries.

We are a commercial lender which, primarily through our wholly owned subsidiary, CapitalSource Bank, provides financial products to small and middle market businesses nationwide and provides depository products and services in southern and central California. Prior to the formation of CapitalSource Bank, CapitalSource Inc. (“CapitalSource,” and together with its subsidiaries other than CapitalSource Bank, the “Parent Company”) conducted its commercial lending business through our other subsidiaries. Subsequent to CapitalSource Bank’s formation, substantially all new loans have been originated at CapitalSource Bank, and we expect this will continue to be the case for the foreseeable future. Our commercial lending activities at the Parent Company consist primarily of satisfying existing commitments made prior to CapitalSource Bank’s formation and receiving payments on our existing loan portfolio. Consequently, we expect that our loans at the Parent Company will gradually run off, while CapitalSource Bank’s loan portfolio will continue to grow. As of December 31, 2009, we had 1,078 loans outstanding, of which 58 were shared between CapitalSource Bank and the Parent Company. Our total loans had an aggregate outstanding balance of $8.3 billion.

We currently operate as three reportable segments: 1) CapitalSource Bank, 2) Other Commercial Finance, and 3) Healthcare Net Lease. Our CapitalSource Bank segment comprises our commercial lending and banking business activities; our Other Commercial Finance segment comprises our loan portfolio in the Parent Company; and our Healthcare Net Lease segment comprises our direct real estate investment business activities. For additional information, see Note 25, Segment Data, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Through our CapitalSource Bank segment activities, we provide a wide range of financial products primarily to small and middle market businesses across the United States and also offer depository products and services in southern and central California, which are insured by the FDIC to the maximum amounts permitted by regulation. As of December 31, 2009, CapitalSource Bank had 443 loans outstanding, of which, 58 loans were shared with the Parent Company and also held a $530.6 million senior participation interest in a pool of commercial real estate loans and related assets (the “A” Participation Interest). Loans held by CapitalSource Bank had an aggregate principal balance of $3.1 billion.

Through our Other Commercial Finance segment activities, the Parent Company provided financial products primarily to small and middle market businesses. As of December 31, 2009, our Other Commercial Finance segment had 693 loans outstanding, of which, 58 loans were shared with CapitalSource Bank. Loans held by the Parent Company had an aggregate balance of $5.2 billion.

Through our Healthcare Net Lease segment activities, we invested in income-producing healthcare facilities — principally long-term healthcare facilities in the United States. We provided lease financing to skilled nursing facilities and, to a lesser extent, assisted living facilities, and long-term acute care facilities. As of December 31, 2009, this segment held $336.0 million in direct real estate investments comprising 103 healthcare facilities leased to 25 tenants through long-term, triple-net operating leases. During the year ended December 31, 2009, we sold 82 healthcare facilities and anticipate selling the remaining facilities in 2010 and 2011. Upon the completion of these asset sales, we will exit the skilled nursing facility ownership business, but continue to actively provide financing for owners and operators in the long-term healthcare industry. As a result, much of the Healthcare Net Lease segment activity and assets are classified as discontinued operations in our audited consolidated financial statements. For additional information, see Note 3, Discontinued Operations, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Although we have made loans as large as $325.0 million, as of December 31, 2009, our average loan size was $7.7 million, and our average loan exposure by client was $11.3 million. Our loans generally have a remaining life to maturity of 1 to 5 years with a weighted average life to maturity of 2.5 years as of December 31, 2009. Substantially all of our loans require monthly interest payments at variable rates and, in many cases, our loans provide for interest rate floors that help us maintain our yields when interest rates are low or declining. We price our loans based upon the risk profile of our clients. As of December 31, 2009, our geographically diverse client base consisted of 739 clients with headquarters in 43 states, the District of Columbia, Puerto Rico and select international locations, primarily in Canada and Europe.

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In our CapitalSource Bank and Other Commercial Finance segments, we specialize in the following lending areas:

•  Healthcare, we provide mortgage loans, asset-based revolving lines of credit, and cash flow loans to healthcare service operators, facility based providers, device manufacturers, distributors and business service providers;

•  Leveraged Lending, we provide senior loans in the security and technology industries, and to a lesser extent other industries; and

•  Structured Finance, our Commercial Real Estate Group provides senior mortgage financing on a variety of commercial and real estate types. Our Lender Finance Group provides senior revolving credit facilities to other finance companies.

Change in Reportable Segments

For the years ended December 31, 2008 and 2007, we presented financial results through three reportable segments: 1) Commercial Banking, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Beginning in the first quarter of 2009, changes were made in the way management organizes financial information to make operating decisions, resulting in the activities previously reported in the Commercial Banking segment being disaggregated into the CapitalSource Bank and Other Commercial Finance segments and the results of our Residential Mortgage Investment segment being combined into the Other Commercial Finance segment. We have reclassified all comparative prior period segment information to reflect our new three reportable segments. For additional information, see Note 25, Segment Data, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Developments During Fiscal Year 2009

During 2009, we simplified our business by:

•  revoking our real estate investment trust (“REIT”) status;

•  selling our agency residential mortgage backed security portfolio and the retained beneficial interest in the owners trust securitization; and

•  partially divesting of assets in our Healthcare Net Lease segment.

We continued to follow our business plan to fund substantially all our new loans through CapitalSource Bank and to manage liquidity and credit outcomes of the Parent Company as its portfolio runs off.

Sale of Healthcare Net Lease Assets

During the year ended December 31, 2009, we sold 82 long-term healthcare facilities with a total net book value of $400.3 million, realizing a pre-tax loss of $9.4 million. Two transactions comprised 77 of the facilities sold. In November 2009, we sold 37 long-term healthcare facilities (the “November Sale Assets”) for approximately $100.0 million in cash. In December 2009, in the first step of a multi-step transaction, we sold 40 long-term healthcare facilities (the “Step 1 Assets”) to Omega Healthcare Investors, Inc. (“Omega”) for approximately $184.2 million in cash and approximately 1.4 million shares of Omega common stock valued at $25.6 million. In addition, by acquiring our facilities in the December 2009 closing, Omega became obligated to pay us $59.4 million of indebtedness associated with the Step 1 Assets. Step two of the transaction with Omega will include the sale of an additional 40 long-term healthcare facilities (the “Step 2 Assets”), which we expect to complete in 2010.

In December 2009, we also received approximately 1.3 million shares of Omega common stock valued at $25.0 million in consideration for a non-refundable option that can be exercised by Omega to acquire an additional 63 of our long-term healthcare facilities (the “Step 3 Assets”) at any time through December 31, 2011. Upon the completion of the sale of Step 2 Assets and Step 3 Assets, we will exit the skilled nursing home ownership business, but continue to actively provide financing for owners and operators in the long-term healthcare industry.

We have presented the financial condition and results of operations of all assets within our Healthcare Net Lease segment, with the exception of the Step 3 Assets, as discontinued operations for all periods presented.

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Additionally, the results of the discontinued operations include the activities of other healthcare facilities that have been sold since the inception of the business. The Step 3 Assets have been included in our continuing operations as they do not meet the criteria to be held for sale as of December 31, 2009. For additional information, see Note 3, Discontinued Operations, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Improvement in Parent Company Liquidity

In 2009, despite the challenging economic environment, we were able to close several transactions that strengthened our balance sheet and improved our liquidity at the Parent Company. As of December 31, 2008, we had six secured credit facilities with aggregate commitments of $2.6 billion and an aggregate outstanding principal balance of $1.4 billion, each with maturity dates in 2009 or 2010. In addition, as of December 31, 2008, our Parent Company unrestricted cash and immediately available committed borrowing capacity was $204.9 million. As of December 31, 2009, we had four secured credit facilities with aggregate commitments of $691.3 million and an aggregate outstanding principal balance of $542.8 million. The maturities of our existing facilities occur in 2010 through 2012. As of December 31, 2009, our Parent Company unrestricted cash and immediately available committed borrowing capacity was $445.0 million.

We terminated two credit facilities and fully repaid the outstanding principal balances, extended the maturities of our other four credit facilities and reduced the principal balance of these credit facilities by $902.3 million. In addition, we increased our Parent Company unrestricted cash and immediately available borrowing capacity by $240.1 million through the issuance of 20,125,000 shares of our common stock, new debt issuances, the sale of certain of our Healthcare Net Lease properties, proceeds from loan and asset sales and cash from operations.

Management Change Announced

In December 2009, we announced the appointment of Steven A. Museles and James J. Pieczynski as Co-CEOs and members of the Company’s Board of Directors, and the formation of an Office of the Chairman, effective January 1, 2010. Founder and former CEO, John K. Delaney, assumed the new role of Executive Chairman and continues to chair the CapitalSource Board of Directors. Dean Graham stepped down as President. The changes were designed to further enhance operational efficiency and ensure effective execution of key initiatives. Both Museles, former Executive Vice President and Chief Legal Officer, and Pieczynski, former President of the Health Care Real Estate business, are longtime members of the CapitalSource senior executive management team.

Loan Products, Service Offerings and Investments

CapitalSource Bank Segment and Other Commercial Finance Segment

Our primary commercial lending and depository products and services include:

•  Senior Secured Loans.  We make senior secured, asset-backed, mortgage, and leveraged loans, which have a first priority lien in the collateral securing the loan. Asset-based loans are collateralized by specified assets of the client, generally the client’s accounts receivable and/or inventory. Mortgage loans are secured by senior mortgages on real property. We make mortgage loans to clients including owners and operators of senior housing and skilled nursing facilities; owners and operators of office, industrial, hospitality and multifamily properties; resort and residential developers; hospitals and companies backed by private equity firms that frequently obtain mortgage-related financing in connection with buyout transactions. We make leveraged loans based on our assessment of a client’s ability to generate cash flows sufficient to repay the loan and to maintain or increase its enterprise value during the term of the loan. Our leveraged loans generally are secured by a security interest in all or substantially all of a client’s assets. In some cases, the equity owners of a client pledge their stock in the client to us as further collateral for the loan.

•  Depository Products and Services.  Through CapitalSource Bank’s 22 branches in southern and central California, we provide savings and money market accounts, individual retirement account products and certificates of deposit. These products are insured up to the maximum amounts permitted by the FDIC.

5

Healthcare Net Lease Segment

•  Direct Real Estate Investments.  Although we have discontinued this business, we have in the past invested in income-producing healthcare facilities, principally long-term healthcare facilities in the United States. These facilities are generally leased through long-term, triple-net operating leases. Under a typical triple-net lease, the client agrees to pay a base monthly operating lease payment, subject to annual escalations, and all facility operating expenses, including real estate taxes, as well as make capital improvements.

As of December 31, 2009, our portfolio of assets by type was as follows (percentages by gross carrying values):

Loan Products and Investments by Type

As of December 31, 2009, our commercial loan portfolio by geographic region was as follows:

Commercial Loan Portfolio by Geographic Region

(1) Includes each jurisdiction that has an aggregate loan balance less than 1% of the aggregate outstanding balance of our commercial loan portfolio.

6

CapitalSource Bank Segment Overview

Portfolio Composition

As of December 31, 2009 and 2008, the composition of the CapitalSource Bank segment portfolio was as follows:

	December 31,
	2009		2008
	($ in thousands)
Assets:
Cash and cash equivalents(1)	$	821,980	$	1,238,173
Investment securities, available-for-sale		901,764		642,714
Investment securities, held-to-maturity		242,078		14,389
Commercial real estate “A” Participation Interest, net		530,560		1,396,611
Loans(2)		3,076,267		2,702,135
FHLB SF stock		20,195		20,195
Total	$	5,592,844		6,014,217
Liabilities:
Deposits	$	4,483,879	$	5,043,695
FHLB SF borrowings		200,000		—
Total	$	4,683,879	$	5,043,695

(1)	As of December 31, 2009 and 2008, the amounts include restricted cash of $65.9 million and $17.4 million, respectively.
(2)	Excludes unamortized premiums and discounts and the allowance for loan losses.

Cash and Cash Equivalents

As of December 31, 2009 and 2008, CapitalSource Bank had $822.0 million and $1.2 billion, respectively, in cash and cash equivalents, including restricted cash of $65.9 million and $17.4 million, respectively. Cash and cash equivalents consists of collections from our borrowers, amounts due from banks, U.S. Treasury securities, short-term investments and commercial paper with an initial maturity of three months or less. For additional information, see Note 4, Cash and Cash Equivalents and Restricted Cash, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Investment Securities, Available-for-Sale

As of December 31, 2009 and 2008, CapitalSource Bank owned $901.8 million and $642.7 million, respectively, in investment securities, available-for-sale. Included in these investment securities, available-for-sale, were discount notes issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank (“FHLB”) (“Agency discount notes”), callable notes issued by Fannie Mae, Freddie Mac, the FHLB and Federal Farm Credit Bank (“Agency callable notes”), bonds issued by the FHLB (“Agency debt”), residential mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae (“Agency MBS”), residential mortgage-backed securities rated AAA issued by non-government-agencies (“Non-agency MBS”) and corporate debt securities. CapitalSource Bank pledged substantially all of the investment securities, available-for-sale, to the Federal Home Loan Bank of San Francisco (“FHLB SF”) and the Federal Reserve Bank (“FRB”) as a source of borrowing capacity as of December 31, 2009. For additional information, see Note 7, Investments, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

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Investment Securities, Held-to-Maturity

As of December 31, 2009 and 2008, CapitalSource Bank owned $242.1 million and $14.4 million, respectively, in investment securities, held-to-maturity, consisting of AAA-rated commercial mortgage-backed securities. For additional information, see Note 7, Investments, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Commercial Real Estate “A” Participation Interest

As of December 31, 2009 and 2008, the “A” Participation Interest had an outstanding balance of $530.6 million and $1.4 billion, respectively, net of discount. We expect the “A” Participation Interest to be fully repaid during 2010. For additional information, see Note 6, Commercial Lending Assets and Credit Quality, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

CapitalSource Bank Segment Loan Portfolio Composition

As of December 31, 2009 and 2008, the CapitalSource Bank loan portfolio had a gross outstanding balance of $3.1 billion and $2.7 billion, respectively. In 2008, we utilized the North American Industry Classification (“NAICS”) to determine the industry classification of our loans. In 2009, we determined our industry classifications using the industry classification categories outlined for the FDIC quarterly regulatory filings, which are consistent with how management categorizes these loans for management reporting. We have recast all periods presented to reflect the industry classification categories used in the FDIC quarterly regulatory filings to ensure comparability of all periods at both the consolidated and segment levels. Total CapitalSource Bank loan portfolio reflected in the portfolio statistics below includes gross loans held for investment.

As of December 31, 2009 and 2008, the composition of the CapitalSource Bank loan portfolio by loan type was as follows:

	December 31,
	2009				2008
	($ in thousands)
Commercial	$	1,599,667	52	%	$	1,445,678	54	%
Real estate		1,095,780	36			812,333	30
Real estate — construction		380,820	12			444,124	16
Total	$	3,076,267	100	%	$	2,702,135	100	%

Our loans have stated maturities at origination that generally range from three to eight years. As of December 31, 2009, the weighted average maturity and weighted average remaining life of our CapitalSource Bank loan portfolio were approximately 5.2 years and 3.0 years, respectively. As of December 31, 2009, the weighted average remaining lives of the CapitalSource Bank loan portfolio by loan type were as follows:

	Due in		Due After One
	One Year		Year Through		Due After
	or Less		Five Years		Five Years		Total
	($ in thousands)
Commercial	$	176,140	$	1,305,384	$	118,143	$	1,599,667
Real estate		75,641		937,839		82,300		1,095,780
Real estate — construction		292,025		88,795		—		380,820
Total	$	543,806	$	2,332,018	$	200,443	$	3,076,267

Substantially all of the CapitalSource Bank loan portfolio bears interest at adjustable rates pegged to an interest rate index plus a specified margin. Approximately 71% of the portfolio is subject to an interest rate floor. Due to low market interest rates as of December 31, 2009, substantially all loans with interest rate floors were bearing interest at such floors. The weighted average spread between the floor rate and the fully indexed rate on the loans was 2.67% as of December 31, 2009. To the extent the underlying indices subsequently increase, CapitalSource Bank’s interest yield on this portfolio will not rise as quickly due to the effect of the interest rate floors.

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As of December 31, 2009, the composition of CapitalSource Bank loan balances by index and by loan type was as follows:

	Loan Type
					Real Estate
	Commercial		Real Estate		Construction		Total		Percentage
	($ in thousands)
1-Month LIBOR	$	366,992	$	696,794	$	377,900	$	1,441,686		47	%
3-Month LIBOR		12,326		98,982		—		111,308		4
6-Month LIBOR		—		11,912		—		11,912		—
Prime		552,556		62,642		2,920		618,118		20
Canadian Prime		20,851		—		—		20,851		1
Blended		640,964		122,946		—		763,910		24
Total adjustable rate loans		1,593,689		993,276		380,820		2,967,785		96
Fixed rate loans		5,978		102,504		—		108,482		4
Total loans	$	1,599,667	$	1,095,780	$	380,820	$	3,076,267		100	%

As of December 31, 2009, our CapitalSource Bank loan portfolio by industry was as follows (percentages by gross carrying values as of December 31, 2009):

CapitalSource Bank Loan Portfolio by Industry⁽¹⁾

(1)	Industry classification is based on the industry classification categories for FDIC quarterly regulatory reporting.
(2)	Includes all industry groups that have an aggregate loan balance less than 1% of the aggregate outstanding balance of our CapitalSource Bank loan portfolio.

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As of December 31, 2009, CapitalSource Bank’s largest loan had an outstanding balance of $129.2 million. As of December 31, 2009, our CapitalSource Bank commercial loan portfolio by loan balance was as follows:

CapitalSource Bank Loan Portfolio by Loan Balance

As of December 31, 2009, the number of loans, average loan size, number of clients and average loan size per client by loan type were as follows:

							Average Loan
	Number		Average		Number of		Size per
	of Loans(1)		Loan Size(2)		Clients		Client(2)
	($ in thousands)
Commercial		270	$	5,925		205	$	7,803
Real Estate		159		6,892		149		7,354
Real Estate — construction		14		27,201		10		38,082
Overall CapitalSource Bank loan portfolio		443		6,944		364		8,451

(1)	Includes 58 loans shared with the Other Commercial Finance segment.
(2)	Excludes unamortized premiums and discounts and the allowance for loan losses.

FHLB SF Stock

As of December 31, 2009 and 2008, CapitalSource Bank owned FHLB SF stock with a carrying value of $20.2 million. Investments in FHLB SF stock are recorded at historical cost. FHLB SF stock does not have a readily determinable fair value, but may generally be sold back to the FHLB SF at par value upon stated notice; however, the FHLB SF has currently ceased repurchases of excess stock. The investment in FHLB SF stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through December 31, 2009.

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Deposits

As of December 31, 2009 and 2008, a summary of CapitalSource Bank’s deposit portfolio by product type and the maturity of the certificates of deposit portfolio were as follows:

	December 31,
	2009					2008
			Weighted					Weighted
			Average					Average
	Balance		Rate			Balance		Rate
	($ in thousands)
Money market	$	258,283		0.99	%	$	279,577		2.26	%
Savings		599,084		1.09			471,014		2.89
Certificates of deposit		3,626,512		1.68			4,259,153		3.55
Brokered certificates of deposit		—		—			33,951		5.70
Total deposits	$	4,483,879		1.56	%	$	5,043,695		3.42	%

	December 31, 2009
			Weighted
			Average
	Balance		Rate
	($ in thousands)
Remaining maturity of certificates of deposit:
0-3 months	$	1,412,289		1.69	%
4-6 months		1,181,479		1.60
7-9 months		221,856		1.40
10-12 months		556,754		1.64
Longer than 12 months		254,134		2.30
Total certificates of deposit	$	3,626,512		1.68	%

FHLB SF Borrowings

FHLB SF borrowings were $200.0 million as of December 31, 2009. CapitalSource Bank did not have FHLB SF borrowings as of December 31, 2008. These borrowings were used primarily for interest rate risk management purposes. The weighted-average remaining maturity of the borrowings was approximately 1.9 years as of December 31, 2009.

As of December 31, 2009, the remaining maturity and the weighted average interest rate of FHLB SF borrowings were as follows:

			Weighted
			Average
	Balance		Rate
	($ in thousands)
Less than 1 year	$	40,000		1.13	%
1 to 2 years		89,000		1.64
2 to 3 years		48,000		2.11
3 to 4 years		3,000		2.60
4 to 5 years		20,000		2.86
Total	$	200,000		1.78	%

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Other Commercial Finance Segment Overview

Portfolio Composition

Total Other Commercial Finance loan portfolio reflected in the portfolio statistics below includes gross loans held for investment and loans held for sale, including lower of cost or fair value adjustments. As of December 31, 2009 and 2008, the composition of the Other Commercial Finance segment portfolio was as follows:

	December 31,
	2009		2008
	($ in thousands)
Investment securities, available-for-sale	$	6,022	$	36,837
Loans		5,245,563		6,753,657
Mortgage-related receivables(1)		—		1,801,535
Other investments(2)		96,517		127,746
Total	$	5,348,102	$	8,719,775

(1)	Represents secured receivables that are backed by adjustable-rate residential prime mortgage loans.
(2)	Includes investments carried at cost, investments carried at fair value, and investments accounted for under the equity method.

Other Commercial Finance Segment Loan Portfolio Composition

As of December 31, 2009 and 2008, our total Other Commercial Finance loan portfolio had a gross outstanding balance of $5.2 billion and $6.8 billion, respectively. Included in these amounts were loans held for sale of $0.7 million and $8.5 million as of December 31, 2009 and 2008, respectively.

As of December 31, 2009 and 2008, the composition of the Other Commercial Finance loan portfolio by loan type was as follows:

	December 31,
	2009				2008
	($ in thousands)
Commercial	$	3,452,903	66	%	$	4,672,931	69	%
Real estate		951,626	18			1,147,093	17
Real estate — construction		841,034	16			933,633	14
Total	$	5,245,563	100	%	$	6,753,657	100	%

Our commercial loans have stated maturities at origination that generally range from 3 to 8 years. As of December 31, 2009, the weighted average maturity and weighted average remaining life of our Other Commercial Finance commercial loan portfolio were approximately 5.8 years and 2.4 years, respectively. As of December 31, 2009, the weighted average remaining lives of the Other Commercial Finance loan portfolio by loan type were as follows:

	Due in		Due After One Year
	One Year		Through		Due After
	or Less		Five Years		Five Years		Total
	($ in thousands)
Commercial	$	644,062	$	2,499,554	$	309,287	$	3,452,903
Real estate		215,773		617,640		118,213		951,626
Real estate — construction		662,090		178,944		—		841,034
Total	$	1,521,925	$	3,296,138	$	427,500	$	5,245,563

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As of December 31, 2009, the composition of Other Commercial Finance loan balances by index and by loan type was as follows:

	Loan Type
					Real Estate
	Commercial		Real Estate		Construction		Total
	($ in thousands)
1-Month LIBOR	$	592,345	$	688,968	$	566,089	$	1,847,402	35	%
2-Month LIBOR		23,955		—		—		23,955	1
3-Month LIBOR		68,213		—		56,647		124,860	2
6-Month LIBOR		4,909		—		—		4,909	—
1-Month EURIBOR		48,188		—		—		48,188	1
3-Month EURIBOR		16,755		—		—		16,755	—
Prime		1,099,155		31,775		159,588		1,290,518	25
Blended		1,393,019		42,386		—		1,435,405	27
Total adjustable rate loans		3,246,539		763,129		782,324		4,791,992	91
Fixed rate loans		206,364		188,497		58,710		453,571	9
Total loans	$	3,452,903	$	951,626	$	841,034	$	5,245,563	100	%

Approximately 55% of the adjustable rate loan portfolio is subject to an interest rate floor. Due to low market interest rates as of December 31, 2009, substantially all loans with interest rate floors were bearing interest at such floors. The weighted average spread between the floor rate and the fully indexed rate on the loans was 2.88% as of December 31, 2009. To the extent the underlying indices subsequently increase, the interest yield on these adjustable rate loans will not rise as quickly due to the effect of the interest rate floors.

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As of December 31, 2009, our Other Commercial Finance loan portfolio by industry was as follows (percentages by gross carrying values as of December 31, 2009):

Other Commercial Finance Loan Portfolio by Industry⁽¹⁾

(1)	Industry classification is based on the industry classification categories for FDIC quarterly regulatory reporting.
(2)	Includes all industry groups that have an aggregate loan balance less than 1% of the aggregate outstanding balance of our commercial loan portfolio.

As of December 31, 2009, the largest commercial loan in our Other Commercial Finance segment had an outstanding balance of $325.0 million and is a mezzanine loan to a borrower that owns, operates, leases or manages

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201 skilled nursing facilities, 22 assisted living facilities and four transition care units in 12 states. As of December 31, 2009, our Other Commercial Finance loan portfolio by loan balance was as follows:

Other Commercial Finance Loan Portfolio by Loan Balance

As of December 31, 2009, our Other Commercial Finance loan portfolio by geographic region was as follows:

Commercial Loan Portfolio by Geographic Region

(1) Includes each jurisdiction that has an aggregate loan balance less than 1% of the aggregate outstanding balance of our commercial loan portfolio.

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As of December 31, 2009, the number of loans, average loan size, number of clients and average loan size per client by loan type were as follows:

							Average Loan
	Number		Average		Number of		Size per
	of Loans(1)		Loan Size		Clients		Client
	($ in thousands)
Composition of Other Commercial Finance loan portfolio by loan type:
Commercial		579	$	5,964		345	$	10,008
Real estate		78		12,200		71		13,403
Real estate — construction		36		23,362		30		28,034
Overall Other Commercial Finance loan portfolio		693		7,569		446		11,761

(1) Includes 58 loans shared with CapitalSource Bank.

Mortgage-related Receivables

As of December 31, 2008, we had $1.8 billion in mortgage-related receivables secured by prime residential mortgage loans. In December 2009, we sold our beneficial interest in these receivables, and as such, there was no outstanding balance of these receivables as of December 31, 2009. For additional information, see Note 5, Mortgage-Related Receivables and Related Owner Trust Securitizations, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Other Investments

We have made investments in some of our borrowers in connection with the loans provided to them. These investments usually comprised equity interests such as common stock, preferred stock, limited liability company interests, limited partnership interests and warrants.

As of December 31, 2009 and 2008, the carrying values of our other investments in the Other Commercial Finance segment were $96.5 million and $127.7 million, respectively. Included in these balances were investments carried at fair value totaling $1.4 million and $4.7 million, respectively.

Healthcare Net Lease Segment Overview

During the year ended December 31, 2009, we sold 82 long-term healthcare facilities and anticipate selling our remaining Healthcare Net Lease real estate investments in 2010 and 2011. Upon the completion of these asset sales, we will exit the skilled nursing home ownership business, but continue to actively provide financing for owners and operators in the long-term healthcare industry. As a result, much of the Healthcare Net Lease segment activity and assets are classified as discontinued operations in our audited consolidated financial statements. For additional information, see Note 3, Discontinued Operations, in our accompanying audited consolidated financial statements for the year ended December 31, 2009 and Item 2, Properties.

Portfolio Composition

We own real estate for long-term investment purposes. These real estate investments are generally long-term healthcare facilities leased through long-term, triple-net operating leases. We had $554.2 million in direct real estate investments as of December 31, 2009, which consisted primarily of land and buildings.

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As of December 31, 2009, our Healthcare Net Lease direct real estate investment portfolio by geographic region was as follows:

Healthcare Net Lease Portfolio by Geographic Region

(1) Includes each state that has an aggregate direct real estate investment balance less than 1% of the aggregate direct real estate investment balance.

No client in our Healthcare Net Lease segment accounted for more than 10% of our total revenues in 2009. We use the term “client” with respect to our leased real estate investments to mean the legal entity that is the lessee pursuant to the lease agreement. As of December 31, 2009, the largest geographical concentration was Florida, which made up approximately 45% of our direct real estate investment portfolio. As of December 31, 2009, the single largest industry concentration in our direct real estate investment portfolio was skilled nursing, which made up approximately 99% of the investments.

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As of December 31, 2009, our direct real estate investment portfolio by asset balance was as follows:

Healthcare Net Lease Portfolio by Asset Balance

Financing

We depend on depository and external financing sources to fund our operations. We employ a variety of financing arrangements, including deposits, secured credit facilities, term debt, convertible debt, subordinated debt and equity. As a member of the FHLB SF, one of 12 regional banks in the FHLB system, CapitalSource Bank had financing availability with the FHLB SF as of December 31, 2009 equal to 20% of CapitalSource Bank’s total assets, increased from 15% as of December 31, 2008. We expect that we will continue to seek and use external financing sources in the future. We cannot assure you, however, that we will have access to any of these funding sources. Our existing financing arrangements are described in further detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.

Competition

Our markets are competitive and characterized by varying competitive factors. We compete with a large number of financial services companies, including:

•  commercial banks and thrifts;

•  specialty and commercial finance companies;

•  private investment funds;

•  insurance companies; and

•  investment banks.

Some of our competitors have substantial market positions. Many of our competitors are large companies that have substantial capital, technological and marketing resources. Some of our competitors also have access to lower cost of capital. We believe we compete based on:

•  in-depth knowledge of our clients’ industries and their business needs from information, analysis, and effective interaction between the clients’ decision-makers and our experienced professionals;

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•  our breadth of product offerings and flexible and creative approach to structuring products that meet our clients’ business and timing needs; and

•  our superior client service.

Supervision and Regulation

Our bank operations are subject to regulation by federal and state regulatory agencies. This regulation is intended primarily for the protection of depositors and the deposit insurance fund, and secondarily for the stability of the U.S. banking system. It is not intended for the benefit of stockholders of financial institutions. CapitalSource Bank is a California industrial bank and is subject to supervision and regular examination by the FDIC and the California Department of Financial Institutions (“DFI”). In addition, CapitalSource Bank’s deposits are insured up to applicable limits by the FDIC.

Although the Parent Company is not directly regulated or supervised by the DFI, the FDIC, the Federal Reserve Board or any other federal or state bank regulatory authority either as a bank holding company or otherwise, the FDIC has authority pursuant to arrangements with the Parent Company and CapitalSource Bank to examine the relationship and transactions between the Parent Company and CapitalSource Bank and the effect of such relationships and transactions on CapitalSource Bank. The Parent Company also is subject to regulation by other applicable federal and state agencies, such as the SEC. We are required to file periodic reports with these regulators and provide any additional information that they may require.

The following summary describes some of the more significant laws, regulations, and policies that affect our operations; it is not intended to be a complete listing of all laws that apply to us. From time to time, federal, state and foreign legislation is enacted and regulations are adopted which may have the effect of materially increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. We cannot predict whether or when potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations.

General

CapitalSource Bank must file reports with the DFI and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to changing its approved business plan or entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. The FDIC recently issued revised guidance concerning banks currently designated as de novo pursuant to which the FDIC will increase the time period for de novo supervisory procedures from three to seven years, and enhance its supervision for compliance examinations and Community Reinvestment Act evaluations, and CapitalSource Bank will be required to submit updated financial statements and business plans for years four through seven. There are periodic examinations by the DFI and FDIC to evaluate CapitalSource Bank’s safety and soundness and compliance with various regulatory requirements. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the regulators or Congress, could have a material adverse impact on our operations.

The FDIC and DFI have enforcement authority over our operations, which includes, among other things, the ability to assess civil money penalties, issue cease-and-desist or removal orders and initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inaction may provide the basis for enforcement action, including misleading or untimely reports filed with the FDIC or DFI. Except under certain circumstances, public disclosure of final enforcement actions by the FDIC or DFI is required.

In addition, the investment, lending and branching authority of CapitalSource Bank is prescribed by state and federal laws and CapitalSource Bank is prohibited from engaging in any activities not permitted by these laws.

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California law provides that industrial banks are generally subject to a limit on loans to one borrower. A bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily marketable collateral. As of December 31, 2009, CapitalSource Bank’s limit on loans to one borrower was $138.5 million if unsecured and $230.9 million if secured by collateral.

The FDIC and DFI, as well as the other federal banking agencies, have adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to comply with these standards must submit a compliance plan.

The Parent Company has entered into a supervisory agreement with the FDIC (the “Parent Agreement”) consenting to examination of the Parent Company by the FDIC to monitor compliance with the laws and regulations applicable to CapitalSource Bank and its affiliates. The Parent Company and CapitalSource Bank are parties to a Capital Maintenance and Liquidity Agreement (“CMLA”) with the FDIC providing that, to the extent CapitalSource Bank independently is unable to do so, the Parent Company must maintain CapitalSource Bank’s total risk-based capital ratio at not less than 15% and must maintain CapitalSource Bank’s total risk-based capital ratio at all times to meet the levels required for a bank to be considered “well-capitalized” under the relevant banking regulations. Additionally, pursuant to requirements of the FDIC, the Parent Company has provided a $150 million unsecured revolving credit facility that CapitalSource Bank may draw on at any time it or the FDIC deems necessary. The Parent Agreement also requires the Parent Company to maintain the capital levels of CapitalSource Bank at the levels required in the CMLA.

It is important to meet minimum capital requirements to avoid mandatory or additional discretionary actions initiated by these regulatory agencies. These potential actions could have a direct material effect on our audited consolidated financial statements. Based upon the regulatory framework, we must meet specific capital guidelines that involve quantitative measures of the banking assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts, the ability to pay dividends and other requirements and classifications are also subject to qualitative judgments by the regulators about risk weightings and other factors.

Federal Home Loan Bank System

CapitalSource Bank is a member of the FHLB SF, which is one of twelve regional FHLBs that provide its members with a source of funding for mortgages and asset-liability management, liquidity for a member’s short-term needs and additional funds for housing finance and community development. Each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. Each FHLB makes advances to members in accordance with policies and procedures established by the Board of Directors of that FHLB, which are subject to the oversight of the Federal Housing Finance Agency. All borrowings from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. As of December 31, 2009, CapitalSource Bank’s unused FHLB SF borrowing capacity was $764.4 million, reflecting $200.0 million of principal outstanding and a letter of credit in the amount of $0.8 million. There were no outstanding FHLB SF borrowings as of December 31, 2008, but a letter of credit in the amount of $0.8 million was outstanding. The financing is subject to various terms and conditions including a pledge of acceptable collateral, satisfaction of the FHLB stock ownership requirement and certain limits regarding the maximum term of debt.

As a member, CapitalSource Bank is required to purchase and maintain stock in the FHLB SF. As of December 31, 2009, CapitalSource Bank had $20.2 million in FHLB SF stock, which was in compliance with this requirement. The FHLB SF declared a cash dividend for the fourth quarter of 2009 at an annual rate of 0.27%, payable in March 2010.

Under federal law, the FHLB is required to pay 20% of net earnings to fund a portion of the interest on the Resolution Funding Corporation debt and to contribute to low and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low and moderate income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future.

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A reduction in value of CapitalSource Bank’s FHLB stock may result in a corresponding reduction in CapitalSource Bank’s capital.

Insurance of Accounts and Regulation by the FDIC

CapitalSource Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions. It also may prohibit any FDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against insured institutions.

The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), requires the FDIC to establish and implement a Restoration Plan if the DIF ratio falls below 1.15%. In 2008, the DIF ratio fell below 1.15% and the FDIC established the Restoration Plan, effective for the first quarter of 2009. Under the Restoration Plan system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and other factors. An institution’s assessment rate depends upon the category to which it is assigned. Assessment rates are determined by the FDIC. Beginning April 1, 2009, initial base assessment rates ranged from 12 to 16 basis points for the healthiest institutions to 45 basis points of assessable deposits for those that pose the highest risk. An institution’s total base assessment rate can vary from the initial base rate as the result of possible adjustments for unsecured debt, secured liabilities and brokered deposits. After applying all possible adjustments, total base assessment rates ranged from seven to 24 basis points for the healthiest institutions to 40 to 77.5 basis points for those that pose the highest risk. The FDIC may adopt rates that are higher or lower than total base assessment rates without the necessity of further notice and comment rulemaking, provided that no single adjustment from one quarter to the next can exceed three basis points. No institution may pay a dividend if in default of the FDIC assessment.

In the second quarter of 2009, the FDIC imposed a special assessment of five basis points on each deposit institution’s assets minus Tier 1 capital as of June 30, 2009. It also provided for additional assessments in 2009 if the FDIC estimates the reserve ratio of the DIF will fall to a level that would adversely affect the public confidence. In the third quarter of 2009, the FDIC also increased the annual assessment rate for 2011 and 2012 by three basis points.

Instead of additional special assessments, in the fourth quarter of 2009, the FDIC further amended the Restoration Plan to require all insured institutions prepay assessments through 2012. The amount of prepayment is based on an assumption of five percent annual growth in deposits and the assessment rate in effect on September 30, 2009, with the assessment rate increasing by three basis points in 2011. The prepaid assessment qualifies for a zero percent risk weighting under risk-based capital rules. The prepaid assessment does not preclude the FDIC from changing the assessment rate or further modifying the risk-based assessment system. The FDIC could institute further assessments in an effort to return the DIF to the statutory minimum ratio, and such assessments could be as much as 10 basis points per quarter. In addition, the FDIC can impose special assessments on an as needed basis if the reserve ratio of the Deposit Insurance Fund is estimated to fall to a level that would adversely affect public confidence.

A significant increase in insurance premiums would have an adverse effect on the operating expenses and results of operations of CapitalSource Bank. There can be no prediction as to what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the DFI.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. The assessment rates, which are determined quarterly, averaged 1.06 basis points of assessable deposits in 2009.

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Prompt Corrective Action

The FDIC and DFI are required to take certain supervisory actions against undercapitalized banks, the severity of which depends upon the institution’s degree of undercapitalization. Generally, an institution is considered to be “undercapitalized” if it has a core capital ratio of less than 4.0% (3.0% or less for institutions with the highest examination rating), a ratio of total capital to risk-weighted assets of less than 8.0%, or a ratio of Tier 1 capital to risk-weighted assets of less than 4.0%. An institution that has a core capital ratio that is less than 3.0%, a total risk-based capital ratio less than 6.0%, and a Tier 1 risk-based capital ratio of less than 3.0% is considered to be “significantly undercapitalized” and an institution that has a tangible capital ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the FDIC or DFI is required to appoint a receiver or conservator for a bank that is “critically undercapitalized.” Regulations also require that a capital restoration plan be filed with the FDIC and DFI within 45 days of the date an institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. “Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions. The FDIC or DFI also could take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

The risk-based capital standard requires banks to maintain Tier 1 and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively, to be considered “adequately capitalized.” In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, and assigned by regulation based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

To remain in compliance with the conditions imposed by the FDIC, Capital Source Bank is required to maintain a total risk-based capital ratio of not less than 15% and must at all times be “well-capitalized,” which requires CapitalSource Bank to have minimum total risk-based capital ratio of 10%, Tier 1 risk-based capital ratio of 6% and Tier 1 leverage ratio of 5%. Further, the DFI approval order requires that CapitalSource Bank, during the first three years of operations, maintain a minimum ratio of tangible shareholder’s equity to total tangible assets of 10.0%. As of December 31, 2009, CapitalSource Bank had Tier-1 leverage, Tier-1 risked-based capital and total risk based capital ratios of 12.80%, 16.19% and 17.47%, respectively, each in excess of the minimum percentage requirements for “well-capitalized” institutions. As of December 31, 2009, CapitalSource Bank satisfied the DFI capital ratio requirement with a ratio of 12.32%. For additional information, see Note 19, Bank Regulatory Capital, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Limitations on Capital Distributions

FDIC and DFI regulations impose various restrictions on banks with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Generally, banks may make capital distributions during any calendar year up to 100% of net income for the year-to-date plus retained net income for the two preceding years if they are well-capitalized both before and after the proposed distribution. However, an institution deemed to be in need of more than normal supervision by the FDIC and DFI may have its dividend authority restricted by the regulating bodies. In accordance with the approval order, as a de novo bank, CapitalSource Bank is prohibited from paying dividends during its first three years of operations without consent from our regulators.

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Transactions with Affiliates

CapitalSource Bank’s authority to engage in transactions with “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board’s Regulation W. The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution, and includes the Parent Company as it relates to CapitalSource Bank. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, specified types of transactions are restricted to an aggregate percentage of the institution’s capital. Collateral in specified amounts must be provided by affiliates to receive extensions of credit from an institution. Federally insured banks are subject, with certain exceptions, to restrictions on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. In addition, these institutions are prohibited from engaging in specified tying arrangements in connection with any extension of credit or the providing of any property or service.

Community Reinvestment Act

Under the Community Reinvestment Act, every FDIC-insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the FDIC, in connection with the examination of CapitalSource Bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by CapitalSource Bank. The FDIC may use an unsatisfactory rating as the basis for the denial of an application. Due to the heightened attention being given to the Community Reinvestment Act in the past few years, CapitalSource Bank may be required to devote additional funds for investment and lending in its local community.

Regulatory and Criminal Enforcement Provisions

The FDIC and DFI have primary enforcement responsibility over CapitalSource Bank and have the authority to bring action against all “institution-affiliated parties,” including stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1.1 million per day in especially egregious cases. The FDIC has the authority to take such action under certain circumstances. Federal law also establishes criminal penalties for specific violations.

Environmental Issues Associated with Real Estate Lending

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), a federal statute, generally imposes strict liability on all prior and current “owners and operators” of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for clean-up costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including the Parent Company and CapitalSource Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.

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Privacy Standards

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. CapitalSource Bank is subject to regulations implementing the privacy protection provisions of the GLBA. These regulations require CapitalSource Bank to disclose its privacy policy, including identifying with whom it shares “non-public personal information” to customers at the time of establishing the customer relationship and annually thereafter. The State of California’s Financial Information Privacy Act provides greater protection for consumer’s rights under California Law to restrict affiliate data sharing.

Anti-Money Laundering and Customer Identification

As part of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”), Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLAFATA”). IMLAFATA amended the Bank Secrecy Act (“BSA”) and adopted additional measures that established or increased existing obligations of financial institutions, including CapitalSource Bank, to identify their customers, monitor and report suspicious transactions, respond to requests for information by federal banking regulatory authorities and law enforcement agencies, and, at the option of CapitalSource Bank, share information with other financial institutions. The U.S. Secretary of the Treasury has adopted several regulations to implement these provisions. Pursuant to these regulations, CapitalSource Bank is required to implement appropriate policies and procedures relating to anti-money laundering matters, including compliance with applicable regulations, suspicious activities, currency transaction reporting and customer due diligence. Our BSA compliance program is subject to federal regulatory review.

Other Laws and Regulations

CapitalSource Bank is subject to many other federal statutes and regulations, such as the Equal Credit Opportunity Act, the Truth in Savings Act, the Fair Credit Reporting Act, the Fair Housing Act, the National Flood Insurance Act and various federal and state privacy protection laws. These laws, rules and regulations, among other things, impose licensing obligations, limit the interest rates and fees that can be charged, mandate disclosures and notices to customers mandate the collection and reporting of certain data regarding customers, regulate marketing practices and require the safeguarding of non-public information of customers. Penalties for violating these laws could subject CapitalSource Bank to lawsuits and could also result in administrative penalties, including, fines and reimbursements. CapitalSource Bank and the Parent Company are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition.

In recent years, examination and enforcement by the state and federal banking agencies for non-compliance with the above-referenced laws and their implementing regulations have become more intense. Due to these heightened regulatory concerns, CapitalSource Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.

The Federal government, in response to the current economic environment, continues to evaluate possible new laws and regulations, which if enacted, could have a material impact on CapitalSource Bank and the Parent Company, including among other things increased reporting obligations, restrictions on current lending activities, Federal and state supervision and increased expenses to operate as a bank.

Regulation of Other Activities

Some other aspects of our operations are subject to supervision and regulation by governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things:

•  regulate credit activities, including establishing licensing requirements in some jurisdictions;

•  regulate lending activities, including establishing licensing requirements in some jurisdictions;

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•  establish the maximum interest rates, finance charges and other fees we may charge our clients;

•  govern secured transactions;

•  require specified information disclosures to our clients;

•  set collection, foreclosure, repossession and claims handling procedures and other trade practices;

•  regulate our clients’ insurance coverage;

•  prohibit discrimination in the extension of credit and administration of our loans; and

•  regulate the use and reporting of certain client information.

In addition, many of our healthcare clients receive significant funding from governmental sources and are subject to licensure, certification and other regulation and oversight under the applicable Medicare and Medicaid programs. These regulations and governmental oversight, both on federal and state levels, indirectly affect our business in several ways as discussed below and in Item 1A, Risk Factors.

•  Failure to comply with the applicable laws and regulation by our clients could result in loss of accreditation, denial of reimbursement, imposition of fines, suspension or decertification from federal and state health care programs, loss of license and closure of the facility.

•  With limited exceptions, the law prohibits payment of amounts owed to healthcare providers under the Medicare and Medicaid programs to be directed to any entity other than actual providers approved for participation in the applicable programs. Accordingly, while we lend money that is secured by pledges of Medicare and Medicaid receivables, if we were required to invoke our rights to the pledged receivables, we would be unable to collect receivables payable under these programs directly. We would need a court order to force collection directly against these governmental payers.

•  Hospitals, nursing facilities and other providers of healthcare services are not always assured of receiving adequate Medicare and Medicaid reimbursements to cover the actual costs of operating the facilities and providing care to patients. In addition, modifications to reimbursement payment mechanisms, statutory and regulatory changes, retroactive rate adjustments, administrative rulings, policy interpretations, payment delays, and government funding restrictions could result in payment delays or alterations in reimbursements affecting providers’ cash flows with possible material adverse affect on a facility’s liquidity.

•  Many states are presently considering enacting, or have already enacted, reductions in the amount of funds appropriated to healthcare programs resulting in rate freezes or reductions to their Medicaid payment rates and often curtailments of coverage afforded to Medicaid enrollees. Most of our healthcare clients depend on Medicare and Medicaid reimbursements, and reductions in reimbursements, caused by either payment cuts, census declines, staffing shortages, or other operational forces from these programs may have a negative impact on their ability to generate adequate revenues to satisfy their obligations to us. There are no assurances that payments from governmental payors will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for coverage under these programs.

•  For our clients to remain eligible to receive reimbursements under the Medicare and Medicaid programs the clients must comply with a number of conditions of participation and other regulations imposed by these programs, and are subject to periodic federal and state surveys to ensure compliance with various clinical and operational covenants. A client’s failure to comply with these covenants and regulations may cause the client to incur penalties and fines and other sanctions, or lose its eligibility to continue to receive reimbursements under the programs, which could result in the client’s inability to make scheduled payments to us.

Employees

As of December 31, 2009, we employed 665 people, 366 of whom were employed by CapitalSource Bank. We believe that our relations with our employees are good.

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Executive Officers

Our executive officers and their ages and positions are as follows:

Name	Age		Position
John K. Delaney		46	Executive Chairman
Steven A. Museles		46	Co-Chief Executive Officer
James J. Pieczynski		47	Co-Chief Executive Officer
Douglas H. (Tad) Lowrey		57	Chief Executive Officer and President — CapitalSource Bank
Donald F. Cole		39	Chief Financial Officer
Bryan D. Smith		39	Senior Vice President and Chief Accounting Officer

Biographies for our executive officers are as follows:

John K. Delaney, 46, a co-founder of the company, has served as our Executive Chairman since January 2010, as a director and Chairman of our Board since our inception in 2000, and as our Chief Executive Officer from our inception in 2000 until January 2010. Mr. Delaney received his undergraduate degree from Columbia University and his juris doctor degree from Georgetown University Law Center.

Steven A. Museles, 46, has served as a director and Co-Chief Executive Officer since January 2010. Mr. Museles previously served as our Executive Vice President, Chief Legal Officer and Secretary from our inception in 2000 until January 2010, and in similar capacities for CapitalSource Bank from July 2008 through December 2009. Mr. Museles received his undergraduate degree from the University of Virginia and his juris doctor degree from Georgetown University Law Center.

James J. Pieczynski, 47, has served as a director and Co-Chief Executive Officer since January 2010. Mr. Pieczynski previously served as our President — Healthcare Real Estate Business from November 2008 until January 2010, our Co-President — Healthcare and Specialty Finance from January 2006 until November 2008, Managing Director — Healthcare Real Estate Group from February 2005 through December 2005, and Director — Long Term Care from November 2001 through January 2005. Mr. Pieczynski served on the board of directors and audit committee of Florida East Coast Industries Inc. from June 2004 until June 2006. Mr. Pieczynski received his undergraduate degree from the University of Illinois, Urbana-Champaign.

Douglas H. (Tad) Lowrey, 57, has served as the Chief Executive Officer and President of CapitalSource Bank since its formation on July 25, 2008. Prior to his appointment, Mr. Lowrey served as Executive Vice President of Wedbush, Inc., a private investment firm and holding company, from January 2006 until June 2008. Mr. Lowrey served as Chairman, President and Chief Executive Officer of Jackson Federal Bank from 1999 until February 2005 following its sale to Union Bank of California. Mr. Lowrey is an elected director of the Federal Home Loan Bank of San Francisco. He received his undergraduate degree from Arkansas Tech University and was licensed in 1977 in the state of Arkansas as a certified public accountant.

Donald F. Cole, 39, has served as our Chief Financial Officer since May 2009. Mr. Cole previously served as our Chief Administrative Officer from September 2008 until May 2009, our interim Chief Accounting Officer from March 2008 until September 2008, our Chief Administrative Officer from January 2007 until March 2008, our Chief Operations Officer from February 2005 until January 2007, and our Chief Information Officer from July 2003 until February 2005. Mr. Cole received his undergraduate degree and masters of business administration from the State University of New York at Buffalo and a juris doctor degree from the University of Virginia School of Law. He was licensed in 1996 in the state of New York as a certified public accountant.

Bryan D. Smith, 39, has served as our Chief Accounting Officer since September 2008. Previously, Mr. Smith worked as a consultant to us from June 2008 until his appointment as our Chief Accounting Officer in September 2008, and served as our Controller — Strategy Execution from January 2007 until May 2008, and our Controller from October 2003 until January 2007. Mr. Smith received his undergraduate degree from Virginia Tech in 1993 and was licensed in 1994 in the State of Maryland as a certified public accountant.

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Statistical Disclosures

The financial data for the year ended December 31, 2009 comprises information from CapitalSource Inc., including CapitalSource Bank, for the entire year. Financial data for the year ended December 31, 2008 comprises information from CapitalSource Inc. for the entire year and CapitalSource Bank for the period from the commencement of CapitalSource Bank’s operations on July 25, 2008 through December 31, 2008. Financial data as of and for the years ended December 31, 2007, 2006, and 2005 does not include any information from CapitalSource Bank.

For purposes of the following statistical disclosures, we determined separate disclosure of foreign data was unnecessary because they are not material in relation to the domestic activities of our operations for all years presented in our audited consolidated financial statements. In addition, certain amounts as of and for the years ended December 31, 2009, 2008, 2007, 2006, and 2005 have been reclassified from previous years’ presentations to conform to the current year presentation.

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Table 1. Distribution of Assets, Liabilities, and Shareholders’ Equity

For the years ended December 31, 2009, 2008 and 2007, our consolidated average balances and the resulting average interest yields and rates were as follows:

	Year Ended December 31,
	2009							2008							2007
			Interest							Interest							Interest
	Average		Income /		Yield/			Average		Income /		Yield /			Average		Income /		Yield /
	Balance		(Expense)		Rate			Balance(1)		(Expense)		Rate			Balance		(Expense)		Rate
	($ in thousands)
Interest-earning assets:
Cash and cash equivalents	$	1,192,863	$	4,562		0.38	%	$	1,346,552	$	23,738		1.76	%	$	560,440	$	21,181		3.78	%
Investment securities, available-for-sale(3)		859,546		34,052		3.96	%		242,668		15,854		6.53	%		44,038		4,293		9.75	%
Investment securities, held to maturity(3)		175,631		20,496		11.67	%		235		67		28.51	%		—		—		N/A
Mortgage related receivables, net		1,612,254		74,276		4.61	%		1,921,538		94,485		4.92	%		2,166,728		127,330		5.88	%
Mortgage-backed securities pledged, trading		58,102		6,411		11.03	%		2,190,775		122,181		5.58	%		3,815,471		212,869		5.58	%
Commercial real estate “A” Participation Interest, net		907,613		47,457		5.23	%		700,973		54,226		7.74	%		—		—		N/A
Loans(2)		9,028,580		698,127		7.73	%		9,655,117		921,949		9.55	%		8,959,621		1,064,107		11.88	%
Other assets		20,745		89		0.43	%		8,651		128		1.48	%		644		27		4.19	%
Total interest-earning assets	$	13,855,334	$	885,470		6.39	%	$	16,066,509	$	1,232,628		7.67	%	$	15,546,942	$	1,429,807		9.20	%
Non interest-earning assets		730,179							831,917							720,884
Assets of discontinued operations, held for sale		686,466							706,547							544,822
Total assets	$	15,271,979						$	17,604,973						$	16,812,648
Interest-bearing liabilities:
Deposits	$	4,604,887	$	109,430		2.38	%	$	2,207,210	$	76,245		3.45	%	$	—	$	—		N/A
Repurchase agreements		124,549		1,874		1.50	%		2,374,890		85,458		3.60	%		3,771,977		198,610		5.27	%
Credit facilities		1,122,498		94,997		8.46	%		1,781,486		125,197		7.03	%		2,808,230		188,543		6.71	%
Term debt		4,806,129		152,989		3.18	%		6,240,744		300,723		4.82	%		6,003,040		369,476		6.15	%
Other borrowings		1,466,979		78,423		5.35	%		1,560,048		105,734		6.78	%		1,408,791		102,551		7.28	%
Borrowings of discontinued operations(4)		80,570		5,532		6.87	%		86,482		5,686		6.57	%		64,460		5,059		7.85	%
Total interest-bearing liabilities	$	12,205,612	$	443,245		3.63	%	$	14,250,860	$	699,043		4.91	%	$	14,056,498	$	864,239		6.15	%
Non interest-bearing liabilities		297,661							359,000							248,285
Liabilities of discontinued operations		49,603							50,518							32,007
Total liabilities		12,552,876							14,660,378							14,336,790
Shareholders’ equity		2,719,103							2,944,595							2,475,858
Total liabilities and shareholders’ equity	$	15,271,979						$	17,604,973						$	16,812,648
Net interest income and net yield on interest-earning assets(5)			$	442,225		3.19	%			$	533,585		3.32	%			$	565,568		3.64	%

(1)	CapitalSource Bank commenced operations on July 25, 2008. Average balances reflect 160 days of activity in 2008.
(2)	The average principal amounts of non-accrual loans have been included in the average loan balances to determine the average yield earned on loans. For the years ended December 31, 2009, 2008 and 2007, interest income from outstanding loans included loan fees of $22.9 million, $33.1 million and $63.3 million, respectively.
(3)	The average yields for investment securities available-for-sale were calculated based on the amortized costs of the individual securities and do not reflect any changes in fair value, which were recorded in accumulated other comprehensive income (loss) in our audited consolidated balance sheets. The average yields for investment securities held-to-maturity have also been calculated using amortized cost balances.
(4)	Includes subordinated debt and mortgage debt related to properties classified as discontinued operations in our audited consolidated balance sheets.
(5)	Net interest income is defined as the difference between total interest income and total interest expense. Net yield on interest-earning assets is defined as net interest-earnings divided by average total interest-earning assets.

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Table 2. Interest Income/Expense Variance Analysis

For the years ended December 31, 2009 and 2008, changes in interest income, interest expense and net interest income as a result of changes in volume, changes in interest rates or both were as follows:

	2009 Compared to 2008									2008 Compared to 2007
	Due to Change in:						Net			Due to Change in:						Net
	Rate			Volume			Change			Rate			Volume			Change
	($ in thousands)
Increase (decrease) in interest income:
Cash and cash equivalents	$	(16,737	)	$	(2,439	)	$	(19,176	)	$	(15,669	)	$	18,226		$	2,557
Investment securities, available-for-sale		(8,367	)		26,565			18,198			(1,851	)		13,412			11,561
Investment securities, held-to-maturity		(63	)		20,492			20,429			—			67			67
Mortgage related receivables, net		(5,690	)		(14,519	)		(20,209	)		(19,399	)		(13,446	)		(32,845	)
Mortgage-backed securities pledged, trading		61,212			(176,982	)		(115,770	)		(78	)		(90,610	)		(90,688	)
Commercial real estate “A” Participation Interest, net		(20,287	)		13,518			(6,769	)		—			54,226			54,226
Loans		(166,890	)		(56,932	)		(223,822	)		(220,167	)		78,009			(142,158	)
Other assets		(134	)		95			(39	)		(28	)		129			101
Total (decrease) increase in interest income		(156,956	)		(190,202	)		(347,158	)		(257,192	)		60,013			(197,179	)
Increase (decrease) in interest expense:
Deposits		(29,561	)		62,746			33,185			—			76,245			76,245
Repurchase agreements		(31,799	)		(51,785	)		(83,584	)		(52,146	)		(61,006	)		(113,152	)
Credit facilities		22,205			(52,405	)		(30,200	)		8,445			(71,791	)		(63,346	)
Term debt		(88,079	)		(59,655	)		(147,734	)		(82,893	)		14,140			(68,753	)
Other borrowings		(21,296	)		(6,015	)		(27,311	)		(7,366	)		10,549			3,183
Interest expense related to discontinued operations		245			(399	)		(154	)		(911	)		1,538			627
Total (decrease) increase in interest expense		(148,285	)		(107,513	)		(255,798	)		(134,871	)		(30,325	)		(165,196	)
Net (decrease) increase in net interest income	$	(8,671	)	$	(82,689	)	$	(91,360	)	$	(122,321	)	$	90,338		$	(31,983	)

Volume and interest rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and interest rates were allocated proportionally to the absolute change in volume and interest rates.

Certain selected ratios associated with our financial information are included in Item 6, Selected Financial Data.

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Table 3. Investment Portfolio

As of December 31, 2009, 2008 and 2007, the outstanding book values of our trading and investment securities were as follows:

	December 31,
	2009		2008		2007
	($ in thousands)
Trading securities:
Agency mortgage-backed securities	$	—	$	1,489,291	$	4,030,180
Securities available-for-sale:
Agency debt obligations(1)	$	324,998	$	495,337	$	—
Agency mortgage-backed securities		418,390		142,236		—
Non-agency mortgage-backed securities		153,275		377		4,518
Other debt securities		1,326		2,416		5,318
Corporate debt securities		9,618		38,972		3,000
Equity securities		52,984		213		473
Total securities available-for-sale	$	960,591	$	679,551	$	13,309
Securities held-to-maturity:
Commercial mortgage-backed securities	$	242,078	$	14,389	$	—

(1) Includes discount notes, callable notes, and debt notes issued by various Government-Sponsored Enterprises (“GSEs”), including $160.9 million, $80.3 million, $36.0 million and $15.0 million of securities issued by Fannie Mae, Freddie Mac, FHLB and Federal Farm Credit Bank, respectively, as of December 31, 2009.

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Table 4. Investments by Maturity Dates

As of December 31, 2009, the carrying amounts, contractual maturities and weighted average yields of our investment securities were as follows:

				Due Between			Due Between
	Due in One			One and Five			Five and Ten			Due after Ten
	Year or Less			Years			Years			Years(1)			Total
	($ in thousands)
Investment securities available-for-sale:
Agency debt obligations	$	75,007		$	177,016		$	72,974		$	—		$	324,997
Agency mortgage-backed securities		—			—			27,094			391,296			418,390
Non-agency mortgage-backed securities		—			—			52,400			100,876			153,276
Other debt securities		—			—			—			1,326			1,326
Corporate debt securities		—			5,162			4,456			—			9,618
Equity securities		—			—			—			52,984			52,984
Total investment securities available-for-sale	$	75,007		$	182,178		$	156,924		$	546,482		$	960,591
Weighted average yield(2)		0.38	%		3.02	%		4.12	%		4.98	%		4.05	%
Investment securities held-to-maturity:
Commercial mortgage-backed securities	$	27,221		$	214,857		$	—		$	—		$	242,078
Total investment securities held-to maturity	$	27,221		$	214,857		$	—		$	—		$	242,078
Weighted average yield(2)		4.18	%		10.93	%		—	%		—	%		10.17	%

(1)	Included in this category are Agency and Non-agency MBS with weighted-average expected maturities of approximately 3.3 years and 2.4 years, respectively, based on interest rates and expected prepayment speeds as of December 31, 2009. Also includes securities with no stated maturity.
(2)	Calculated based on the amortized costs of the individual securities and does not reflect any changes in fair value of our investment securities, available for sale, which were recorded in accumulated other comprehensive income (loss) in our consolidated balance sheets.

Actual maturities of these securities may differ from contractual maturity dates because issuers may have the right to call or prepay obligations.

Table 5. Loan Balances by Product Type

The outstanding unpaid principal balance of loans in our commercial loan portfolio (including loans held for sale) by category as of December 31 2009, 2008, 2007, 2006 and 2005 was as follows:

	December 31,
	2009		2008		2007		2006		2005
	($ in thousands)
Commercial	$	5,052,570	$	6,118,609	$	6,334,670	$	5,003,978	$	3,904,835
Real estate		2,047,406		1,959,426		1,979,571		2,056,116		1,693,894
Real estate — construction		1,221,854		1,377,757		1,497,232		754,592		346,477
Total loans(1)	$	8,321,830	$	9,455,792	$	9,811,473	$	7,814,686	$	5,945,206

(1) Excludes deferred loan fees and discounts and the allowance for loan losses. Includes lower of cost or fair value adjustments on loans held for sale.

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Although our loan portfolio included borrowers from more than 18 industries as of December 31, 2009, we had a high concentration of our loan balances in three industries in particular. These industries and their respective percentage to total loans were follows:

	Percentage of
	Total Loans
Health care and social assistance		20.1	%
Accommodation and food services		16.4	%
Finance and insurance		11.7	%

The 360 loans within these industries are to 281 borrowers located throughout most of the United States (34 states and the District of Columbia). The largest loan was $325.0 million, which was 3.9% of total loans. A discussion of our commercial loan portfolio, including further statistical analysis, is in the Overview section of Item 1, Business.

Table 6. Loan Balances by Maturities

As of December 31, 2009, the contractual maturities of our commercial loan portfolio (including loans held for sale) were as follows:

			Due After One
	Due in One Year or		Year Through		Due After Five
	Less		Five Years		Years		Total
	($ in thousands)
Commercial	$	820,202	$	3,804,938	$	427,430	$	5,052,570
Real estate		291,414		1,555,479		200,513		2,047,406
Real estate — construction		954,115		267,739		—		1,221,854
Total loans(1)	$	2,065,731	$	5,628,156	$	627,943	$	8,321,830

(1) Excludes deferred loan fees and discounts and the allowance for loan losses. Includes lower of cost or fair value adjustments on loans held for sale.

Table 7. Sensitivity of Loans to Changes in Interest Rates

As of December 31, 2009, the total amount of loans due after one year with predetermined interest rates and floating or adjustable interest rates were as follows:

	Loans with		Loans with Floating
	Predetermined		or
	Rates(1)		Adjustable Rates		Total
	($ in thousands)
Commercial	$	162,566	$	4,069,802	$	4,232,368
Real estate		278,065		1,477,927		1,755,992
Real estate — construction		—		267,739		267,739
Total loans(2)	$	440,631	$	5,815,468	$	6,256,099

(1)	Represents loans for which the interest rate is fixed for the entire term of the loan.
(2)	Excludes deferred loan fees and discounts and the allowance for loan losses. Includes lower of cost or fair value adjustments on loans held for sale.

Table 8. Non-performing and Potential Problem Loans

Non-performing loans are loans accounted for on a non-accrual basis, accruing loans which are contractually past due 90 days or more as to principal or interest payments, and other loans identified as troubled debt restructurings, as defined in the Receivables: Troubled Debt Restructurings by Creditors Subtopic of the Accounting Standards Codification (the “Codification”).

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Loans accounted for on a non-accrual basis are loans on which interest income is no longer recognized on an accrual basis and loans for which a specific provision is recorded for the full amount of accrued interest receivable. We place loans on non-accrual status when we expect, based on our credit judgment, that the borrower will not be able to service its debt and other obligations.

Troubled debt restructurings are loans that have been restructured as a result of deterioration in the borrower’s financial position and for which we have granted a concession to the borrower that we would not have otherwise granted if those conditions did not exist.

The outstanding unpaid principal balances of non-performing loans in our loan portfolio by category as of December 31, 2009, 2008, 2007, 2006 and 2005 were as follows:

	December 31,
	2009		2008		2007		2006		2005
	($ in thousands)
Non-accrual loans
Commercial	$	406,002	$	283,997	$	146,553	$	142,138	$	100,879
Real estate		208,848		38,860		16,097		46,585		40,665
Real estate — construction		453,235		94,207		22,044		7,881		—
Total loans on non-accrual	$	1,068,085	$	417,064	$	184,694	$	196,604	$	141,544
Accruing loans contractually past-due 90 days or more
Commercial	$	43,213	$	7,429	$	2,227	$	—	$	—
Real estate		—		24,135		—		12,600		—
Real estate — construction		23,780		—		—		1,728		77
Total accruing loans contractually past-due 90 days or more	$	66,993	$	31,564	$	2,227	$	14,328	$	77
Troubled debt restructurings(1)
Commercial	$	96,415	$	139,948	$	139,801	$	81,783	$	47,364
Real estate		15,328		1,404		1,476		—		—
Total troubled debt restructurings	$	111,743	$	141,352	$	141,277	$	81,783	$	47,364
Total non-performing loans
Commercial	$	545,630	$	431,374	$	288,581	$	223,921	$	148,243
Real estate		224,176		64,399		17,573		59,185		40,665
Real estate — construction		477,015		94,207		22,044		9,609		77
Total non-performing loans	$	1,246,821	$	589,980	$	328,198	$	292,715	$	188,985

(1) Excludes non-accrual loans and accruing loans contractually past-due 90 days or more.

Interest income that would have been recorded for the year ended December 31, 2009 from non-accrual loans and troubled debt restructurings presented in the table above if such loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, was $49.7 million. For the year ended December 31, 2009, interest income earned on these loans recorded in our audited consolidated statement of operations was $10.9 million.

Potential problem loans are loans that are not considered non-performing loans, as previously discussed, but loans where management is aware of information regarding potential credit problems of a borrower that leads to serious doubts as to the ability of compliance with loan covenants or defaults by the borrower. Such non-compliance or defaults could eventually result in the loans being reclassified as non-performing loans.

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As of December 31, 2009, the outstanding balance of our potential problem loans by category was as follows ($ in thousands):

With specific allowance on principal
Commercial	$	—
Real estate		—
Real estate — construction		—
Total with specific allowance on principal		—
Without specific allowance on principal
Commercial		3,739
Real estate		—
Total without specific allowance on principal		—
Total potential problem loans	$	3,739

Table 9. Summary of Loan Loss Experience

Our allowance for loan losses represents management’s estimate of loan losses inherent in our loan portfolio as of the balance sheet date. See additional discussion surrounding the factors, which influence such judgments within Allowance for Loan Losses under the Critical Accounting Estimates section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation. Changes in the allowance for loan losses by category for the years ended December 31, 2009, 2008, 2007, 2006 and 2005 were as follows:

	Year Ended December 31,
	2009			2008			2007			2006			2005
				($ in thousands)
Balance as of beginning of year	$	423,844		$	138,930		$	120,575		$	87,370		$	35,208
Charge offs:
Commercial		(308,554	)		(206,822	)		(46,314	)		(43,399	)		(8,680	)
Real estate		(76,919	)		(16,173	)		(2,416	)		(4,592	)		(3,079	)
Real estate — construction		(204,381	)		(49,188	)		(9,664	)		(115	)		(1,913	)
Total charge offs		(589,854	)		(272,183	)		(58,394	)		(48,106	)		(13,672	)
Recoveries:
Commercial		11,299			1,122			—			—			—
Real estate		16			—			13			—			—
Real estate — construction		46			161			892			100			123
Total recoveries		11,361			1,283			905			100			123
Net charge offs		(578,493	)		(270,900	)		(57,489	)		(48,006	)		(13,549	)
Transfers to held for sale		(33,907	)		(20,991	)		(1,732	)		—			—
Increase to allowance charged to operations		775,252			576,805			77,576			81,211			65,711
Balance as of end of year	$	586,696		$	423,844		$	138,930		$	120,575		$	87,370
Net charge offs as a percentage of average loans outstanding		6.4	%		2.8	%		0.6	%		0.7	%		0.3	%

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Table 10. Allocation of the Allowance for Loan Losses

The allowance for loan losses allocated to each category of loans and the percentage of each category to our total loan portfolio as of December 31, 2009, 2008, 2007, 2006 and 2005 was as follows:

	December 31,
	2009			2008			2007			2006			2005
	($ in thousands)
Allocation by Category
Commercial	$	261,392		$	306,505		$	112,374		$	97,867		$	69,438
Real estate		138,575			67,698			14,413			14,982			15,982
Real estate — construction		186,729			49,641			12,143			7,726			1,950
Total loan loss allowance	$	586,696		$	423,844		$	138,930		$	120,575		$	87,370
Percent of Total Loan Portfolio by Category
Commercial		60.7	%		64.7	%		64.6	%		64.0	%		65.7	%
Real estate		24.6	%		20.7	%		20.2	%		26.3	%		28.5	%
Real estate — construction		14.7	%		14.6	%		15.2	%		9.7	%		5.8	%
Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Table 11. Average Deposits

As of December 31, 2009 and 2008, the average balances and the average interest rates on deposit categories in excess of 10% of average total deposits were as follows. There were no deposits held as of December 31, 2007.

	December 31,
	2009					2008(1)
	Average Balance		Average Rate			Average Balance		Average Rate
	($ in thousands)
Savings deposits	$	776,807		1.42	%	$	282,194		2.79	%
Time deposits		3,828,080		2.57			1,925,016		3.55
Total deposits	$	4,604,887		2.38	%	$	2,207,210		3.45	%

(1) CapitalSource Bank commenced operations on July 25, 2008. Average deposit balances reflect 160 days of activity in 2008 and the average rates represent annualized rates.

Table 12. Significant Time Deposits

As of December 31, 2009, the amount of time certificates of deposit in the amount of $100,000 or more and categorized by time remaining to maturity was as follows ($ in thousands):

0-3 months	$	535,733
3-6 months		465,181
6-12 months		372,338
Greater than 12 months		124,205
Total	$	1,497,457

Table 13. Analysis of Short-term Borrowings

Short-term borrowings are borrowings with an original maturity of one year or less, of which securities sold under repurchase agreements, was our only significant category for the years ended December 31, 2008 and 2007. We had no significant categories of short-term borrowings for the year ended December 31, 2009. See additional

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discussion surrounding the general terms of these securities sold under repurchase agreements in Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

As of and for the years ended December 31 2009, 2008 and 2007, information about our securities sold under repurchase agreements was as follows:

	Year Ended December 31,
	2009			2008			2007
	($ in thousands)
Balance as of year end	$	—		$	1,499,250		$	3,796,396
Average daily balance during the year	$	—		$	2,268,868		$	3,727,665
Maximum outstanding month-end balance	$	—		$	3,780,942		$	4,217,086
Weighted average interest rate during the year		—	%		3.5	%		5.3	%
Weighted average interest rate as of year end		—	%		2.6	%		5.1	%

Other Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our website at www.capitalsource.com as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission or by contacting CapitalSource Investor Relations, at (800) 370-9431 or investor.relations@capitalsource.com.

We also provide access on our website to our Principles of Corporate Governance, Code of Business Conduct and Ethics, the charters of our Audit, Compensation, Asset, Liability and Credit Policy and Nominating and Corporate Governance Committees and other corporate governance documents. Copies of these documents are available to any shareholder upon written request made to our corporate secretary at our Chevy Chase, Maryland address. In addition, we intend to disclose on our website any changes to or waivers for executive officers from, our Code of Business Conduct and Ethics.

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ITEM 1A.   RISK FACTORS

Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our business operations. If any of the events or circumstances described in the following risk factors actually occur, our business, financial condition or results of operations could suffer, and the trading price of our securities could decline. The U.S. economy entered an economic recession, and we expect this to continue to have a significant adverse impact on our business and operations, including, without limitation, the credit quality of our loan portfolio, our liquidity and our earnings. You should know that many of the risks described may apply to more than just the subsection in which we grouped them for the purpose of this presentation. As a result, you should consider all of the following risks, together with all of the other information in this Annual Report on Form 10-K, before deciding to invest in our securities.

Risks Related to Our Lending Activities

Our results of operation and financial condition would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses.

Experience in the financial services industry indicates that a portion of our loans in all categories of our lending business will become delinquent or impaired, and some may only be partially repaid or may never be repaid at all. Our methodology for establishing the adequacy of the allowance for loan losses depends on subjective determinations and judgments about our borrowers’ ability to repay. Despite management’s efforts to estimate the specific allowance, ultimate resolutions of specific loans may result in actual losses that are greater than our specific allowance. Deterioration in general economic conditions and unforeseen risks affecting customers may have an adverse effect on our borrowers’ capacity to repay their obligations, whether our risk ratings or valuation analyses reflect those changing conditions. Changes in economic and market conditions may increase the risk that the allowance would become inadequate if borrowers experience economic and other conditions adverse to their businesses. Maintaining the adequacy of our allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which would materially affect our results of operations and capital adequacy. Recognizing that many of our loans individually represent a significant percentage of our total allowance for loan losses, adverse collection experience in a relatively small number of loans could require an increase in our allowance. Federal and State regulators, as an integral part of their respective supervisory functions, periodically review a portion of our allowance for loan losses. The regulatory agencies may require changes to classifications or grades on loans, increases in the allowance for loan losses with large provisions for loan losses and recognition of further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses required by these regulatory agencies could have a negative effect on our results of operations and financial condition.

We may not recover all amounts that are contractually owed to us by our borrowers.

We charged off $612.2 million in loans for the year ended December 31, 2009, and, in light of current economic and market conditions, we expect to experience additional charge-offs and delinquencies in the future. If we experience material losses on our portfolio, such losses would have a material adverse effect on our ability to fund our business and on our revenues, net income and assets, to the extent the losses exceed our allowance for loan losses. In addition, like other commercial lenders, we have experienced missed and late payments, failures by clients to comply with operational and financial covenants in their loan agreements and client performance below that which we expected when we originated the loan. Any of these events may be an indication that our risk of credit loss with respect to a particular loan has materially increased.

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We make loans to other lenders and commercial real estate developers which have been disproportionately negatively impacted by the economic recession. These clients face a variety of risks, any of which may negatively impact their results of operations and impair their ability to pay principal and interest on our loans.

We make loans to other lenders to finance their real estate lending operations and to other clients for development, construction and renovation projects. The ability of these clients to make required payments to us on these loans is subject to the risks associated with their loans and these projects. An unsuccessful loan by, or development, construction or renovation project of, any such client could limit that client’s ability to repay its obligations to us.

Our concentration of loans to a limited number of clients within a particular industry, including commercial real estate, or region could impair our revenues if the industry or region were to experience continued or worsening economic difficulties or changes in the regulatory environment.

Defaults by our clients may be correlated with economic conditions affecting particular industries or geographic regions. As a result, if any particular industry or geographic region were to experience continuing or worsening economic difficulties, the overall timing and amount of collections on our loans to clients operating in those industries or geographic regions may differ from what we expected and result in material harm to our revenues, net income and assets. As of December 31, 2009, $1.7 billion, or 20.2% of our commercial loan portfolio consisted of loans to seven clients that are individually greater than $100 million. Of the loans held by these clients, five were commercial real estate loans totaling $673.6 million. These loans are among the largest and pose the highest risk of loss upon default in our portfolio. As of December 31, 2009, all of these loans were performing; however, if any of these loans were to experience problems, it could have a material adverse impact on our financial condition or results of operations. The commercial real estate sector is currently experiencing severe economic difficulties, and we expect this sector to deteriorate further in which case we are likely to suffer additional losses on these types of loans as well as increases in loan-to-value, delinquencies and foreclosures. We have limited experience owning, operating and developing real estate owned (“REO”) properties we obtain through foreclosures.

In addition, as of December 31, 2009, loans representing 20% of the aggregate outstanding balance of our commercial loan portfolio were to clients in the healthcare industry. Reimbursements under the Medicare and Medicaid programs comprise the bulk of the revenues of many of these clients. Our clients’ dependence on reimbursement revenues could cause us to suffer losses in several instances.

•  If clients fail to comply with operational covenants and other regulations imposed by these programs, they may lose their eligibility to continue to receive reimbursements under the program or incur monetary penalties, either of which could result in the client’s inability to make scheduled payments to us.

•  If reimbursement rates do not keep pace with increasing costs of services to eligible recipients, or funding levels decrease as a result of increasing pressures from Medicare and Medicaid to control healthcare costs, our clients may not be able to generate adequate revenues to satisfy their obligations to us.

•  If a healthcare client were to default on its loan, we would be unable to invoke our rights to the pledged receivables directly as the law prohibits payment of amounts owed to healthcare providers under the Medicare and Medicaid programs to be directed to any entity other than the actual providers. Consequently, we would need a court order to force collection directly against these governmental payors. There is no assurance that we would be successful in obtaining this type of court order.

We make loans to privately owned small and medium-sized companies that present a greater risk of loss than loans to larger companies.

Our portfolio consists primarily of commercial loans to small and medium-sized, privately owned businesses. Compared to larger, publicly owned firms, these companies generally have limited access to capital and higher funding costs, may be in a weaker financial position and may need more capital to expand or compete. These financial challenges may make it difficult for our clients to make scheduled payments of interest or principal on our

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loans. Accordingly, loans made to these types of clients entail higher risks than loans made to companies who are able to access a broader array of credit sources.

We may not have all of the material information relating to a potential client at the time that we make a credit decision with respect to that potential client or at the time we advance funds to the client. As a result, we may suffer losses on loans or make advances that we would not have made if we had all of the material information.

There is generally no publicly available information about the privately owned companies to which we lend. Therefore, we must rely on our clients and the due diligence efforts of our employees to obtain the information that we consider when making our credit decisions. To some extent, our employees depend and rely upon the management of these companies to provide full and accurate disclosure of material information concerning their business, financial condition and prospects. We may not have access to all of the material information about a particular client’s business, financial condition and prospects, or a client’s accounting records may be poorly maintained or organized. The client’s business, financial condition and prospects may also change rapidly in the current economic environment. In such instances, we may not make a fully informed credit decision which may lead, ultimately, to a failure or inability to recover our loan in its entirety.

Increases in interest rates could negatively affect our clients’ ability to repay their loans.

Most of our loans bear interest at variable interest rates. If interest rates increase, interest obligations of our clients may also increase. Some of our clients may not be able to make the increased interest payments, resulting in defaults on their loans.

A client’s fraud could cause us to suffer losses.

The failure of a client to accurately report its financial position, compliance with loan covenants or eligibility for initial or additional borrowings could result in the loss of some or all of the principal of a particular loan or loans including, in the case of revolving loans, amounts we may not have advanced had we possessed complete and accurate information.

Some of our clients require licenses, permits and other governmental authorizations to operate their businesses, which may be revoked or modified by applicable governmental authorities. Any revocation or modification could have a material adverse effect on the business of a client and, consequently, the value of our loan to that client.

In addition to clients in the healthcare industry subject to Medicare and Medicaid regulation, clients in other industries require permits and licenses from various governmental authorities to operate their businesses. These governmental authorities may revoke or modify these licenses or permits if a client is found to be in violation of any regulation to which it is subject. In addition, these licenses may be subject to modification by order of governmental authorities or periodic renewal requirements or changes as a result of changes in the law. The loss of a permit, whether by termination, modification or failure to renew, could impair the client’s ability to continue to operate its business in the manner in which it was operated when we made our loan to it, which could impair the client’s ability to generate cash flows necessary to service our loan or repay indebtedness upon maturity, either of which outcomes would reduce our revenues, cash flow and net income. See the Supervision and Regulation section of Item 1, Business, above for additional discussion of specific regulatory and governmental oversight applicable to many of our healthcare clients.

Our loans to foreign clients may involve significant risks in addition to the risks inherent in loans to U.S. clients.

Loans to foreign clients may expose us to risks not typically associated with loans to U.S. clients. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher

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transaction costs, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.

To the extent that any of our loans are denominated in foreign currency, these loans will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but we can offer no assurance that these strategies will be effective.

Because of the nature of our loans and the manner in which we disclose client and loan concentrations, it may be difficult to evaluate our risk exposure to any particular client or group of related clients.

We use the term “client” to mean the legal entity that is the borrower party to a loan agreement with us or the tenant of one of our healthcare owned properties. We have several clients that are related to each other through common ownership or management. Because we underwrite each transaction separately, we report each transaction with one of these clients as a separate transaction and each client as a separate client. In situations where clients are related through common ownership, to the extent the common owner suffers financial distress, the common owner may be unable to continue to support our clients, which could, in turn, lead to financial difficulties for those clients. Further, some of our healthcare clients are managed by the same entity and, to the extent that management entity suffers financial distress or is otherwise unable to continue to manage the operations of the related clients, those clients could, in turn, face financial difficulties. In both of these cases, our clients could have difficulty servicing their debt to us, which could have an adverse effect on our financial condition.

We may be unable to recognize or act upon an operational or financial problem with a client in a timely fashion so as to prevent a loss of our loan to that client.

Our clients may experience operational or financial problems that, if not timely addressed by us, could result in a substantial impairment or loss of the value of our loan to the client. We may fail to identify problems because our client did not report them in a timely manner or, even if the client did report the problem, we may fail to address it quickly enough or at all. Although we attempt to minimize our credit risk by carefully monitoring the concentration of our loans within specific industries and through prudent loan approval practices in all categories of our lending, we cannot assure you that such monitoring and approval procedures will reduce these lending risks or that our credit administration personnel, policies and procedures will adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio. As a result, we could suffer loan losses which could have a material adverse effect on our revenues, net income and results of operations.

We may make errors in evaluating information reported by our clients and, as a result, we may suffer losses on loans or advances that we would not have made if we had properly evaluated the information.

We underwrite our loans based on detailed financial information and projections provided to us by our clients. Even if clients provide us with full and accurate disclosure of all material information concerning their businesses, our investment officers, underwriting officers and credit committee members may misinterpret or incorrectly analyze this information. Mistakes by our staff and credit committees may cause us to make loans that we otherwise would not have made, to fund advances that we otherwise would not have funded or result in losses on one or more of our existing loans.

Our balloon loans and bullet loans may involve a greater degree of risk than other types of loans.

As of December 31, 2009, approximately 95% of the outstanding balance of our commercial loans comprised either balloon loans or bullet loans. A balloon loan is a term loan with a series of scheduled payment installments calculated to amortize the principal balance of the loan so that, upon maturity of the loan, more than 25%, but less than 100%, of the loan balance remains unpaid and must be satisfied. A bullet loan is a loan with no scheduled payments of principal before the maturity date of the loan. All of our revolving loans and some of our term loans are bullet loans.

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Balloon loans and bullet loans involve a greater degree of risk than other types of loans because they require the borrower to, in many cases, make a large, final payment upon the maturity of the loan. The ability of a client to make this final payment upon the maturity of the loan typically depends upon its ability either to generate sufficient cash flow to repay the loan prior to maturity, to refinance the loan or to sell the related collateral securing the loan, if any. The ability of a client to accomplish any of these goals will be affected by many factors, including the availability of financing at acceptable rates to the client, the financial condition of the client, the marketability of the related collateral, the operating history of the related business, tax laws and the prevailing general economic conditions. Consequently, a client may not have the ability to repay the loan at maturity, and we could lose some or all of the principal of our loan.

We are limited in pursuing certain of our rights and remedies under our Term B, second lien and mezzanine loans, which may increase our risk of loss on these loans.

Term B loans generally are senior secured loans that are equal as to collateral and junior as to right of payment to clients’ other senior debt. Second lien loans are junior as to both collateral and right of payment to clients’ senior debt. Mezzanine loans may not have the benefit of any lien against clients’ collateral and are junior to any lienholder both as to collateral (if any) and payment. Collectively, Term B, second lien and mezzanine loans comprised 17% of the aggregate outstanding balance of our commercial loan portfolio as of December 31, 2009. As a result of the subordinate nature of these loans, we may be limited in our ability to enforce our rights to collect principal and interest on these loans or to recover any of the loan balance through our right to foreclose upon collateral. For example, we typically are not contractually entitled to receive payments of principal on a subordinated loan until the senior loan is paid in full, and may only receive interest payments on a Term B, second lien or mezzanine loan if the client is not in default under its senior loan. In many instances, we are also prohibited from foreclosing on a Term B, second lien or mezzanine loan until the senior loan is paid in full. Moreover, any amounts that we might realize as a result of our collection efforts or in connection with a bankruptcy or insolvency proceeding under a Term B, second lien or mezzanine loan must generally be turned over to the senior lender until the senior lender has realized the full value of its own claims. These restrictions may materially and adversely affect our ability to recover the principal of any non-performing Term B, second lien or mezzanine loans.

The collateral securing a loan may not be sufficient to protect us from a partial or complete loss if we have not properly obtained or perfected a lien on such collateral or if the loan becomes non-performing, and we are required to foreclose.

While most of our loans are secured by a lien on specified collateral of the client, there is no assurance that we have obtained or properly perfected our liens, or that the value of the collateral securing any particular loan will protect us from suffering a partial or complete loss if the loan becomes non-performing and we move to foreclose on the collateral.

Our leveraged loans are not fully covered by the value of assets or collateral of the client and, consequently, if any of these loans becomes non-performing, we could suffer a loss of some or all of our value in the loan.

Leveraged lending involves lending money to a client based primarily on the expected cash flow, profitability and enterprise value of a client rather than on the value of its assets. As of December 31, 2009, approximately 49% of the commercial loans in our portfolio were leveraged loans under which we had advanced 39% of the aggregate outstanding commercial loan balance of our portfolio. While in the case of our senior leveraged loans we generally take a lien on substantially all of the client’s assets, the value of those assets is typically substantially less than the amount of money we advance to a client under a leveraged loan. When a leveraged loan becomes non-performing, our primary recourse to recover some or all of the principal of our loan is to force the sale of the entire company as a going concern. We could also choose to restructure the company in a way we believe would enable it to generate sufficient cash flow over time to repay our loan. Neither of these alternatives may be an available or viable option or generate enough proceeds to repay the loan. Additionally, given the current economic conditions, many businesses suffer decreases in revenues and net income, and we expect that many of our leveraged clients will suffer these decreases making them more likely to underperform and default on our loans and making it less likely that we could

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obtain sufficient proceeds from a restructuring or sale of the company. If we are a subordinate lender rather than the senior lender in a leveraged loan, our ability to take remedial action is constrained by our agreement with the senior lender.

We are not the agent for a portion of our loans and, consequently, have little or no control over how those loans are administered or controlled.

We are neither the agent of the lending group that receives payments under the loan nor the agent of the lending group that controls the collateral for purposes of administering the loan on loans comprising approximately 21% of the aggregate outstanding balance of our commercial loan portfolio as of December 31, 2009. When we are not the agent for a loan, we may not receive the same financial or operational information as we receive for loans for which we are the agent and, in many instances, the information on which we must rely is provided to us by the agent rather than directly by the client. As a result, it may be more difficult for us to track or rate these loans than it is for the loans for which we are the agent. Additionally, we may be prohibited or otherwise restricted from taking actions to enforce the loan or to foreclose upon the collateral securing the loan or otherwise exercise remedies without the agreement of other lenders holding a specified minimum aggregate percentage, generally a majority or two-thirds of the outstanding principal balance. It is possible that an agent for one of these loans may not manage the loan to our standards or may choose not to take the same actions to enforce the loan, to foreclose upon the collateral securing the loan or to exercise remedies that we would or would not take if we were agent for the loan. We also could experience losses in the event of the bankruptcy of the agent.

We are the agent for loans in which syndicates of lenders participate and, in the event of a loss on any such loan, we could have liability to other members of the syndicate related to our management and servicing of the loan.

We are often the agent representing a syndicate of multiple lenders that has made a loan. In that capacity, we may act on behalf of our co-lenders in administering the loan, receiving all payments under the loan and/or controlling the collateral for purposes of administering the loan. As of December 31, 2009, we were either the paying, administrative or the collateral agent or all for a group of third-party lenders for loans with outstanding commitments of $2.7 billion. When we are the agent for a loan, we often receive financial and/or operational information directly from the borrower and are responsible for providing some or all of this information to our co-lenders. We may also be responsible for taking actions on behalf of the lending group to enforce the loan, to foreclose upon the collateral securing the loan or to exercise remedies. It is possible that as agent for one of these loans we may not manage the loan to the applicable standard. In addition, we may choose a different course of action than one or more of our co-lenders would take to enforce the loan, to foreclose upon the collateral securing the loan or to exercise remedies if our co-lenders were in a position to manage the loan. If we do not administer these loans in accordance with our obligations and the applicable legal standards and the lending syndicate suffers a loss on the loan, we may have liability to our co-lenders.

We may purchase distressed loans at amounts that may exceed what we are able to recover on these loans.

We may purchase loans of companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although these investments may result in significant returns to us, they involve a substantial degree of risk. Any one or all of the loans which we purchase may be unsuccessful or not show any return for a considerable period of time. The level of analytical sophistication, both financial and legal, necessary for making a profit on the purchase of loans to companies experiencing significant business and financial difficulties is particularly high. We may not correctly evaluate the value of the assets collateralizing the loans or the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to a distressed company, we may lose the entire amount of our loan, may be required to accept cash or securities with a value less than our purchase price and/or may be required to accept payment over an extended period of time.

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Debtor-in-possession loans may have a higher risk of default.

“Debtor-in-possession” loans to clients that have filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code are used by these clients to fund on-going operations as part of the reorganization process. While security position for these loans is generally better than that of the other asset-based loans, there may be a higher risk of default on these loans due to the uncertain business prospects of these clients and the inherent risks with the bankruptcy process. Furthermore, if our calculations as to the outcome or timing of reorganization are inaccurate, the client may not be able to make payments on the loan on time or at all.

Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such loans.

Courts may apply the doctrine of equitable subordination to subordinate the claim or lien of a lender against a borrower to claims or liens of other creditors of the borrower, when the lender or its affiliates is found to have engaged in unfair, inequitable or fraudulent conduct. The courts have also applied the doctrine of equitable subordination when a lender or its affiliates is found to have exerted inappropriate control over a client, including control resulting from the ownership of equity interests in a client. We own direct equity investments or warrants in connection with loans representing approximately 12% of the aggregate outstanding balance of our commercial loan portfolio as of December 31, 2009. Payments on one or more of our loans, particularly a loan to a client in which we also hold an equity interest, may be subject to claims of equitable subordination. If we were deemed to have the ability to control or otherwise exercise influence over the business and affairs of one or more of our clients resulting in economic hardship to other creditors of our client, this control or influence may constitute grounds for equitable subordination and a court may treat one or more of our loans as if it were unsecured or common equity in the client. In that case, if the client were to liquidate, we would be entitled to repayment of our loan on a pro-rata basis with other unsecured debt or, if the effect of subordination was to place us at the level of common equity, then on an equal basis with other holders of the client’s common equity only after all of the client’s obligations relating to its debt and preferred securities had been satisfied.

We may incur lender liability as a result of our lending activities.

A number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. We are and may in the future be subject to allegations of lender liability. We cannot assure you that these claims will not continue to arise or that we will not be subject to significant liability in connection with these types of claims.

At the Parent Company, we have engaged in the past, and may engage in the future, in lending transactions with affiliates of our directors. Because of the conflicts of interest inherent in these transactions, their terms may not be in our shareholders’ best interests.

As of December 31, 2009, we had five loans representing $86.5 million in committed funds to companies affiliated with our directors. We may make additional loans to affiliates of our directors in the future. Although we generally require these transactions to be approved by the disinterested members of our board (or a committee thereof), such policy may not be successful in eliminating the influence of conflicts of interest. These transactions may divert our resources and benefit our directors and their affiliates to the detriment of our shareholders.

If we do not obtain or maintain the necessary state licenses and approvals, we will not be allowed to acquire, fund or originate residential mortgage loans and other loans in some states, which would adversely affect our operations.

We engage in consumer mortgage lending activities which involve the collection of numerous accounts, as well as compliance with various federal, state and local laws that regulate consumer lending. Many states in which we do business require that we be licensed, or that we be eligible for an exemption from the licensing requirement,

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to conduct our business. We cannot assure you that we will be able to obtain all the necessary licenses and approvals, or be granted an exemption from the licensing requirements, that we will need to maximize the acquisition, funding or origination of residential mortgages or other loans or that we will not become liable for a failure to comply with the myriad of regulations applicable to our lines of business.

We are in a competitive business and may not be able to take advantage of attractive opportunities.

Our markets are competitive and characterized by varying competitive factors. We compete with a large number of financial services companies, including:

•  commercial banks and thrifts;

•  specialty and commercial finance companies;

•  private investment funds;

•  insurance companies; and

•  investment banks.

Some of our competitors have greater financial, technical, marketing and other resources and market positions than we do. They also have greater access to capital than we do and at a lower cost than is available to us. Furthermore, we would expect to face increased price competition if finance companies seek to expand within or enter our target markets. Increased competition could cause us to reduce our pricing and lend greater amounts as a percentage of a client’s eligible collateral or cash flows. Even with these changes, in an increasingly competitive market, we may not be able to attract and retain new clients or maintain or grow our business and our market share and future revenues may decline. If our existing clients choose to use competing sources of credit to refinance their loans, the rate at which loans are repaid may be increased, which could change the characteristics of our loan portfolio as well as cause our anticipated return on our existing loans to vary.

Risks Impacting Funding our Operations

Our ability to operate our business depends on our ability to maintain our external financing, which is challenging in the existing economic environment.

We require a substantial amount of money to make new loans, repay indebtedness, fund obligations to existing clients and otherwise operate our business. To date, we have obtained this money through issuing equity, secured notes, convertible debentures, mortgage debt and subordinated debt, by borrowing money under our credit facilities, term debt (including securitization transactions), borrowings from the Federal Home Loan Bank — San Francisco and through deposits at CapitalSource Bank. Prior to 2008, we had completed several securitizations transactions involving loans in our commercial lending portfolio through which we raised a significant amount of debt capital. The market for securitized loans has effectively been closed since 2007. Our access to these and other types of external funding depends on a number of factors, including general market and deposit raising conditions, the markets’ and our lenders’ perceptions of our business, our current and potential future earnings and financial performance and the market price of our common stock. The capital and credit markets disruptions continue to constrain our ability to access and maintain prudent levels of liquidity through the sources described above. If the recession and levels of credit and capital markets disruption continue or worsen, it is not certain that sufficient funding and capital will be available to us on acceptable terms or at all. Without sufficient funding, we would not be able to continue to operate our business. The Parent Company may not sell loans to CapitalSource Bank and CapitalSource Bank is prohibited from paying dividends to the Parent Company for its first three years of operation. Consequently, while CapitalSource Bank may have more than adequate liquidity, the Parent Company is unable to directly benefit from that liquidity to fund its significant obligations and operations and must rely to a large extent on external sources of financing which, as described above, are limited.

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Required commitment reductions, proceeds restrictions and mandatory redemption provisions under our indebtedness may limit our ability to maintain sufficient liquidity.

We are required to reduce the commitments of the lenders under our syndicated bank credit facility that did not extend the maturity of their commitments to us under the facility representing $66.1 million as of December 31, 2009 and fully repay any amounts due by March 13, 2010. In addition, to the extent not earlier reduced by the events described below, the commitments of the lenders that did extend the maturity of their commitments to us under the facility representing $258.9 million as of December 31, 2009 are required to be reduced to $200.0 million by April 30, 2010 and to $185.0 million on January 31, 2011. Thereafter, such commitments will further reduce by $15.0 million per month until November 30, 2011 and terminate entirely on December 31, 2011.

In addition, the commitments under our syndicated bank credit facility will reduce, and we will be required to make payments as necessary to prevent outstanding borrowings from exceeding such commitments, in $20.0 million increments based on a portion of proceeds realized from specified events, including:

•  75% of the cash proceeds of any unsecured debt issuance by the Parent Company, and

•  75% of any principal repayments on, or the cash proceeds received on the disposition of or the incurrence of secured debt with respect to, assets constituting collateral under the facility.

The terms of our 12.75% First Priority Senior Secured Notes due in July 2014 (the “2014 Senior Secured Notes”) require that proceeds of some asset sales not applied as described above must be used to make offers to purchase these notes instead of for other purposes. In addition, if we voluntarily reduce the amount of outstanding obligations under our syndicated bank credit facility, the terms of certain of our warehouse credit facilities and securitization trusts require a proportional prepayment.

The terms of our outstanding convertible debentures require us to make offers to repurchase them in 2011 and 2012. As of December 31, 2009 the principal amounts of convertible debentures that we may be required to purchase in those years are $330.0 million in July 2011 and $250.0 million in July 2012. If the conversion prices of all of these debentures remain significantly out of the money, we would expect that all of the holders would elect to tender their debentures to us in response to these offers, requiring us to pay the respective principal amounts in cash at the conclusion of each offer.

If we are unable to sell sufficient assets, raise new capital or restructure these payment obligations, we may not have sufficient liquidity to make these required prepayments by these dates. Consequently, we could default on these payment obligations, which would trigger cross-defaults under our other debt and could result in accelerated maturity of all of our debt. In such circumstances, our business, liquidity and operations would be materially adversely affected, and we may not be able to continue operating.

We must comply with various covenants and obligations under our indebtedness and our failure to do so could adversely affect our ability to operate our business, manage our portfolio or pursue certain opportunities.

The Parent Company is subject to financial and non-financial covenants under our indebtedness, including, without limitation, with respect to restricted payments, interest coverage, minimum tangible net worth, leverage, maximum delinquent and charged-off loans, servicing standards, and limitations on incurring or guaranteeing indebtedness, refinancing existing indebtedness, repaying subordinated indebtedness, making investments, dividends, distributions, redemptions or repurchases of our capital stock, selling assets, creating liens and engaging in a merger, sale or consolidation. If we were to default under our indebtedness by violating these covenants or otherwise, our lenders’ remedies would include the ability to, among other things, transfer servicing to another servicer, foreclose on collateral, accelerate payment of all amounts payable under such indebtedness and/or terminate their commitments under such indebtedness. Our failure to comply with these restrictive covenants could result in an event of default that, if not cured or waived, could cross-default to all or a substantial portion of our debt. In the past, we have received waivers to potential breaches of some of these provisions. In the future, we may have difficulty complying with some of these provisions if economic conditions affecting our industry fail to improve, and we may need to obtain additional waivers or amendments again in the future if we cannot satisfy all of the covenants and obligations under our debt. There can be no assurance that we will be able to obtain such waivers or

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amendments in the future. A default under our indebtedness could have a material adverse affect on our business, financial condition, liquidity position and our ability to continue to operate our business.

In addition, upon the occurrence of specified servicer defaults, our lenders under our credit facilities and the holders of the notes issued in our term debt securitizations may elect to terminate us as servicer of the loans under the applicable facility or term debt securitizations and appoint a successor servicer or replace us as cash manager for our secured facilities and term debt securitizations. If we were terminated as servicer, we would no longer receive our servicing fee. In addition, because there can be no assurance that any successor servicer would be able to service the loans according to our standards, the performance of our loans could be materially adversely affected and our income generated from those loans significantly reduced.

Substantially all of the assets of the Parent Company are pledged or otherwise encumbered by liens we have granted in favor of our lenders. The restrictive covenants in our syndicated bank credit facility, the indenture relating to our 2014 Senior Secured Notes and the documents governing our other indebtedness may, among other things, impair our ability and reduce our flexibility to operate our business, restrict our ability to optimally restructure our existing debt, plan for or react to changes in our business, the economy and/or markets, or limit our ability to engage in activities that may be in our long-term best interest, thereby negatively impacting our financial condition or results of operations. Our failure to comply with these restrictive covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt.

Our significant level of debt and interest payment obligations may limit our ability to compete, expose us to interest rate risk to the extent of our variable-rate debt and prevent us from meeting our obligations under our senior secured notes.

As of December 31, 2009, the Parent Company had in excess of $5.0 billion of indebtedness outstanding. This substantial level of indebtedness could have important consequences. For example, it may:

•  make it more difficult for us to satisfy our financial obligations, including those relating to our 2014 Senior Secured Notes;

•  increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations, because a significant portion of our borrowings are at variable rates of interest;

•  require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

•  limit our ability to borrow additional funds to expand our business or alleviate liquidity constraints, as a result of financial and other restrictive covenants in our indebtedness;

•  limit our ability to refinance all or a portion of our indebtedness on or before maturity;

•  limit our flexibility in planning for, or reacting to, changes in our business and industry; and

•  place us at a competitive disadvantage relative to companies that have less indebtedness.

If our lenders terminate or fail to renew any of our credit facilities, we may not be able to continue to fund our business.

As of December 31, 2009, we had four credit facilities totaling $691.3 million in commitments. One of these credit facilities aggregating $124.8 million in commitments is scheduled to mature during 2010. We may not be able to renew or extend the term of these financings or to repay amounts outstanding under them when due. Additionally, if we breach a covenant or other provision of these facilities, the lenders could terminate them prior to their maturity dates. If any of these financings were terminated, not renewed upon its maturity or renewed on materially worse terms, our liquidity position could be materially adversely affected, and we may not be able to satisfy our outstanding obligations or continue to fund our operations. We cannot assure you that we will be able to continue to satisfy our obligations under our credit facilities or receive additional waivers or amendments should they be needed to avoid future defaults.

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We are not currently eligible to maintain a universal shelf registration statement, which could adversely affect our ability to quickly and efficiently access the public capital markets.

For the past several years, we have maintained an effective “universal” shelf registration statement registering the continuous offering and sale of a variety of securities. As a result, we have been able to offer and sell our securities, including through our dividend reinvestment and direct stock purchase plan, to the public without having to file a new registration statement for each offering, thereby avoiding delays that can be associated with possible review by the staff of the Securities and Exchange Commission (the “SEC”), and the necessity for the staff to formally declare the effectiveness of any such registration statement. On October 30, 2009, we filed with the Commission a Current Report on Form 8-K to report that a member of our board had notified one of our officers on October 2, 2009 that he had decided not to stand for reelection at the Company’s 2010 annual meeting. Because the 8-K was not filed within the prescribed period of four business days from the date of the director’s notice, it was not considered timely, with the consequence of terminating our status as a “well-known seasoned issuer” and terminating our eligibility to maintain our universal shelf registration statement. Assuming we file on a timely basis all required filings and continue to satisfy the other requirements of a well-known seasoned issuer, we would expect to again be eligible to file and maintain a universal shelf registration statement beginning November 1, 2010. Until then, should we choose to raise capital in one or more registered offerings, we would be obligated to file a post-effective amendment on Form S-1 to the universal shelf registration statement, or a new registration statement on Form S-1, for each such offering, resulting in the possibility of delays due to review of such filings by the Commission staff. If the staff elects to review such a filing, the potential delay could be approximately two months.

Although we do not have any immediate plans to conduct a registered offering, we periodically assess opportunities to raise capital on favorable terms in light of our capital needs from time to time. We believe that our ability to access the capital markets rapidly, and to execute a favorable transaction with little advance notice, has been and will likely continue to be important to our financial condition and liquidity, and that our inability to maintain a universal shelf registration statement could have a material adverse impact on our ability to so access the public markets. The risks of delay associated with registered offerings could lead us to pursue private placements instead of registered offerings, which could make our capital raising efforts more costly and time consuming and could increase the execution risk associated with them due to the more limited universe of investors in private placements as compared to public offerings.

Our commitments to lend additional amounts to existing clients exceed our resources available to fund these commitments.

As of December 31, 2009, the amount of the Parent Company’s unfunded commitments to extend credit with respect to existing loans exceeded unused funding sources and unrestricted cash by $1.3 billion. Due to their nature, we cannot know with certainty the aggregate amounts we will be required to fund under these unfunded commitments. In many cases, our obligation to fund unfunded commitments is subject to our clients’ ability to provide collateral to secure the requested additional fundings, the collateral’s satisfaction of eligibility requirements, our clients’ ability to meet specified preconditions to borrowing, including compliance with all provisions of the loan agreements, and/or our discretion pursuant to the terms of the loan agreements. In other cases, however, there are no such prerequisites to future fundings by us, and our clients may draw on these unfunded commitments at any time. In light of current economic conditions and constraints on liquidity in the credit markets, clients may seek to draw on our unfunded commitments to improve their cash positions. Due to this fact and because of potential constraints on our liquidity, we expect that these unfunded commitments will continue to exceed the Parent Company’s available funds. Our failure to satisfy our full contractual funding commitment to one or more of our clients could create breach of contract and lender liability for us and irreparably damage our reputation in the marketplace, which would have a material adverse effect on our ability to continue to operate our business.

Our cash flows from the interests we retain in our term debt securitizations have been, and we expect will continue to be, delayed or reduced due to the requirements of the term debt securitizations.

We generally have retained the most junior classes of securities issued in our term debt securitizations. Our receipt of cash flows on those junior securities is governed by provisions that control the distribution of cash flows from the loans included in our term debt securitizations, which cash flows are tied to the performance of the

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underlying loans. As more delinquencies among loans included in the collateral pools of $3.7 billion of our outstanding term debt securitizations have occurred, the timing and amount of the cash flows we receive from loans included in our term debt securitizations have been adversely affected and we expect these cash flows will continue to be adversely affected if delinquencies continue or increase. In addition, under our term debt securitizations, the priority of payments is altered if the notes remain outstanding beyond the stated maturity dates and upon other termination events, in which case we would receive no cash flow from these transactions until the notes senior to our retained interests are retired.

Fluctuating interest rates could adversely affect our profit margins and ability to operate our business.

We borrow money from our lenders at variable interest rates and raise short-term deposits at prevailing rates in the relevant markets. We generally lend money at variable rates based on either prime or LIBOR indices. Our operating results and cash flow depend on the difference between the interest rates at which we borrow funds and raise deposits and the interest rates at which we lend these funds. Because many of our loans are currently below their contractual interest rate floors, upward movements in interest rates will not immediately result in additional interest income, although these movements would increase our cost of funds. Therefore, any upward movement in rates may result in a reduction of our net interest income. For additional information about interest rate risk, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk Management.

Interest on some of our borrowings is based in part on the rates and maturities at which vehicles sponsored by our lenders issue asset backed commercial paper. Changes in market interest rates or the relationship between market interest rates and asset backed commercial paper rates could increase the effective cost at which we borrow funds under some of our indebtedness.

In addition, changes in market interest rates, or in the relationships between short-term and long-term market interest rates, or between different interest rate indices, could affect the interest rates charged on interest earning assets differently than the interest rates paid on interest bearing liabilities, which could result in an increase in interest expense relative to our interest income.

Hedging instruments involve inherent risks and costs and may adversely affect our earnings.

We have entered into interest rate swap agreements and other contracts for interest rate risk management purposes. Our hedging activities vary in scope based on a number of factors, including the level of interest rates, the type of portfolio investments held, and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:

•  interest rate hedging can be expensive, particularly during periods of volatile interest rates;

•  available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

•  the duration of the hedge may not match the duration of the related liability or asset;

•  the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

•  the party owing money in the hedging transaction may default on its obligation to pay.

Because we do not employ hedge accounting, our hedging activity may materially adversely affect our earnings. Therefore, while we pursue such transactions to reduce our interest rate risks, it is possible that changes in interest rates may result in losses that we would not otherwise have incurred if we had not engaged in any such hedging transactions. For additional information, see Note 22 Derivative Instruments, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and, thus, increase our hedging costs during periods when interest rates are volatile or rising. Furthermore, the enforceability of agreements associated with

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derivative instruments we use may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. In the event of default by a counterparty to hedging arrangements, we may lose unrealized gains associated with such contracts and may be required to execute replacement contract(s) on market terms which may be less favorable to us. Although generally we seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

We may enter into derivative contracts that could expose us to future contingent liabilities.

Part of our investment strategy involves entering into derivative contracts that require us to fund cash payments in certain circumstances. Our ability to fund these contingent liabilities will depend on the liquidity of our assets and access to funding sources at the time, and the need to fund these contingent liabilities could materially adversely impact our financial condition. For additional information, see Note 22, Derivative Instruments, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Risks Related to Our Operations

We may fail to maintain or raise sufficient deposits or other sources of funding at CapitalSource Bank to operate our business.

CapitalSource Bank’s ability to maintain or raise sufficient deposits may be limited by several factors, including:

•  competition from a variety of competitors, many of which offer a greater selection of products and services and have greater financial resources, including, without limitation, other banks, credit unions and brokerage firms;

•  as a California state-chartered industrial bank, CapitalSource Bank is permitted to offer only savings, money market and time deposit products, which limitations may adversely impact its ability to compete effectively; and

•  perceptions of CapitalSource Bank’s quality could be adversely affected by depositors’ negative views of the Parent Company, which could cause depositors to withdraw their deposits or seek higher rates.

While we expect to maintain and continue to raise deposits at a reasonable rate of interest, there is no assurance that we will be able to do so successfully.

In addition, given the short average maturity of CapitalSource Bank’s deposits to the maturity of its loans, the inability of CapitalSource Bank to raise or maintain deposits could compromise our ability to operate our business, impair our liquidity and threaten the solvency of CapitalSource Bank and the rest of CapitalSource.

Aside from deposit funding, CapitalSource Bank may obtain back-up liquidity from the FHLB SF, the FRB, and the Parent Company. The availability of these sources of funds may be limited or threatened in the event of a severe economic crisis. The access to borrowing from FHLB SF may be materially impacted should Congress alter or dissolve the Federal Home Loan Bank system. Our access to the FRB primary credit program may be materially impacted should the FRB modify its credit program and limit CapitalSource Bank’s access to the program. In addition, if the liquidity or financial performance of the Parent Company weakens, CapitalSource Bank may not be able to draw on the $150.0 million revolving credit facility it has established with the Parent Company. As a result, if the ability of CapitalSource Bank to attract and retain suitable levels of deposits weakens, this could negatively impact our business, financial condition, results of operations and the market price of our common stock.

We are subject to extensive government regulation and supervision which limit our flexibility and could result in adverse actions by regulatory agencies against us.

We are subject to extensive federal and state regulation and supervision that govern, limit or otherwise affect the activities in which we may engage, our ability to use our capital for certain business purposes and our ability to

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expand our business. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not our shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to banking laws or regulations, including changes in their interpretation or implementation, could materially affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit or restrict our ability to use capital for business purposes, limit the types of financial services and products we may offer or increase the ability of non-banks to offer competing financial services and products, among other things. In addition, increased regulatory requirements, whether due to the adoption of new laws and regulations, changes in existing laws and regulations, or more expansive or aggressive interpretations of existing laws and regulations, may have a material adverse effect on our business, financial condition, results of operations and reputation.

Failure to comply with laws, regulations or policies or the regulatory orders pursuant to which CapitalSource Bank operates, even if unintentionally or inadvertently, could result, among other things, in sanctions by regulatory agencies, increased deposit insurance costs, civil monetary penalties or fines, issuance of cease and desist or other supervisory orders or reputation damage. Supervisory actions also could result in higher capital requirements, higher insurance premiums and additional limitations on our activities or termination of deposit insurance, which could have a material adverse effect on our business, financial condition, results of operations and reputation. See the Supervision and Regulation section of Item 1, Business, above, Note 19, Bank Regulatory Capital, in our accompanying audited consolidated financial statements for the year ended December 31, 2009 and Item 7, Financial Statements and Supplementary Data.

We face risks in connection with our strategic undertakings.

If appropriate opportunities present themselves, we may engage in strategic activities, which could include acquisitions, joint ventures, or other business growth initiatives or undertakings. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful.

In order to finance future strategic undertakings, we might obtain additional equity or debt financing. Such financing might not be available on terms favorable to us, or at all. If obtained, equity financing could be dilutive and the incurrence of debt and contingent liabilities could have material adverse effect on our business, results of operations and financial condition.

Our ability to execute strategic activities successfully will depend on a variety of factors. These factors likely will vary on the nature of the activity but may include our success in integrating the operations, services, products, personnel and systems of an acquired company into our business, operating effectively with any partner with whom we elect to do business, retaining key employees, achieving anticipated synergies, meeting expectations and otherwise realizing the undertaking’s anticipated benefits. Our ability to address these matters successfully cannot be assured. In addition, our strategic efforts may divert resources or management’s attention from ongoing business operations and may subject us to additional regulatory scrutiny. If we do not successfully execute a strategic undertaking, it could adversely affect our business, financial condition, results of operations, reputation and growth prospects. In addition, if we were able to conclude that the value of an acquired business had decreased and that the related goodwill had been impaired, that conclusion would result in an impairment of goodwill charge to us, which should adversely affect our results of operations.

In addition, from time to time, we may develop and grow new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully

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manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition.

Our Agreement to sell our Direct Real Estate Investments is subject to conditions which may not be met.

In November 2009, we entered into an agreement with Omega to sell, in three closings over time, the remainder of our direct real estate investments. In December 2009, we completed the first closing and sold 40 long-term care facilities and anticipate selling an additional 40 long-term care facilities to Omega under the agreement in 2010. The third part of the transaction is an option that can be exercised by Omega to acquire 63 additional long-term care facilities at any time through December 31, 2011. We and Omega have made customary representations, warranties, covenants and indemnifications in the transaction documents, including, among others, covenants regarding the conduct of our entities’ business and other activities between the execution of the agreement and the closings. Consummation of the transactions contemplated by the agreement is subject to customary conditions, and there can be no assurance that the transactions will be consummated. We and Omega have termination rights pursuant to the agreement. As a result, the future closings of the transactions may not be completed on schedule or at all.

The “A” Participation Interest may not pay down to the extent necessary to avoid losses.

As the holder of the “A” Participation Interest, we are entitled to receive 70% of principal payments received with respect to the assets underlying the “A” Participation Interest, which include both loans and REO. Certain of the loans underlying the “A” Participation Interest are in default from time to time. The loan portfolio underlying the “A” Participation Interest includes commercial real estate construction loans which may be more susceptible to default than other commercial loans. Given current economic conditions affecting the commercial and residential real estate markets, we expect the level of defaults, and the level of losses associated with such defaults, to increase. To the extent losses on the underlying assets exceed expectations, the amount of principal available for distribution to us as the holder of the “A” Participation Interest could be reduced to a level which would cause us to experience credit losses. If losses reach levels in excess of the credit-enhancement features of the “A” Participation Interest, we could experience losses which would adversely impact our financial results. Although as the holder of the “A” Participation Interest we have no obligation to make any further advances with respect to the assets underlying the “A” Participation Interest, the failure of iStar Financial, Inc. and its subsidiaries (“iStar”) as the lender with respect to the underlying assets to meet its funding obligations could also contribute to losses on the assets underlying the “A” Participation Interest.

We also could experience losses in the event of the bankruptcy of iStar. iStar is the guarantor of the payment obligations to us as the holder of the “A” Participation Interest and such guaranty may be impaired if iStar files for bankruptcy. In the event of its bankruptcy, it is possible that iStar could seek to commingle collections on the “A” Participation Interest with its other funds making it difficult to indentify the funds as our property and for us to receive our money. Moreover, the characterization of the “A” Participation Interest as a true participation could be challenged in the bankruptcy of iStar. If the challenge were successful, the “A” Participation Interest would likely be viewed as a secured loan to iStar, entitling iStar in certain circumstances to use the collections on the “A” Participation Interest and to restructure the obligations owed to us as the holder of the “A” Participation Interest as part of a bankruptcy reorganization plan.

We revoked our REIT election which could have adverse legal implications.

We operated as a REIT through 2008, but revoked our REIT election as of January 1, 2009. We had agreed in contracts relating to some of our financings that we will use reasonable efforts to remain qualified as a REIT. While we believe our decision not to qualify as a REIT for 2009 was reasonable, it could nevertheless be deemed to breach certain of our agreements. If the counterparties to these financings allege breaches of those agreements, we may be subject to lengthy and costly litigation, and if we were not to prevail in such litigation, we may be required to repay certain indebtedness prior to stated maturity, which would materially impair our liquidity.

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If it were determined that we violated REIT requirements or failed to qualify as a REIT in any given year during which we operated as a REIT, it could adversely impact our historical, current and future results of operations.

We operated as a REIT from January 1, 2006 through December 31, 2008. Our senior management had limited experience in managing a portfolio of assets under the highly complex tax rules governing REITs and we cannot assure you that we successfully operated our business within the REIT requirements. Given the highly complex nature of the rules governing REITs and the importance of factual determinations, the Internal Revenue Service, or IRS, could contend that we violated REIT requirements in one or more of these years. We are currently under audit by the IRS for our 2006, 2007 and 2008 tax returns. To the extent it were to be determined that we did not comply with REIT requirements for one or more of our REIT years, we could be required to pay corporate federal income tax and certain state and local income taxes on our net income for the relevant years or we could be required to pay taxes that would be due if we were to avail ourselves of certain savings provisions to preserve our REIT status for the relevant years, either of which could have adverse affects on our historical, current and future financial results and the value of our common stock.

The change of control rules under Section 382 of the Internal Revenue Code may limit our ability to use net operating loss carryovers and other tax attributes to reduce future tax payments or our willingness to issue equity.

We have net operating loss carryforwards for federal and state income tax purposes that can be utilized to offset future taxable income. If we were to undergo a change in ownership of more than 50% of our capital stock over a three-year period as measured under Section 382 of the Internal Revenue Code, our ability to utilize our net operating loss carryforwards, certain built-in losses and other tax attributes recognized in years after the ownership change generally would be limited. The annual limit would equal the product of the applicable long term tax exempt rate and the value of the relevant taxable entity’s capital stock immediately before the ownership change. These change of ownership rules generally focus on ownership changes involving stockholders owning directly or indirectly 5% or more of a company’s outstanding stock, including certain public groups of stockholders as set forth under Section 382, and those arising from new stock issuances and other equity transactions, which may limit our willingness and ability to issue new equity. The determination of whether an ownership change occurs is complex and not entirely within our control. No assurance can be given as to whether we have undergone, or in the future will undergo, an ownership change under Section 382 of the Internal Revenue Code.

The requirements of the Investment Company Act impose limits on our operations that impact the way we acquire and manage our assets and operations.

We conduct our operations so as not to be required to register as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. We believe that we are primarily engaged in the business of commercial lending and real estate investment, and not in the business of investing, reinvesting, and trading in securities, and therefore are not required to register under the Investment Company Act.

While we do not believe we are engaged in an investment company business, we nevertheless endeavor to conduct our operations in a manner that would permit us to rely on one or more exemptions under the Investment Company Act. Our ability to rely on these exemptions may limit the types of loans and other assets we own.

One of our wholly owned subsidiaries, CapitalSource Finance LLC (“Finance”), is a guarantor on certain of our indebtedness, which guarantees could be deemed to cause Finance to have outstanding securities for purposes of the Investment Company Act. Finance or other subsidiaries may guarantee future indebtedness from time to time. Even if one or more of our subsidiaries were deemed to be engaged in investment company business, and the provisions of the Investment Company Act were deemed to apply on an individual basis to our wholly owned subsidiaries, generally they could rely either on an exemption from registration under the Investment Company Act for banks or entities that do not offer securities to the public and do not have more than 100 security holders. Because it is possible such reliance could be deemed unavailable to Finance or some of our other subsidiaries, we also attempt to conduct Finance’s and such other subsidiaries’ businesses in a manner that we believe would permit them to rely on exemptions from registration under the Investment Company Act.

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If we or any subsidiary were required to register under the Investment Company Act and could not rely on an exemption or exclusion, we or such subsidiary could be characterized as an investment company. Such characterization would require us to either change the manner in which we conduct our operations, or register the relevant entity as an investment company. Any modification of our business for these purposes could have a material adverse effect on us. Further, if we or a subsidiary were determined to be an unregistered investment company, we or such subsidiary:

•  could be subject to monetary penalties and injunctive relief in an action brought by the SEC and could be found to be in default of some of our indebtedness;

•  may be unable to enforce contracts with third parties, and third parties could seek to rescind transactions undertaken during the period it was established that we or such subsidiary was an unregistered investment company;

•  would have to significantly reduce the amount of leverage in our business;

•  would have to restructure operations dramatically;

•  may have to raise substantial amounts of additional equity to come into compliance with the limitations prescribed under the Investment Company Act; and

•  may have to terminate agreements with our affiliates.

Any of these results likely would have a material adverse effect on our business, operations, financial results and the price of our common stock.

Changes in the values of our assets and subsidiaries and the income produced by them have made, and may make, it more difficult for us to maintain our exemptions from the Investment Company Act.

If the market value of or net income from our non-qualifying assets at the Parent Company increase or the market value of or net income from CapitalSource Bank or our qualifying assets at the Parent Company decrease, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets to maintain our exemptions from the Investment Company Act. If the declines or increases occur quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of many of our assets. We may have to make investment decisions that we otherwise would not make absent the Investment Company Act consideration, which would likely have a material adverse effect on our business, operations, financial results and the price of our common stock.

Our systems may experience an interruption or breach in security which could subject us to increased operating costs as well as litigation and other liabilities.

We rely on the computer and telephone systems and network infrastructure we use to conduct our business. These systems and infrastructure could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer and telephone equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our clients. In addition, we must be able to protect the computer systems and network infrastructure utilized by us against physical damage, security breaches and service disruption caused by the internet or other users. Such break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our systems and network infrastructure, which may result in significant liability to us and deter potential clients. While we have systems, policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our systems and infrastructure, there can be no assurance that these measures will be successful and that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. In addition, the failure of our clients to maintain appropriate security for their systems also may increase our risk of loss in connection with loans made to them. The occurrence of any failures, interruptions or security breaches of systems and infrastructure could damage our reputation, result in a loss of business and/or clients, result in losses to us or our clients, subject us to additional regulatory scrutiny, cause

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us to incur additional expenses, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our controls and procedures may fail or be circumvented.

We review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition. In addition, if we identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. This could have an adverse effect on our business, financial condition and results of operations, including our stock price, and could potentially subject us to litigation.

Risks Related to our Direct Real Estate Investments

We are exposed to liabilities, including environmental liabilities, with respect to properties to which we take title.

Owning real estate can subject us to liabilities for injury to persons on the property or property damage. To the extent that any such liabilities are not adequately covered by insurance, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

We could be subject to environmental liabilities with respect to properties we own. We may be liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances, or chemical releases, at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

We have experienced and may continue to experience losses if the creditworthiness of our tenants leasing our healthcare properties deteriorates and they are unable to meet their obligations under our leases.

We own healthcare properties leased to tenants from whom we receive rents during the terms of our leases. A tenant’s ability to pay rent is determined by the creditworthiness of the tenant. If a tenant’s credit deteriorates, the tenant could default on its obligations under our lease and the tenant may also become bankrupt. The bankruptcy or insolvency or other failure to pay of our tenants is likely to adversely affect the income produced by many of our direct real estate investments.

The operators of our healthcare properties are faced with increased litigation, rising insurance costs and enhanced government scrutiny that may affect their ability to make payments to us.

Advocacy groups that monitor the quality of care at healthcare facilities have sued healthcare operators and called upon state and federal legislatives to enhance their oversight of trends in healthcare facility ownership and quality of care. Patients have also sued healthcare facility operators and have, in certain cases, succeeded in winning very large damage awards for alleged abuses. The effect of this litigation and potential litigation in the future has been to materially increase the costs incurred by our operators for monitoring and reporting quality of care compliance. In addition, the cost of medical malpractice and liability insurance has increased and may continue to increase so long as the present litigation environment affecting the operations of healthcare facilities continues. Increased costs could limit our operators’ ability to make payments to us, potentially decreasing our revenue and increasing our collection and litigation costs. To the extent we are required to remove or replace the operators of our healthcare properties, our revenue from those properties could be reduced or eliminated for an extended period of time.

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Risks Related to our Common Stock

We may issue additional shares of common stock at prices that are dilutive to our existing shareholders.

We may issue equity or equity linked securities at prices that are dilutive to our shareholders, which may result in a significant decrease in the market price of our common stock. These issuances could be for cash or in exchange for outstanding debt securities in cases where we either do not have sufficient cash to pay off those debt securities or believe it would be more prudent to conserve our cash.

We may not pay dividends on our common stock.

We expect to retain a majority of our earnings, consistent with dividend policies of other commercial depository institutions, to redeploy in our business. Our board of directors, in its sole discretion, will determine the amount and frequency of dividends to our shareholders based on a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions prohibiting the payment of dividends after defaults. In addition, for so long as our 2014 Senior Secured Notes are outstanding, absent meeting certain thresholds, we cannot make cash dividend payments that exceed $0.01 per share per quarter. Consequently, we can not assure you that we will pay any dividend on our common stock. If we change our dividend policy our stock price could be adversely affected.

If a substantial number of shares available for sale are sold in a short period of time, the market price of our common stock could decline.

If our existing shareholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. As of February 22, 2010, we had 322,870,525 shares of common stock outstanding and had issued options then exercisable for 2,381,206 shares. Subject, in some cases, to Rule 144 compliance, all of these shares are eligible for sale in the public market. The perception in the public market that our existing shareholders might sell shares of common stock could also depress our market price. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities. Similarly, if we were to issue a substantial amount of common stock in exchange for outstanding indebtedness, and the recipients were to sell such common stock in the public market, the market price of our common stock could decrease significantly.

Some provisions of Delaware law and our certificate of incorporation and bylaws may deter third parties from acquiring us.

Our certificate of incorporation and bylaws provide for, among other things:

•  a classified board of directors;

•  restrictions on the ability of our shareholders to fill a vacancy on the board of directors;

•  the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without shareholder approval; and

•  advance notice requirements for shareholder proposals.

We also are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which restricts the ability of any shareholder that at any time holds more than 15% of our voting shares to acquire us without the approval of shareholders holding at least 662/3% of the shares held by all other shareholders that are eligible to vote on the matter.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take other corporate actions than you desire.

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ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

Our headquarters are located in Chevy Chase, Maryland, a suburb of Washington, D.C., where we lease office space under long-term operating leases. This office space houses the bulk of our technology and administrative functions and serves as the primary base for our operations. We also maintain offices in California, Connecticut, Florida, Georgia, Illinois, Massachusetts, Missouri, New York, North Carolina, Pennsylvania, Tennessee, Texas, Utah and in the United Kingdom. We believe our leased facilities are adequate for us to conduct our business.

Our Healthcare Net Lease segment owns real estate for long-term investment purposes. These real estate investments primarily consist of long-term healthcare facilities generally leased through long-term, triple-net operating leases. We had $554.2 million in direct real estate investments as of December 31, 2009, which consisted primarily of land and buildings, of which $218.1 million were classified as a component of assets from discontinued operations in our audited consolidated balance sheets.

During the year ended December 31, 2009, we sold 82 long-term healthcare facilities and anticipate selling the remaining facilities in 2010 and 2011. Upon the completion of these asset sales, we will exit the skilled nursing home ownership business, but continue to actively provide financing for owners and operators in the long-term healthcare industry. As a result, much of the Healthcare Net Lease segment activity and assets are classified as discontinued operations in our audited consolidated balance sheets and audited consolidated statements of operations. For additional information, see Note 3, Discontinued Operations, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

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Our direct real estate investment properties as of and for the year ended December 31, 2009, were as follows:

	Number of							Total
Facility Location	Facilities			Capacity(1)		Investment(2)		Revenues(3)
						($ in thousands)
Assisted Living Facilities:
Florida		4			206	$	5,658	$	209
Indiana		1			39		1,971		32
		5			245		7,629		241
Skilled Nursing Facilities:
Alabama		1			174		7,951		283
Arizona		2			192		9,306		294
Arkansas		2			185		1,605		120
California		1			99		4,661		104
Colorado		2			163		6,675		233
Florida		43			5,381		241,182		9,594
Indiana		11			1,041		45,641		1,335
Iowa		1			201		10,830		305
Kansas		1			82		2,665		74
Kentucky		5			344		21,860		584
Maryland		3			413		25,493		648
Massachusetts		1			124		11,224		330
Mississippi		4			448		31,422		1,067
New Mexico		1			102		3,058		69
North Carolina		6			682		39,146		820
Ohio		2			249		14,604		456
Oklahoma		5			657		18,143		360
Tennessee		3			438		31,801		2,397
Texas		4			405		9,474		3,957
Wisconsin		2			227		9,787		363
		100			11,607		546,528		23,393
Less multi-function facilities(4)		(2	)		—		—		—
Total owned properties		103			11,852	$	554,157	$	23,634

(1)	Capacity of assisted living and long-term acute care facilities, which are apartment-like facilities, is stated in units (studio, one or two bedroom apartments). Capacity of skilled nursing facilities is measured by licensed bed count.
(2)	Represent the acquisition costs of the assets less any related accumulated depreciation as of December 31, 2009. Included in this amount were $218.1 million of investments, which were classified as discontinued operations as of December 31, 2009.
(3)	Represents the amount of operating lease income recognized in our audited consolidated statement of operations for the year ended December 31, 2009. Included in this amount were $16.3 million of revenues, which were classified as discontinued operations as of December 31, 2009.
(4)	Two of our properties in Florida serve as both assisted living facilities and skilled nursing facilities.

ITEM 3.   LEGAL PROCEEDINGS

From time to time, we are party to legal proceedings. We do not believe that any currently pending or threatened proceeding, if determined adversely to us, would have a material adverse effect on our business, financial condition or results of operations, including our cash flows.

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ITEM 4.   RESERVED

PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “CSE.” The high and low sales prices for our common stock as reported by the NYSE for the quarterly periods during 2009 and 2008 were as follows:

	High		Low
2009:
Fourth Quarter	$	4.34	$	2.99
Third Quarter	$	5.08	$	3.55
Second Quarter	$	4.97	$	1.19
First Quarter	$	4.62	$	0.90
2008:
Fourth Quarter	$	12.99	$	2.75
Third Quarter	$	14.75	$	9.11
Second Quarter	$	16.95	$	9.75
First Quarter	$	18.14	$	7.56

On February 22, 2010, the last reported sale price of our common stock on the NYSE was $5.44 per share.

Holders

As of February 22, 2010, there were 1,729 holders of record of our common stock. The number of holders does not include individuals or entities who beneficially own shares but whose shares, are held of record by a broker or clearing agency, but does include each such broker or clearing agency as one record holder. American Stock Transfer & Trust Company serves as transfer agent for our shares of common stock.

Dividend Policy

For the years ended December 31, 2009 and 2008, we declared and paid dividends as follows:

	Dividends
	Declared
	and Paid per
	Share
	2009		2008
Fourth Quarter(1)	$	0.01	$	0.05
Third Quarter		0.01		0.05
Second Quarter		0.01		0.60
First Quarter		0.01		0.60
Total dividends declared and paid	$	0.04	$	1.30

(1) Dividend declared for the fourth quarter of 2008 was paid in January 2009.

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For shareholders who held our shares for the entire year, the $0.04 per share dividend declared and paid in 2009 was classified for tax reporting purposes as ordinary dividends.

We expect to retain a majority of our earnings, consistent with dividend policies of other commercial depository institutions, to redeploy in our business. Our Board of Directors, in its sole discretion, will determine the amount and frequency of dividends to be provided to our shareholders based on a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions prohibiting the payment of dividends after defaults. In addition, for so long as our 2014 Senior Secured Notes are outstanding, absent meeting certain thresholds, we cannot make cash dividend payments that exceed $0.01 per quarter.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

A summary of our repurchases of shares of our common stock for the three months ended December 31, 2009, was as follows:

							Maximum Number
					Total Number of		of Shares (or
					Shares Purchased		Approximate Dollar
	Total Number		Average		as Part of Publicly		Value) that May
	of Shares		Price Paid		Announced Plans		Yet be Purchased
	Purchased(1)		per Share		or Programs		Under the Plans
October 1 — October 31, 2009		8,226	$	3.75		—		—
November 1 — November 30, 2009		3,479		3.78		—		—
December 1 — December 31, 2009		45,997		3.93		—		—
Total		57,702		3.89		—		—

(1) Represents the number of shares acquired as payment by employees of applicable statutory minimum withholding taxes owed upon vesting of restricted stock granted under our Third Amended and Restated Equity Incentive Plan.

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Performance Graph

The following graph compares the performance of our common stock during the five-year period beginning on December 31, 2004 to December 31, 2009, with the S&P 500 Index and the S&P 500 Financials Index. The graph depicts the results of investing $100 in our common stock, the S&P 500 Index, and the S&P 500 Financials Index at closing prices on December 31, 2004, assuming all dividends were reinvested. Historical stock performance during this period may not be indicative of future stock performance.

Comparison of Cumulative Total Return

	Base
	Period		Year Ended December 31,
Company/Index	12/31/04		2005		2006		2007		2008		2009
CapitalSource Inc.	$	100	$	96.4	$	127.2	$	91.4	$	27.3	$	23.8
S&P 500 Index		100		104.9		121.5		128.2		80.7		102.1
S&P 500 Financials Index		100		106.5		126.9		103.3		46.1		54.1

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ITEM 6.   SELECTED FINANCIAL DATA

You should read the data set forth below in conjunction with our audited consolidated financial statements and related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations and other financial information appearing elsewhere in this report. The following tables show selected portions of historical consolidated financial data as of and for the five years ended December 31, 2009. We derived our selected consolidated financial data as of and for the five years ended December 31, 2009, from our audited consolidated financial statements, which have been audited by Ernst & Young LLP, independent registered public accounting firm.

	Year Ended December 31,
	2009			2008			2007			2006		2005
	($ in thousands, except for share and per share data)
Results of operations:
Interest income	$	862,586		$	1,199,529		$	1,366,461		$	1,102,780	$	591,660
Fee income		22,884			33,099			63,346			71,304		39,440
Total interest and fee income		885,470			1,232,628			1,429,807			1,174,084		631,100
Operating lease income		33,985			31,896			33,444			2,656		—
Total investment income		919,455			1,264,524			1,463,251			1,176,740		631,100
Interest expense		437,713			693,357			859,180			619,346		199,805
Net investment income		481,742			571,167			604,071			557,394		431,295
Provision for loan losses		845,986			593,046			78,641			81,562		65,680
Net investment income after provision for loan losses		(364,244	)		(21,879	)		525,430			475,832		365,615
Depreciation of direct real estate investments		10,160			10,110			10,379			699		—
Other operating expenses		277,708			254,926			234,623			204,116		143,836
Total other (expense) income		(105,885	)		(163,759	)		(63,821	)		52,759		33,423
Net (loss) income from continuing operations before income taxes and cumulative effect of accounting change		(757,997	)		(450,674	)		216,607			323,776		255,202
Income tax expense (benefit)(1)		136,314			(190,583	)		87,563			37,177		98,332
Net (loss) income from continuing operations before cumulative effect of accounting changes		(894,311	)		(260,091	)		129,044			286,599		156,870
Cumulative effect of accounting change, net of taxes		—			—			—			370		—
Net (loss) income from continuing operations		(894,311	)		(260,091	)		129,044			286,969		156,870
Net (loss) income from discontinued operations, net of taxes		33,335			41,310			35,027			12,032		—
Gain (loss) from sale of discontinued operations, net of taxes		(8,071	)		104			156			—		—
Net (loss) income		(869,047	)		(218,677	)		164,227			299,001		156,870
Net(loss) income attributable to noncontrolling interests		(28	)		1,426			4,938			4,711		—
Net (loss) income attributable to CapitalSource Inc.	$	(869,019	)	$	(220,103	)	$	159,289		$	294,290	$	156,870
Basic (loss) income per share:
From continuing operations	$	(2.92	)	$	(1.04	)	$	0.67		$	1.73	$	1.30
From discontinued operations		0.08			0.16			0.18			0.07		—
Attributable to CapitalSource Inc.	$	(2.84	)	$	(0.88	)	$	0.83		$	1.77	$	1.30
Diluted (loss) income per share:
From continuing operations	$	(2.92	)	$	(1.04	)	$	0.67		$	1.70	$	1.27
From discontinued operations		0.08			0.16			0.18			0.07		—
Attributable to CapitalSource Inc.	$	(2.84	)	$	(0.88	)	$	0.82		$	1.74	$	1.27
Average shares outstanding:
Basic		306,417,394			251,213,699			191,697,254			166,273,730		120,976,558
Diluted		306,417,394			251,213,699			193,282,656			169,220,007		123,433,645
Cash dividends declared per share	$	0.04		$	1.30		$	2.38		$	2.02	$	0.50
Dividend payout ratio attributable to CapitalSource Inc.		(0.01	)		(1.48	)		2.87			1.14		0.38

(1) As a result of our decision to elect REIT status beginning with the tax year ended December 31, 2006, we provided for income taxes for the years ended December 31, 2008, 2007 and 2006, based on effective tax rates

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of 36.5%, 39.4% and 39.9%, respectively, for the income earned by our taxable REIT subsidiaries (“TRSs”). We did not provide for any income taxes for the income earned by our qualified REIT subsidiaries for the years ended December 31, 2008, 2007 and 2006. We provided for income (benefit) expense on the consolidated (loss) incurred or income earned based on effective tax rates of (18.0)%, 43.5%, 39.6%, 11.1% and 38.5% in 2009, 2008, 2007, 2006 and 2005, respectively. Effective January 1, 2009, we revoked our REIT election.

	December 31,
	2009			2008			2007			2006			2005
	($ in thousands)
Balance sheet data:
Investment securities, available-for-sale	$	960,591		$	679,551		$	13,309		$	61,904		$	50,461
Investment securities, held-to-maturity		242,078			14,389			—			—			—
Mortgage-related receivables, net		—			1,801,535			2,033,296			2,286,083			39,438
Mortgage-backed securities pledged, trading		—			1,489,291			4,030,180			3,476,424			322,027
Commercial real estate “A” Participation Interest, net		530,560			1,396,611			—			—			—
Total loans, net(1)		7,588,805			8,857,631			9,525,454			7,563,718			5,737,430
Direct real estate investments, net		336,007			346,167			358,901			361,874			—
Assets of discontinued operations, held for sale		260,541			686,466			706,547			383,097			—
Total assets		12,246,942			18,419,632			18,039,364			15,209,295			6,955,325
Deposits		4,483,879			5,043,695			—			—			—
Repurchase agreements		—			1,595,750			3,910,027			3,510,768			358,423
Credit facilities		542,781			1,445,062			2,207,063			2,251,658			2,450,452
Term debt		2,956,536			5,338,456			7,146,437			5,766,370			1,774,475
Other borrowings from continuing operations		1,466,834			1,493,243			1,592,894			1,227,247			714,579
Total borrowings from continuing operations		4,966,151			9,872,511			14,856,421			12,756,043			5,297,929
Liabilities of discontinued operations		223,149			130,173			136,999			55,934			—
Total shareholders’ equity		2,183,259			2,830,720			2,651,466			2,210,314			1,245,848
Portfolio statistics:
Number of loans closed to date		2,815			2,596			2,457			1,986			1,409
Number of loans paid off to date		(1,737	)		(1,524	)		(1,243	)		(914	)		(486	)
Number of loans		1,078			1,072			1,214			1,072			923
Total loan commitments	$	11,600,297		$	13,296,755		$	14,602,398		$	11,929,568		$	9,174,567
Average outstanding loan size	$	7,720		$	8,857		$	8,128		$	7,323		$	6,487
Average balance of loans	$	9,028,580		$	9,655,117		$	8,959,621		$	6,932,389		$	5,008,933
Employees as of year end		665			716			562			548			520

(1) Includes loans held for sale and loans held for investment, net of deferred loan fees and discounts and the allowance for loan losses.

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	Year Ended December 31,
	2009			2008			2007			2006			2005
Performance ratios:
Return on average assets:
(Loss) income from continuing operations		(6.13	)%		(1.54	)%		0.79	%		2.35	%		2.89	%
Net (loss) income		(5.69	)%		(1.25	)%		0.95	%		2.34	%		2.89	%
Return on average equity:
(Loss) income from continuing operations		(41.35	)%		(10.95	)%		6.36	%		17.37	%		13.81	%
Net (loss) income		(31.96	)%		(7.53	)%		6.55	%		14.89	%		13.81	%
Yield on average interest-earning assets(1)		6.39	%		7.67	%		9.20	%		9.60	%		11.61	%
Cost of funds(1)		3.61	%		4.90	%		6.14	%		5.97	%		4.83	%
Net finance margin(1)		3.39	%		3.47	%		3.78	%		4.60	%		7.94	%
Operating expenses as a percentage of average total assets(1)		1.97	%		1.57	%		1.51	%		1.68	%		2.65	%
Operating expenses (excluding direct real estate investment depreciation) as a percentage of average total assets(1)		1.90	%		1.51	%		1.44	%		1.67	%		2.65	%
Core lending spread(1)		7.40	%		6.88	%		6.63	%		7.74	%		9.01	%
Credit quality ratios:
Loans 30-89 days contractually delinquent as a percentage of commercial lending assets (as of year end)		3.12	%		2.76	%		0.85	%		2.16	%		0.30	%
Loans 90 or more days contractually delinquent as a percentage of commercial lending assets (as of year end)		4.80	%		1.30	%		0.60	%		0.80	%		0.71	%
Loans on non-accrual status as a percentage of commercial lending assets (as of year end)		12.06	%		4.05	%		1.74	%		2.35	%		2.31	%
Impaired loans as a percentage of commercial lending assets (as of year end)		14.12	%		6.38	%		3.25	%		3.60	%		3.35	%
Net charge offs (as a percentage of average commercial lending assets)		6.63	%		2.89	%		0.64	%		0.69	%		0.27	%
Allowance for loan losses as a percentage of commercial lending assets (as of year end)		6.63	%		3.91	%		1.42	%		1.54	%		1.47	%
Capital and leverage ratios:
Total debt and deposits to equity (as of year end)(1)		4.40	x		6.56	x		7.14	x		6.77	x		4.53	x
Average equity to average assets(1)		14.83	%		14.05	%		12.46	%		13.51	%		20.96	%
Equity to total assets (as of year end)(1)		17.90	%		12.83	%		12.01	%		12.70	%		17.91	%

(1) Ratios calculated based on continuing operations.

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

Overview and Highlights

We are a commercial lender which primarily, through our wholly owned subsidiary, CapitalSource Bank, provides financial products to middle market businesses and provides depository products and services in southern and central California. Prior to the formation of CapitalSource Bank, CapitalSource Inc. (“CapitalSource,” and together with its subsidiaries other than CapitalSource Bank, the “Parent Company”) conducted its commercial lending business through our other subsidiaries. Subsequent to CapitalSource Bank’s formation, substantially all new loans have been originated at CapitalSource Bank, and we expect this will continue to be the case for the foreseeable future. Our commercial lending activities in the Parent Company consist primarily of satisfying existing commitments made prior to CapitalSource Bank’s formation and receiving payments on our existing loan portfolio. Consequently, we expect that our loans at the Parent Company will gradually run off, while CapitalSource Bank’s loan portfolio will continue to grow. As of December 31, 2009, we had 1,078 loans outstanding, of which 58 were shared between CapitalSource Bank and the Parent Company. Our total loans had an aggregate outstanding balance of $8.3 billion.

We currently operate as three reportable segments: 1) CapitalSource Bank, 2) Other Commercial Finance, and 3) Healthcare Net Lease. Our CapitalSource Bank segment comprises our commercial lending and banking business activities; our Other Commercial Finance segment comprises our loan portfolio and other business activities in the Parent Company; and our Healthcare Net Lease segment comprises our direct real estate investment business activities. For additional information, see Note 25, Segment Data, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Through our CapitalSource Bank segment activities, CapitalSource Bank provides a wide range of financial products primarily to small and middle market businesses across the United States and also offers depository products and services in southern and central California, which are insured by the FDIC to the maximum amounts permitted by regulation. As of December 31, 2009, CapitalSource Bank held a $530.6 million senior participation interest in a pool of commercial real estate loans and related assets (the “A” Participation Interest) and had 443 loans outstanding of which 58 loans were shared with the Parent Company. Our total loans had an aggregate principal balance held by CapitalSource Bank of $3.1 billion.

Through our Other Commercial Finance segment activities, the Parent Company has provided financial products primarily to small and middle market businesses. As of December 31, 2009, our Other Commercial Finance segment had 693 loans outstanding of which 58 loans were shared with CapitalSource Bank. Our total loans had an aggregate balance of $5.2 billion in the Parent Company.

During the year ended December 31, 2009, we sold 82 long-term healthcare facilities with a total net book value of $400.3 million, realizing a pre-tax loss of $9.4 million. Two transactions comprised 77 of the facilities sold. In November 2009, we sold 37 long-term healthcare facilities (the “November Sale Assets”) for approximately $100.0 million in cash. In December 2009, in the first step of a multi-step transaction, we sold 40 long-term healthcare facilities (the “Step 1 Assets”) to Omega Healthcare Investors, Inc. (“Omega”) for approximately $184.2 million in cash and approximately 1.4 million shares of Omega common stock valued at $25.6 million. In addition, by acquiring our facilities in the December 2009 closing, Omega became obligated to pay us $59.4 million of indebtedness associated with the Step 1 Assets. Step two of the transaction with Omega will include the sale of an additional 40 long-term healthcare facilities (the “Step 2 Assets”), which we expect to complete in 2010.

In December 2009, we also received approximately 1.3 million shares of Omega common stock valued at $25.0 million in consideration for a non-refundable option that can be exercised by Omega to acquire an additional 63 of our long-term healthcare facilities (the “Step 3 Assets”) at any time through December 31, 2011. Upon the completion of the sale of Step 2 Assets and Step 3 Assets, we will exit the skilled nursing home ownership business, but continue to actively provide financing for owners and operators in the long-term healthcare industry.

We have presented the financial condition and results of operations of all assets within our Healthcare Net Lease segment, with the exception of the Step 3 Assets, as discontinued operations for all periods presented.

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Additionally, the results of the discontinued operations include the activities of other healthcare facilities that have been sold since the inception of the business. The Step 3 Assets have been included in our continuing operations as they do not meet the criteria to be held for sale as of December 31, 2009. For additional information, see Note 3, Discontinued Operations, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Consolidated Results of Operations

We currently operate as three reportable segments: 1) CapitalSource Bank, 2) Other Commercial Finance, and 3) Healthcare Net Lease. Our CapitalSource Bank segment comprises our commercial lending and banking business activities; our Other Commercial Finance segment comprises our loan portfolio and other business activities in the Parent Company; and our Healthcare Net Lease segment comprises our direct real estate investment business activities.

The discussion that follows differentiates our results of operations between our segments.

Explanation of Reporting Metrics

Interest Income.  In our CapitalSource Bank segment, interest income represents interest earned on loans, the “A” Participation Interest, investment securities and cash and cash equivalents, as well as amortization of loan origination fees, net of the direct costs of origination. In our Other Commercial Finance segment, interest income represents interest earned on loans, coupon interest, other investments and cash and cash equivalents. In addition, interest income includes amortization of loan origination fees, net of direct costs of amortization and the amortization of purchase discounts and premiums, which are amortized into income using the interest method. Although the majority of our loans charge interest at variable rates that adjust periodically, we also have loans charging interest at fixed rates. In our Healthcare Net Lease segment, interest income represents interest earned on cash and restricted cash.

Fee Income.  In our CapitalSource Bank and Other Commercial Finance segments, fee income represents net fee income earned from our commercial loan operations. Fee income includes prepayment-related fees as well as other fees charged to borrowers. We currently do not generate any fee income in our Healthcare Net Lease segment.

Operating Lease Income.  In our Healthcare Net Lease segment, operating lease income represents lease income earned in connection with direct real estate investments. Our operating leases typically include fixed rental payments, subject to escalation over the life of the lease. We generally project a minimum escalation rate for the leases and recognize operating lease income on a straight-line basis over the life of the lease. We currently do not generate any operating lease income in our CapitalSource Bank and Other Commercial Finance segments.

Interest Expense.  Interest expense is the amount paid on deposits and borrowings, including the amortization of deferred financing fees and debt discounts. In our CapitalSource Bank segment, interest expense includes interest paid to depositors and interest paid on FHLB SF borrowings. In our Other Commercial Finance segment, interest expense includes borrowing costs associated with repurchase agreements, secured credit facilities, term debt, convertible debt and subordinated debt. In our Healthcare Net Lease segment, interest expense includes borrowing costs associated with mortgage debt. The majority of our borrowings charge interest at variable rates based primarily on one-month LIBOR or Commercial Paper (“CP”) rates plus a margin. Our 2014 Senior Secured Notes charge interest at a fixed rate. Our convertible debt, three series of our subordinated debt, our term debt recorded in connection with our investments in mortgage-related receivables and the intercompany debt within our Healthcare Net Lease segment bear a fixed rate of interest. Deferred financing fees, debt discounts and the costs of issuing debt, such as commitment fees and legal fees, are amortized over the estimated life of the borrowing. Loan prepayments may materially affect interest expense on our term debt since in the period of prepayment the amortization of deferred financing fees and debt acquisition costs is accelerated.

Provision for Loan Losses.  We record a provision for loan losses in our CapitalSource Bank and Other Commercial Finance segments. The provision for loan losses is the periodic cost of maintaining an appropriate allowance for loan losses inherent in our commercial lending portfolio and in our portfolio of residential mortgage-related receivables. As the size and mix of loans within these portfolios change, or if the credit quality of the

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portfolios change, we record a provision to appropriately adjust the allowance for loan losses. We do not have any loan receivables in our Healthcare Net Lease segment.

Other (Expense) Income.  In our CapitalSource Bank and Other Commercial Finance segments, other income (expense) consists of gains (losses) on the sale of loans, gains (losses) on the sale of debt and equity investments, unrealized appreciation (depreciation) on certain investments, other-than-temporary impairment on investment securities, available for sale, gains (losses) on derivatives, due diligence deposits forfeited, unrealized appreciation (depreciation) of our equity interests in certain non-consolidated entities, servicing income, income from our management of various loans held by third parties, income (expenses) on operations of and gains (losses) on the sales of our REO, gains (losses) on debt extinguishment at the Parent Company, and other miscellaneous fees and expenses not attributable to our commercial lending and banking operations. In our Healthcare Net Lease segment, other income (expense) consists of gain (loss) on the sale of assets.

Operating Expenses.  In our CapitalSource Bank and Other Commercial Finance segments, operating expenses include compensation and benefits, professional fees, travel, rent, insurance, depreciation and amortization, marketing and other general and administrative expenses, including deposit insurance premiums. In our Healthcare Net Lease segment, operating expenses include depreciation of direct real estate investments, professional fees, an allocation of overhead expenses (including compensation and benefits) and other direct expenses.

Income Taxes.  We provide for income taxes as a “C” corporation on income earned from operations. Currently, our subsidiaries cannot participate in the filing of a consolidated federal tax return. As a result, certain subsidiaries may have taxable income that cannot be offset by taxable losses or loss carryforwards of other entities. The Company and its subsidiaries are subject to federal, foreign, state and local taxation in various jurisdictions.

We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases . Deferred tax assets and liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the change.

From 2006 through 2008, we operated as a REIT.  Effective January 1, 2009, we revoked our REIT election and recognized the deferred tax effects in our audited consolidated financial statements as of December 31, 2008. During the period we operated as a REIT, we were generally not subject to federal income tax at the REIT level on our net taxable income distributed to shareholders, but we were subject to federal corporate-level tax on the net taxable income of our taxable REIT subsidiaries, and we were subject to taxation in various foreign, state and local jurisdictions. In addition, we were required to distribute at least 90% of our REIT taxable income to our shareholders and meet various other requirements imposed by the Internal Revenue Code, through actual operating results, asset holdings, distribution levels, and diversity of stock ownership.

Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. All evidence, both positive and negative, is evaluated when making this determination. Items considered in this analysis include the ability to carry back losses to recoup taxes previously paid, the reversal of temporary differences, tax planning strategies, historical financial performance, expectations of future earnings and the length of statutory carryforward periods. Significant judgment is required in assessing future earning trends and the timing of reversals of temporary differences.

In 2009, we established a valuation allowance against a substantial portion of our net deferred tax assets for subsidiaries where we determined that there was significant negative evidence with respect to our ability to realize such assets. Negative evidence we considered in making this determination included the incurrence of operating losses at several of our subsidiaries, and uncertainty regarding the realization of a portion of the deferred tax assets at future points in time. At December 31, 2009, the total valuation allowance was $385.9 million. Although realization is not assured, we believe it is more likely than not that the remaining recognized net deferred tax assets of $107.1 million as of December 31, 2009 will be realized. We intend to maintain a valuation allowance with

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respect to our deferred tax assets until sufficient positive evidence exists to support its reduction or reversal. As of December 31, 2008, we recorded no valuation allowance against our deferred tax assets.

Operating Results for the Years Ended December 31, 2009, 2008 and 2007

Our results of operations for 2009 were impacted by the global recession, a challenging credit market environment, the availability of liquidity, and the effect of revoking our REIT election effective January 1, 2009. As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2009 compared to 2008 were:

•  Increased provision for loan losses;

•  Increased income tax expense due primarily to deferred tax asset valuation allowances established in 2009 and deferred tax benefit recorded in 2008 related to the revocation of our REIT election;

•  The inclusion of a full year of CapitalSource Bank operations in 2009, as opposed to five months in 2008 as it commenced operations on July 25, 2008;

•  Decreased balance of our commercial lending portfolio;

•  Gains and losses on our residential mortgage investment portfolio;

•  Gains and losses on extinguishment of our debt;

•  Losses on derivatives and other investments in our Other Commercial Finance segment;

•  Changes in lending and borrowing spreads; and

•  Divestiture of a substantial portion of our Healthcare Net Lease segment.

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Our consolidated operating results for the year ended December 31, 2009, compared to the year ended December 31, 2008, and for the year ended December 31, 2008, compared to the year ended December 31, 2007, were as follows:

	Year Ended December 31,									2009 vs. 2008			2008 vs. 2007
	2009			2008			2007			% Change			% Change
	($ in thousands)
Interest income	$	862,586		$	1,199,529		$	1,366,461			(28	)%		(12	)%
Fee income		22,884			33,099			63,346			(31	)		(48	)
Operating lease income		33,985			31,896			33,444			7			(5	)
Interest expense		437,713			693,357			859,180			(37	)		(19	)
Provision for loan losses		845,986			593,046			78,641			43			654
Depreciation of direct real estate investments		10,160			10,110			10,379			—			(3	)
Operating expenses		277,708			254,926			234,623			9			9
Other expense		(105,885	)		(163,759	)		(63,821	)		35			(157	)
Net (loss) income from continuing operations before income taxes		(757,997	)		(450,674	)		216,607			(68	)		(308	)
Income tax expense (benefit)		136,314			(190,583	)		87,563			172			(318	)
Net (loss) income from continuing operations		(894,311	)		(260,091	)		129,044			(244	)		(302	)
Net income from discontinued operations, net of taxes		33,335			41,310			35,027			(19	)		18
(Loss) gain from sale of discontinued operations, net of taxes		(8,071	)		104			156			(7,861	)		(33	)
Net (loss) income		(869,047	)		(218,677	)		164,227			(297	)		(233	)
Net (loss) income attributable to noncontrolling interests		(28	)		1,426			4,938			(102	)		(71	)
Net (loss) income attributable to CapitalSource Inc.		(869,019	)		(220,103	)		159,289			(295	)		(238	)

Our consolidated yields on income earning assets and the costs of interest-bearing liabilities for the years ended December 31, 2009, 2008 and 2007, were as follows:

	Year Ended December 31,
	2009							2008							2007
	Weighted		Net		Average			Weighted		Net		Average			Weighted		Net		Average
	Average		Investment		Yield/			Average		Investment		Yield/			Average		Investment		Yield/
	Balance		Income		Cost			Balance		Income		Cost			Balance		Income		Cost
	($ in thousands)
Interest-earning assets:
Interest income			$	862,586		6.23	%			$	1,199,529		7.47	%			$	1,366,461		8.49	%
Fee income				22,884		0.16					33,099		0.20					63,346		0.71
Total interest-earning assets(1)	$	13,855,334		885,470		6.39		$	16,066,509		1,232,628		7.67		$	15,546,942		1,429,807		9.20
Total direct real estate investments		335,031		33,985		10.14			377,606		31,896		8.45			576,731		33,444		5.80
Total income earning assets		14,190,365		919,455		6.48			16,444,115		1,264,524		7.69			16,123,673		1,463,251		9.08
Total interest-bearing liabilities(2)		12,125,042		437,713		3.61			14,164,378		693,357		4.90			13,992,038		859,180		6.14
Net finance spread			$	481,742		2.87	%			$	571,167		2.79	%			$	604,071		2.94	%
Net finance margin						3.39	%						3.47	%						3.75	%

(1)	Interest-earning assets include cash and cash equivalents, restricted cash, marketable securities, mortgage-related receivables, RMBS, loans, the “A” Participation Interest and investments in debt securities.
(2)	Interest-bearing liabilities include deposits, repurchase agreements, secured and unsecured credit facilities, term debt, convertible debt and subordinated debt.

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Discontinued Operations

During the year ended December 31, 2009, we sold 82 healthcare facilities and anticipate selling our remaining facilities in 2010 and 2011. Upon the completion of these asset sales, we will exit the skilled nursing facility ownership business, but continue to actively provide financing for owners and operators in the long-term healthcare industry. As a result, all consolidated comparisons below reflect the continuing results of our operations. For operating information about our discontinued operations, see the Healthcare Net Lease Segment section.

Operating Expenses

2009 vs. 2008.  The increase in consolidated operating expenses to $277.7 million for the year ended December 31, 2009 from $254.9 million for the year ended December 31, 2008 was primarily due to the inclusion of twelve months of operating expenses related to CapitalSource Bank in 2009, while only five months were included in 2008. Also contributing to the increase was a $8.0 million increase in FDIC premiums paid by CapitalSource Bank, including a one-time special assessment of $2.5 million paid to the FDIC’s Deposit Insurance Fund, which was part of a required payment for all insured institutions, a $7.2 million increase in rental expenses, primarily due to the addition of CapitalSource Bank occupancy expenses as well as a new office lease in Chevy Chase, Maryland, and a $4.7 million increase in professional fees. These increases were partially offset by a $1.8 million decrease in marketing expenses, related primarily to the one-time promotion and advertising expenses related to the commencement of CapitalSource Bank’s operations and a $4.1 million decrease in travel and entertainment expenses.

2008 vs. 2007.  The increase in consolidated operating expenses to $254.9 million for the year ended December 31, 2008 from $234.6 million for the year ended December 31, 2007 was primarily due to a $23.2 million increase in professional fees, including a write-off of previously capitalized costs related to a terminated merger transaction, fees related to the previously planned initial public offering of CapitalSource Healthcare REIT, consulting fees and legal and other professional fees related to the formation and commencement of operations of CapitalSource Bank, a $3.0 million increase in depreciation and amortization expense primarily resulting from increases in depreciation on CapitalSource Bank’s fixed assets, and a $3.5 million increase in rent and marketing expense related to CapitalSource Bank. These increases were primarily offset by a $14.4 million decrease in total employee compensation and a $2.3 million decrease in travel and entertainment expenses. The decrease in employee compensation was primarily due to a $21.7 million decrease in incentive compensation partially offset by a $4.1 million increase in salaries. For the years ended December 31, 2008 and 2007, incentive compensation totaled $60.0 million and $81.7 million, respectively. Incentive compensation comprises annual bonuses, as well as expense attributed to stock options, restricted stock awards and restricted stock units, which generally have vesting periods ranging from three to five years.

Income Taxes

2009 vs. 2008.  Consolidated income tax expense for the year ended December 31, 2009 was $136.3 million, compared to an income tax benefit of $190.6 million for the year ended December 31, 2008. The change in income tax expense was caused primarily by deferred tax asset valuation allowances established in 2009 and deferred tax benefit recorded in 2008 related to the revocation of our REIT election.

2008 vs. 2007.  As a result of our decision to elect REIT status beginning with the tax year ended December 31, 2006, we provided for income taxes for the years ended December 31, 2008 and 2007, based on effective tax rates of 36.5% and 39.4%, respectively, for the income earned by our TRSs. We did not provide for any income taxes for the income earned by our qualified REIT subsidiaries for the years ended December 31, 2008 and 2007. We provided for income taxes on the consolidated income earned based on a 43.5% and 39.6% effective tax rate in 2008 and 2007, respectively. We revoked our REIT election effective January 1, 2009. As a result of our REIT revocation, we have recorded $97.7 million in deferred tax benefit and $97.7 million in net deferred tax asset on our audited consolidated financial statements as of and for the year ended December 31, 2008.

Comparison of the Years Ended December 31, 2009, 2008 and 2007

We have reclassified all comparative prior period segment information to reflect our three reportable segments. The discussion that follows differentiates our results of operations between our segments.

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CapitalSource Bank Segment

CapitalSource Bank commenced operations on July 25, 2008. As a result, the comparison of the results of operations for this segment relates to the full year ended December 31, 2009 and only 160 days of operations in 2008.

Our CapitalSource Bank segment operating results for the year ended December 31, 2009, compared to the year ended December 31, 2008, were as follows:

	Year Ended December 31,
	2009			2008			% Change
	($ in thousands)
Interest income	$	307,653		$	146,542			110	%
Fee income		6,462			1,562			314
Interest expense		111,993			76,246			47
Provision for loan losses		213,381			55,600			284
Operating expenses		100,474			43,287			132
Other income		34,806			12,451			180
Income tax benefit		(6,228	)		(6,089	)		(2	)
Net loss		(70,699	)		(8,489	)		(733	)

Interest Income

2009 vs. 2008.  Total interest income increased to $307.7 million for the year ended December 31, 2009 from $146.5 million for the year ended December 31, 2008, with an average yield on interest-earning assets of 5.53% as compared to 5.70% in 2008. The increase was primarily due to the inclusion of only five months of its operations in 2008 as CapitalSource Bank commenced operations on July 25, 2008 compared to a full year in 2009. During the years ended December 31, 2009 and 2008, interest income on loans was $209.3 million and $74.3 million, respectively, yielding 7.16% and 6.93% on an average loan balance of $2.9 billion and $1.1 billion, respectively. During the year ended December 31, 2009, $11.4 million of our accrued interest was reversed on non-accrual loans and negatively impacted the yield on loans by 0.39%. We did not reverse any accrued interest on non-accrual loans during the year ended December 31, 2008.

Interest income on the “A” Participation Interest was $47.5 million and $54.2 million, during the years ended December 31, 2009 and 2008, respectively, yielding 5.23% and 7.74% on an average balance of $907.6 million and $701.0 million, respectively. During the years ended December 31, 2009 and 2008, we accreted $29.8 million and $23.8 million, respectively, of discount into interest income on loans in our audited consolidated statements of operations. Changes from one period to the next in actual or expected repayments may have a material impact on our interest income and yield recognized during the period.

During the years ended December 31, 2009 and 2008, interest income from our investments, including available-for-sale and held-to-maturity securities, was $46.5 million and $7.5 million, respectively, yielding 4.64% and 3.76% on an average balance of $1.0 billion and $200.0 million, respectively. During the year ended December 31, 2009, $1.4 billion and $236.4 million of our investment securities, available-for-sale and held-to-maturity, respectively, were purchased while $1.2 billion and $23.4 million, respectively, of principal repayments were received. For the year ended December 31, 2008, $1.2 billion and $14.3 million of our investment securities, available-for-sale and held-to-maturity, respectively, were purchased, and $478.1 million in principal repayments were received from available-for-sale securities.

During the years ended December 31, 2009 and 2008, interest income on cash and cash equivalents was $4.4 million and $10.6 million, respectively, yielding 0.53% and 1.70% on an average balance of $816.3 million and $619.4 million, respectively.

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Fee Income

2009 vs. 2008.  Fee income increased to $6.5 million for the year ended December 31, 2009 from $1.6 million for the year ended December 31, 2008, with an average yield on interest-earning assets of 0.11% and 0.06%, respectively, primarily due to an increase in new loans at CapitalSource Bank combined with the impact of twelve months of operations included in 2009 compared with five months in 2008.

Interest Expense

2009 vs. 2008.  Total interest expense increased to $112.0 million for the year ended December 31, 2009 from $76.2 million for the year ended December 31, 2008. The increase was primarily due to the inclusion of only five months of its operations in 2008 as CapitalSource Bank commenced operations on July 25, 2008 compared to a full year in 2009. During the years ended December 31, 2009 and 2008, our average cost of interest-bearing liabilities was 2.36% and 3.45%, respectively. Our average balance of interest-bearing liabilities, consisting of deposits and borrowings, was $4.7 billion and $2.2 billion, during the years ended December 31, 2009 and 2008, respectively. Our interest expense on deposits for the years ended December 31, 2009 and 2008, was $109.4 million and $76.2 million, respectively, with an average cost of deposits of 2.38% and 3.45% on an average balance of $4.6 billion and $2.2 billion, respectively. During the year ended December 31, 2009, $5.9 billion of our time deposits matured with a weighted average interest rate of 3.03% and $5.3 billion of new time deposits were issued at a weighted average interest rate of 1.64%. During the year ended December 31, 2008, $3.1 million of our time deposits, including brokered deposits, matured with a weighted average interest rate of 3.47% and $2.9 billion of new time deposits were issued at a weighted average interest rate of 3.48%. Additionally, during the year ended December 31, 2009, our weighted average interest rate of our liquid deposits, savings and money market accounts, declined from 2.66% at the beginning of the year to 1.06% at end of the year. During the year ended December 31, 2009, our interest expense on borrowings, primarily consisting of FHLB SF borrowings, was $2.6 million with an average cost of 1.92% on an average balance of $133.2 million. For the year ended December 31, 2008, our weighted average interest rate of our liquid deposits, savings and money market accounts, increased from 2.62% to 2.66% at the end of the period. During the year ended December 31, 2009, no borrowings matured or were repaid. There were no borrowings from the FHLB SF during the year ended December 31, 2008.

Net Finance Margin

The yields of income earning assets and the costs of interest-bearing liabilities in this segment for the years ended December 31, 2009 and 2008 were as follows:

	Year Ended December 31,
	2009							2008
	Weighted		Net		Average			Weighted		Net		Average
	Average		Investment		Yield/			Average		Investment		Yield/
	Balance		Income		Cost			Balance		Income		Cost
	($ in thousands)
Interest-earning assets:
Interest income			$	307,653		5.32	%			$	146,542		5.55	%
Fee income				6,462		0.22					1,562		0.15
Total interest-earning assets(1)	$	5,672,675		314,115		5.54		$	2,600,219		148,104		5.70
Total interest-bearing liabilities(2)		4,738,114		111,993		2.36			2,207,209		76,246		3.45
Net finance spread			$	202,122		3.18	%			$	71,858		2.25	%
Net finance margin						3.56	%						2.76	%

(1)	Interest-earning assets include cash and cash equivalents, investments, the “A” Participation Interest and loans.
(2)	Interest-bearing liabilities include deposits and borrowings.

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Provision for Loan Losses

Our provision for loan losses is based on our evaluation of the adequacy of the existing allowance for loan losses in relation to total loan portfolio and our periodic assessment of the inherent risks relating to the loan portfolio resulting from our review of selected individual loans. For details of activity in our provision for loan losses, see Credit Quality and Allowance for Loan Losses section.

Operating Expenses

2009 vs. 2008.  Operating expenses increased to $100.5 million for the year ended December 31, 2009 from $43.3 million, for the year ended December 31, 2008. The increase was primarily due to the inclusion of only five months of its operations in 2008 as CapitalSource Bank commenced operations on July 25, 2008 compared to a full year in 2009. The increase also reflects an increase in deposit premium expense due to an increase in the FDIC deposit premium assessment rate and a special assessment of $2.5 million, which was part of a required payment for all insured institutions, offset by lower advertising and promotion costs of $1.0 million related to the commencement of CapitalSource Bank’s operations.

CapitalSource Bank relies on the Parent Company to source loans, provide loan origination due diligence services and perform certain underwriting services. For these services, CapitalSource Bank pays the Parent Company loan sourcing fees based upon the funded amount of each new loan funded by CapitalSource Bank during the period. Based on our accounting policies, we do not capitalize loan sourcing fees, as these fees are eliminated in consolidation. These fees are included in other operating expense of this segment and were $14.6 million and $7.6 million for the years ended December 31, 2009 and 2008, respectively. CapitalSource Bank subleases from the Parent Company office space in several locations and also leases space to the Parent Company in other facilities in which CapitalSource Bank is the primary lessee. Each sublease arrangement was established based on then market rates for comparable subleases.

Other Income

2009 vs. 2008.  Other income, which primarily consists of loan servicing fees paid to CapitalSource Bank by the Parent Company, increased to $34.8 million for the year ended December 31, 2009 from $12.5 million for the year ended December 31, 2008. CapitalSource Bank provides loan servicing for loans and other assets, which are owned by the Parent Company and third parties. During the years ended December 31, 2009 and 2008, CapitalSource Bank provided loan servicing to the Parent Company. Loans and other assets being serviced by CapitalSource Bank for the benefit of others were $7.7 billion and $9.5 billion, respectively, as of December 31, 2009 and 2008, of which $5.2 billion and $6.8 billion, respectively, were owned by the Parent Company. All loan servicing fees paid by the Parent Company to CapitalSource Bank are eliminated in consolidation.

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Other Commercial Finance Segment

Our Other Commercial Finance segment operating results for the year ended December 31, 2009, compared to the year ended December 31, 2008, and for the year ended December 31, 2008, compared to the year ended December 31, 2007, were as follows:

	Year Ended December 31,									2009 vs. 2008			2008 vs. 2007
	2009			2008			2007			% Change			% Change
	($ in thousands)
Interest income	$	573,543		$	1,059,514		$	1,366,465			(46	)%		(22	)%
Fee income		16,422			31,190			63,346			(47	)		(51	)
Interest expense		318,662			591,645			824,558			(46	)		(28	)
Provision for loan losses		632,605			537,446			78,641			18			583
Operating expenses		213,042			223,697			226,550			(5	)		(1	)
Other expense		(91,080	)		(138,174	)		(63,790	)		34			(117	)
Income tax expense (benefit)		143,800			(183,146	)		87,563			179			(309	)
Net (loss) income		(809,224	)		(217,112	)		148,709			(273	)		(246	)
Net loss attributable to noncontrolling interests		(28	)		(706	)		(1,037	)		96			32
Net (loss) income attributable to CapitalSource Inc.		(809,196	)		(216,406	)		149,746			(274	)		(245	)

Interest Income

2009 vs. 2008.  Interest income decreased to $573.5 million for the year ended December 31, 2009 from $1.1 billion for the year ended December 31, 2008, primarily due to an increase in non-accrual loans, a decrease in average total interest-earning assets and a decrease in yield on average interest-earning assets. During the year ended December 31, 2009, our average balance of interest-earning assets decreased by $5.3 billion, or 39.3%, compared to the year ended December 31, 2008, primarily due to the sale of $1.6 billion of residential mortgage-backed securities that were issued and guaranteed by Fannie Mae or Freddie Mac (“Agency RMBS”) during the first quarter of 2009 as well as a decrease in loans resulting from the sale of $2.2 billion of loans to CapitalSource Bank from the Parent Company in 2008. During the year ended December 31, 2009, yield on average interest-earning assets decreased to 7.23% compared to 8.12% for the year ended December 31, 2008. This decrease was primarily the result of a decrease in the interest component of yield to 7.03% for the year ended December 31, 2009, from 7.88% for the year ended December 31, 2008, due to an increase in non-accrual loans and the sale of the mortgage related receivables, a decrease in short-term interest rates, partially offset by an increase in our core lending spread. Fluctuations in yields are driven by a number of factors, including changes in short-term interest rates (such as changes in the prime rate or one-month LIBOR), the coupon on new loan originations, the coupon on loans that pay down or pay off, non-accrual loans and modifications of interest rates on existing loans.

2008 vs. 2007.  Interest income decreased to $1.1 billion for the year ended December 31, 2009 from $1.4 billion for the year ended December 31, 2008, primarily due to an increase in non-accrual loans, a decrease in average total interest-earning assets and a decrease in yield on average interest-earning assets. During the year ended December 31, 2008, our average balance of interest-earning assets decreased by $2.1 billion, or 13.4%, compared to the year ended December 31, 2007, primarily due to the sale of loans to CapitalSource Bank. During the year ended December 31, 2008, yield on average interest-earning assets decreased to 8.12% compared to 9.22% for the year ended December 31, 2007. This decrease was primarily the result of a decrease in the interest component of yield to 7.88% for the year ended December 31, 2008, from 8.81% for the year ended December 31, 2007, due to changes in the short-term interest rates, partially offset by our core lending spread. Fluctuations in yields are driven by a number of factors, including changes in short-term interest rates (such as changes in the prime rate or one-month LIBOR), the coupon on new loan originations, the coupon on loans that pay down or pay off, non-accrual loans and modifications of interest rates on existing loans.

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Fee Income

2009 vs. 2008.  Fee income decreased to $16.4 million for the year ended December 31, 2009 from $31.2 million for the year ended December 31, 2008, with an average yield on interest-earning assets of 0.20% and 0.24%, respectively, primarily due to a decrease in prepayment fees and unused line fees.

2008 vs. 2007.  Fee income decreased to $31.2 million for the year ended December 31, 2008 from $63.3 million for the year ended December 31, 2007, with an average yield on interest-earning assets of 0.24% and 0.41%, respectively, primarily due to a decrease in prepayment fees.

Interest Expense

2009 vs. 2008.  We fund our Other Commercial Finance segment activities largely through debt, and the decrease in interest expense to $318.7 million for the year ended December 31, 2009 from $591.6 million for the year ended December 31, 2008 was primarily due to a decrease in average interest-bearing liabilities of $4.5 billion, or 38.8%, primarily due to repayment of repurchase agreements of $1.6 billion during the first quarter of 2009. Also contributing to the decrease in our interest expense was a decrease in our cost of borrowings, which was 4.46% and 5.07% for the years ended December 31, 2009 and 2008, respectively, as a result of lower LIBOR and CP rates on which interest on our term securitizations and credit facilities is based.

2008 vs. 2007.  The decrease in interest expense to $591.6 million for the year ended December 31, 2008 from $824.6 million for the year ended December 31, 2007 was primarily due to a decrease in average interest-bearing liabilities of $1.9 billion, or 14.1%, primarily due to the sale of loans to CapitalSource Bank. Also contributing to the decrease in our interest expense was a decrease in our cost of borrowings, which was 5.07% compared to 6.08% for the years ended December 31, 2008 and 2007, respectively, as a result of lower LIBOR and CP rates on which interest on our term securitizations and credit facilities is based.

Net Finance Margin

2009 vs. 2008.  Net finance margin was 3.32% for the year ended December 31, 2009, a decrease of 0.39% from 3.71% for the year ended December 31, 2008. The decrease in net finance margin was primarily due to the decrease in interest income offset by a decrease in our costs of funds as measured by a spread to short-term market rates on interest such as LIBOR. Net finance spread was 2.77% for the year ended December 31, 2009, a decrease of 0.28% from 3.05% for the year ended December 31, 2008. The decrease in net finance spread is attributable to the changes in its interest-earning assets and interest-bearing liabilities as described above.

2008 vs. 2007.  Net finance margin was 3.71% for the year ended December 31, 2008, a decrease of 0.19% from 3.90% for the year ended December 31, 2007. The decrease in net finance margin was primarily due to the decrease in interest income offset by a decrease in our costs of funds as measured by a spread to short-term market rates on interest such as LIBOR. Net finance spread was 3.05% for the year ended December 31, 2008, a decrease of 0.09% from 3.14% for the year ended December 31, 2007. The decrease in net finance spread is attributable to the changes in its interest-earning assets and interest-bearing liabilities as described above.

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The yields of income earning assets and the costs of interest-bearing liabilities in this segment for the years ended December 31, 2009, 2008 and 2007 were as follows:

	Year Ended December 31,
	2009							2008							2007
	Weighted		Net		Average			Weighted		Net		Average			Weighted		Net		Average
	Average		Investment		Yield/			Average		Investment		Yield/			Average		Investment		Yield/
	Balance		Income		Cost			Balance		Income		Cost			Balance		Income		Cost
	($ in thousands)
Interest-earning assets:
Interest income			$	573,543		7.03	%			$	1,059,514		7.88	%			$	1,366,465		8.81	%
Fee income				16,422		0.20					31,190		0.24					63,346		0.41
Total interest-earning assets(1)	$	8,162,038		589,965		7.23		$	13,440,001		1,090,704		8.12		$	15,513,639		1,429,811		9.22
Total interest-bearing liabilities(2)		7,137,868		318,662		4.46			11,659,636		591,645		5.07			13,566,393		824,558		6.08
Net finance spread			$	271,303		2.77	%			$	499,059		3.05	%			$	605,253		3.14	%
Net finance margin						3.32	%						3.71	%						3.90	%

(1)	Interest-earning assets include cash and cash equivalents, restricted cash, mortgage-related receivables, loans and investments in debt securities.
(2)	Interest-bearing liabilities include repurchase agreements, secured and unsecured credit facilities, term debt, convertible debt and subordinated debt.

Provision for Loan Losses

Our provision for loan losses is based on our evaluation of the adequacy of the existing allowance for loan losses in relation to total loan portfolio and our periodic assessment of the inherent risks relating to the loan portfolio resulting from our review of selected individual loans. For details of activity in our provision for loan losses, see Credit Quality and Allowance for Loan Losses section.

Operating Expenses

2009 vs. 2008.  Operating expenses decreased to $213.0 million for the year ended December 31, 2009 from $223.7 million for the year ended December 31, 2008, primarily due to a $28.3 million decrease in compensation and benefits, primarily related to a $18.4 million decrease in incentive compensation, and a $4.3 million decrease in travel and entertainment expenses, partially offset by a $15.7 million increase in loan servicing fees paid to CapitalSource Bank, a $3.0 million increase in professional fees and a $2.7 million increase in rent expense resulting from a new office lease in Chevy Chase, Maryland. Operating expenses as a percentage of average total assets, increased to 2.43% for the year ended December 31, 2009, from 1.58% for the year ended December 31, 2008.

2008 vs. 2007.  Operating expenses decreased to $223.7 million for the year ended December 31, 2008 from $226.6 million for the year ended December 31, 2007, primarily due a $34.4 million decrease in employee compensation resulting from decreases in incentive compensation and a $2.9 million decrease in travel and entertainment expenses, partially offset by a $22.6 million increase in professional fees, including a write-off of previously capitalized costs related to a terminated merger transaction, fees related to the previously planned initial public offering of CapitalSource Healthcare REIT, consulting fees and legal and other professional fees related to the formation and commencement of operations of CapitalSource Bank. Also partially offsetting the decrease was a $13.6 million increase in loan servicing fees paid to CapitalSource Bank. Operating expenses as a percentage of average total assets, increased to 1.58% for the year ended December 31, 2008, from 1.42% for the year ended December 31, 2007.

Other Expenses

2009 vs. 2008.  Other expenses decreased to $91.1 million for the year ended December 31, 2009 from $138.2 million for the year ended December 31, 2008, primarily due to decreases in losses on our investments,

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decreases in losses on our derivative instruments and changes in our residential mortgage investment portfolio, partially offset by losses on debt extinguishment and increased losses on REO.

Losses on investments decreased to $30.7 million for the year ended December 31, 2009 from $73.6 million for the year ended December 31, 2008, primarily due to lower losses on our cost basis investments as well as a decrease in impairments on available-for-sale investments. Net losses on derivatives decreased to $13.1 million for the year ended December 31, 2009 from $41.1 million for the year ended December 31, 2008, primarily due to changes in fair value of swaps used in hedging certain of our assets and liabilities to minimize our exposure to interest rate movements. In addition, 2008 losses on derivatives included losses of $8.2 million related to collateralized loan obligations. Gains on our residential mortgage investment portfolio securities were $15.3 million for the year ended December 31, 2009 compared with losses of $102.8 million for the year ended December 31, 2008. Our residential mortgage-backed securities were sold and the related derivatives were unwound during the first quarter of 2009.

Losses on debt extinguishment were $40.5 million for the year ended December 31, 2009, compared to gains on debt extinguishment of $58.9 million for the year ended December 31, 2008. In addition, we recorded losses on REO of $45.8 million for the year ended December 31, 2009 compared to losses of $19.7 million for the year ended December 31, 2008, primarily due to the continued softening of the real estate market resulting in increased realized losses on these properties as the portfolio is liquidated.

2008 vs. 2007.  Other expenses increased to $138.2 million for the year ended December 31, 2008 compared with $63.8 million for the year ended December 31, 2007, primarily due to losses on our investments and losses on our residential mortgage investment portfolio, partially offset by gains on debt extinguishment and decreased losses on our derivative instruments.

Losses on investments were $73.6 million for the year ended December 31, 2008 compared with gains of $20.3 million for the year ended December 31, 2007, primarily due to increased losses on our cost basis investments as well as an increase in impairments on available-for-sale investments in 2008. Losses on our residential mortgage investment portfolio securities were $102.8 million for the year ended December 31, 2008 compared with losses of $75.2 million for the year ended December 31, 2007, primarily due to a $32.0 million increase in net unrealized losses on our Agency RMBS.

Losses on debt extinguishment were $58.9 million for the year ended December 31, 2008, compared to losses on debt extinguishment of $0.7 million for the year ended December 31, 2007. Net losses on derivatives decreased to $41.1 million for the year ended December 31, 2008 from $46.2 million for the year ended December 31, 2007, primarily due to changes in fair value of swaps used in hedging certain of our assets and liabilities to minimize our exposure to interest rate movements.

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Healthcare Net Lease Segment

Healthcare Net Lease segment operating results for the year ended December 31, 2009, compared to the year ended December 31, 2008, and for the year ended December 31, 2008, compared to the year ended December 31, 2007, were as follows:

	Year Ended December 31,									2009 vs. 2008			2008 vs. 2007
	2009			2008			2007			% Change			% Change
	($ in thousands)
Interest income	$	450		$	1,055		$	1,362			(57	)%		(23	)%
Fee income		—			347			—			(100	)		N/A
Operating lease income		33,985			31,896			33,444			7			(5	)
Interest expense		20,109			37,546			35,988			(46	)		4
Depreciation of direct real estate investments		10,160			10,110			10,379			—			(3	)
Other operating expenses		8,854			11,200			8,073			(21	)		39
Other (expense) income		(2,136	)		41			(31	)		(5,310	)		232
Net loss from continuing operations		(6,824	)		(25,517	)		(19,665	)		73			(30	)
Net income from discontinued operations, net of taxes		33,335			41,310			35,027			(19	)		18
(Loss) gain from sale of discontinued operations, net of taxes		(8,071	)		104			156			(7,861	)		(33	)
Income tax expense		(1,258	)		(1,348	)		—			7			N/A
Net income		19,698			17,245			15,518			14			11
Net income attributable to noncontrolling interests		—			2,132			5,975			(100	)		(64	)
Net income attributable to CapitalSource Inc.		19,698			15,113			9,543			30			58

Discontinued Operations

During the year ended December 31, 2009, we sold 82 healthcare facilities and anticipate selling our remaining facilities in 2010 and 2011. Upon the completion of these asset sales, we will exit the skilled nursing facility ownership business, but continue to actively provide financing for owners and operators in the long-term healthcare industry. As a result, comparisons provided reflect the continuing results of our operations for the Healthcare Net Lease segment.

Income from discontinued operations was $25.3 million, net of a loss on disposal of $8.1 million, for the year ended December 31, 2009, compared with $41.4 million, including a gain on disposal of $0.1 million, for the year ended December 31, 2008, and compared with $35.2 million, including a gain on disposal of $0.2 million, for the year ended December 31, 2007. For additional information, see Note 3, Discontinued Operations, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Operating Lease Income

2009 vs. 2008.  Operating lease income increased to $34.0 million for the year ended December 31, 2009 from $31.9 million for the year ended December 31, 2008.

2008 vs. 2007.  Operating lease income decreased to $31.9 million for the year ended December 31, 2008 from $33.4 million for the year ended December 31, 2007.

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Interest Expense

2009 vs. 2008.  Interest expense decreased to $20.1 million for the year ended December 31, 2009 from $37.5 million for the year ended December 31, 2008 primarily due to a decrease in the cost of borrowings to 4.95% from 7.24% for the years ended December 31, 2009 and 2008, respectively. The overall borrowing spread to average one-month LIBOR for the year ended December 31, 2009 was 4.62% compared to 4.57% for the year ended December 31, 2008.

2008 vs. 2007.  Interest expense increased to $37.5 million for the year ended December 31, 2008 from $36.0 million for the year ended December 31, 2007 primarily due an increase in the cost of borrowings. Our cost of borrowings increased to 7.24% for the year ended December 31, 2008, from 6.76% for the year ended December 31, 2007. Our overall borrowing spread to average one-month LIBOR for the year ended December 31, 2008, was 4.57% compared to 1.51% for the year ended December 31, 2007.

Depreciation of Direct Real Estate Investments

2009 vs. 2008.  Depreciation on our direct real estate investments remained constant for the year ended December 31, 2009 compared with the year ended December 31, 2008.

2008 vs. 2007.  Depreciation on our direct real estate investments remained constant for the year ended December 31, 2008 compared with the year ended December 31, 2007.

Other Operating Expenses

2009 vs. 2008.  Operating expenses decreased to $8.9 million for the year ended December 31, 2009 from $11.2 million for the year ended December 31, 2008, primarily due to a decrease in allocated overhead from the Parent Company. Operating expenses as a percentage of average total assets increased to 2.65% for the year ended December 31, 2009, from 3.01% for the year ended December 31, 2008.

2008 vs. 2007.  Operating expenses increased to $11.2 million for the year ended December 31, 2008 from $8.1 million for the year ended December 31, 2007, primarily due to an increase in allocated overhead from the Parent Company. Operating expenses as a percentage of average total assets increased to 3.01% for the year ended December 31, 2008, from 1.83% for the year ended December 31, 2007.

Net Income Attributable to Noncontrolling Interests

2009 vs. 2008.  The decrease in net income attributable to noncontrolling interests was primarily due to the redemption of certain noncontrolling interests during 2008 in connection with our direct real estate investments.

2008 vs. 2007.  The decrease in net income attributable to noncontrolling interests was primarily due to a decrease in our quarterly dividends during the year ended December 31, 2008 and the redemption of certain noncontrolling interests.

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Financial Condition

CapitalSource Bank Segment

Portfolio Composition

As of December 31, 2009 and 2008, the composition of the CapitalSource Bank segment portfolio was as follows:

	December 31,
	2009		2008
	($ in thousands)
Assets:
Cash and cash equivalents(1)	$	821,980	$	1,238,173
Investment securities, available-for-sale		901,764		642,714
Investment securities, held-to-maturity		242,078		14,389
Commercial real estate “A” Participation Interest, net		530,560		1,396,611
Loans(2)		3,076,267		2,702,135
FHLB SF stock		20,195		20,195
Total	$	5,592,844	$	6,014,217
Liabilities:
Deposits	$	4,483,879	$	5,043,695
FHLB SF borrowings		200,000		—
Total	$	4,683,879	$	5,043,695

(1)	As of December 31, 2009 and 2008, the amounts include restricted cash of $65.9 million and $17.4 million, respectively.
(2)	Excludes deferred loan fees and discounts and the allowance for loan losses.

Cash and cash equivalents

As of December 31, 2009 and 2008, CapitalSource Bank had $822.0 million and $1.2 billion, respectively, in cash and cash equivalents, including restricted cash of $65.9 million and $17.4 million, respectively. Cash and cash equivalents consists of collections from our borrowers, amounts due from banks, U.S. Treasury securities, short-term investments and commercial paper with an initial maturity of three months or less. For additional information, see Note 4, Cash and Cash Equivalents and Restricted Cash, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Investment Securities, Available-for-Sale

As of December 31, 2009 and 2008, CapitalSource Bank owned $901.8 million and $642.7 million, respectively, in investment securities, available-for-sale. Included in these investment securities, available-for-sale, were Agency discount notes, Agency callable notes, Agency debt, Agency MBS, Non-agency MBS and corporate debt securities. CapitalSource Bank pledged substantially all of the investment securities, available-for-sale, to the FHLB SF and the FRB as a source of borrowing capacity as of December 31, 2009. For additional information, see Note 7, Investments, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Investment Securities, Held-to-Maturity

As of December 31, 2009 and 2008, CapitalSource Bank owned $242.1 million and $14.4 million, respectively, in investment securities, held-to-maturity, consisting of AAA-rated commercial mortgage-backed securities.

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For additional information, see Note 7, Investments, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Commercial Real Estate “A” Participation Interest

As of December 31, 2009 and 2008, the “A” Participation Interest had an outstanding balance of $530.6 million and $1.4 billion, respectively, net of discount. We expect the “A” Participation Interest to be fully repaid during 2010. For additional information, see Note 6, Commercial Lending Assets and Credit Quality, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

CapitalSource Bank Segment Loan Portfolio Composition

As of December 31, 2009 and 2008, the CapitalSource Bank loan portfolio had outstanding balances of $3.1 billion and $2.7 billion, respectively. Total CapitalSource Bank loan portfolio reflected in the portfolio statistics below includes gross loans held for investment.

As of December 31, 2009 and 2008, the composition of the CapitalSource Bank loan portfolio by loan type was as follows:

	December 31,
	2009				2008
	($ in thousands)
Commercial	$	1,599,667	52	%	$	1,445,678	54	%
Real estate		1,095,780	36			812,333	30
Real estate — construction		380,820	12			444,124	16
Total	$	3,076,267	100	%	$	2,702,135	100	%

As of December 31, 2009, the scheduled maturities of the CapitalSource Bank loan portfolio by loan type were as follows:

	Due in		Due After One
	One Year		Year Through		Due After
	or Less		Five Years		Five Years		Total
	($ in thousands)
Commercial	$	176,140	$	1,305,384	$	118,143	$	1,599,667
Real estate		75,641		937,839		82,300		1,095,780
Real estate — construction		292,025		88,795		—		380,820
Total	$	543,806	$	2,332,018	$	200,443	$	3,076,267

Substantially all of the CapitalSource Bank loan portfolio bears interest at adjustable rates pegged to an interest rate index plus a specified margin. Approximately 71% of the portfolio is subject to an interest rate floor. Due to low market interest rates as of December 31, 2009, substantially all loans with interest rate floors were bearing interest at such floors. The weighted average spread between the floor rate and the fully indexed rate on the loans was 2.67% as of December 31, 2009. To the extent the underlying indices subsequently increase, CapitalSource Bank’s interest yield on this portfolio will not rise as quickly due to the effect of the interest rate floors.

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As of December 31, 2009, the composition of CapitalSource Bank loan balances by index and by loan type were as follows:

	Loan Type
					Real Estate
	Commercial		Real Estate		Construction		Total		Percentage
	($ in thousands)
1-Month LIBOR	$	366,992	$	696,794	$	377,900	$	1,441,686		47	%
3-Month LIBOR		12,326		98,982		—		111,308		4
6-Month LIBOR		—		11,912		—		11,912		—
Prime		552,556		62,642		2,920		618,118		20
Canadian Prime		20,851		—		—		20,851		1
Blended		640,964		122,946		—		763,910		24
Total adjustable rate loans		1,593,689		993,276		380,820		2,967,785		96
Fixed rate loans		5,978		102,504		—		108,482		4
Total loans	$	1,599,667	$	1,095,780	$	380,820	$	3,076,267		100	%

As of December 31, 2009, the number of loans, average loan size, number of clients and average loan size per client by loan type were as follows:

							Average Loan
	Number		Average		Number of		Size per
	of Loans(1)		Loan Size		Clients		Client
	($ in thousands)
Commercial		270	$	5,925		205	$	7,803
Real Estate		159		6,892		149		7,354
Real Estate — construction		14		27,201		10		38,082
Overall CapitalSource Bank loan portfolio		443		6,944		364		8,451

(1) Includes 58 loans shared with the Other Commercial Finance segment.

Credit Quality and Allowance for Loan Losses

As of December 31, 2009 and 2008, the principal balances of contractually delinquent accruing loans and non-accrual loans in the CapitalSource Bank loan portfolio were as follows:

	December 31,
	2009		2008
	($ in thousands)
Accruing loans 30-89 days contractually delinquent	$	1,057	$	—
Accruing loans 90 or more days contractually delinquent		17,695		—
Non-accrual loans		173,931		—

Of our non-accrual loans, $28.6 million were 30-89 days delinquent and $84.1 million were over 90 days delinquent as of December 31, 2009.

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The activity in the allowance for loan losses for the years ended December 31, 2009 and 2008 was follows:

	Year Ended December 31,
	2009			2008
	($ in thousands)
Allowance for loan losses as of beginning of year	$	55,600		$	—
Provision for loan losses:
General		78,400			55,600
Specific		134,981			—
Total provision for loan losses		213,381			55,600
Charge offs		(116,473	)		—
Allowance for loan losses as of end of year	$	152,508		$	55,600
Total gross loans as of end of year	$	3,076,267		$	2,702,135
Allowance for loan losses ratio		4.96	%		2.06	%
Provision for loan losses ratio		6.93	%		2.06	%
Net charge off ratio		3.79	%		—

As of December 31, 2009 and 2008, no allowance for loan losses was deemed necessary with respect to the “A” Participation Interest.

During the years ended December 31, 2009, loans with an aggregate carrying value of $36.8 million, as of their respective restructuring dates, were involved in troubled debt restructurings. Loans involved in these troubled debt restructurings are assessed as impaired, generally for a period of at least one year following the restructuring, assuming the loan performs under the restructured terms and the restructured terms were at market. The allocated reserves for loans that were involved in troubled debt restructurings were $2.2 million, as of December 31, 2009. As of December 31, 2008, CapitalSource Bank did not have any loans subject to troubled debt restructurings.

Of the total $135.0 million specific provision for loan losses for the year ended December 31, 2009, $109.5 million related to commercial real estate loans. Due to the large individual credit exposures and characteristics of commercial real estate loans, we expect the level of charge offs in this area to be volatile.

Given our loss experience, we consider our higher-risk loans within the commercial real estate portfolio to be loans secured by collateral that has not reached stabilization. As of December 31, 2009, commercial real estate loans that have not reached stabilization had an outstanding balance of $381.6 million. This amount was net of charge offs taken on these loans of $52.1 million. In addition, specific reserves allocated to these loans totaled $15.6 million as of December 31, 2009.

FHLB SF Stock

As of December 31, 2009 and 2008, CapitalSource Bank owned FHLB SF stock with a carrying value of $20.2 million. Investments in FHLB SF stock are recorded at historical cost. FHLB SF stock does not have a readily determinable fair value, but can generally be sold back to the FHLB SF at par value upon stated notice; however, the FHLB SF has currently ceased repurchases of excess stock. The investment in FHLB SF stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through December 31, 2009.

Deposits

Total deposits decreased by $559.8 million, or 11.1%, to $4.5 billion as of December 31, 2009 from $5.0 billion as of December 31, 2008. This decrease was primarily due to the strategic decision to compete less aggressively on time deposit interest rates.

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As of December 31, 2009 and 2008, a summary of CapitalSource Bank’s deposit portfolio by product type and the maturity of the certificates of deposit portfolio were as follows:

	December 31,
	2009					2008
			Weighted					Weighted
			Average					Average
	Balance		Rate			Balance		Rate
	($ in thousands)
Money market	$	258,283		0.99	%	$	279,577		2.26	%
Savings		599,084		1.09			471,014		2.89
Certificates of deposit		3,626,512		1.68			4,259,153		3.55
Brokered certificates of deposit		—		—			33,951		5.70
Total deposits	$	4,483,879		1.56		$	5,043,695		3.42

	December 31, 2009
			Weighted
			Average
	Balance		Rate
	($ in thousands)
Remaining maturity of certificates of deposit:
0-3 months	$	1,412,289		1.69	%
4-6 months		1,181,479		1.60
7-9 months		221,856		1.40
10-12 months		556,754		1.64
Longer than 12 months		254,134		2.30
Total certificates of deposit	$	3,626,512		1.68

FHLB SF Borrowings

FHLB SF borrowings increased to $200.0 million as of December 31, 2009. These borrowings were primarily for interest rate risk management purposes. The weighted-average remaining maturity of the borrowings was approximately 1.9 years as of December 31, 2009. CapitalSource Bank did not have FHLB SF borrowings as of December 31, 2008.

As of December 31, 2009, the remaining maturity and the weighted average interest rate of FHLB SF borrowings were as follows:

			Weighted
			Average
	Balance		Rate
	($ in thousands)
Less than 1 year	$	40,000		1.13	%
1 to 2 years		89,000		1.64
2 to 3 years		48,000		2.11
3 to 4 years		3,000		2.60
4 to 5 years		20,000		2.86
Total	$	200,000		1.78

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Other Commercial Finance Segment

Portfolio Composition

Total Other Commercial Finance loan portfolio reflected in the portfolio statistics below includes gross loans held for investment and loans held for sale, including lower of cost or fair value adjustments. As of December 31, 2009 and 2008, the composition of the Other Commercial Finance segment portfolio was as follows:

	December 31,
	2009		2008
	($ in thousands)
Investment securities, available-for-sale	$	6,022	$	36,837
Loans		5,245,563		6,753,657
Mortgage-related receivables(1)		—		1,801,535
Other investments(2)		96,517		127,746
Total	$	5,348,102	$	8,719,775

(1)	Represents secured receivables that are backed by adjustable-rate residential prime mortgage loans, all of which were sold during the year ended December 31, 2009.
(2)	Includes investments carried at cost, investments carried at fair value and investments accounted for under the equity method.

Other Commercial Finance Segment Loan Portfolio Composition

As of December 31, 2009 and 2008, our total Other Commercial Finance loan portfolio had gross outstanding balances of $5.2 billion and $6.8 billion, respectively. Included in these amounts were loans held for sale of $0.7 million and $8.5 million as of December 31, 2009 and 2008, respectively.

As of December 31, 2009 and 2008, the composition of the Other Commercial Finance loan portfolio by loan type was as follows:

	December 31,
	2009				2008
	($ in thousands)
Commercial	$	3,452,903	66	%	$	4,672,931	69	%
Real estate		951,626	18			1,147,093	17
Real estate — construction		841,034	16			933,633	14
Total	$	5,245,563	100	%	$	6,753,657	100	%

As of December 31, 2009, the scheduled maturities of the Other Commercial Finance loan portfolio by loan type were as follows:

	Due in		Due After One Year
	One Year		Through		Due After
	or Less		Five Years		Five Years		Total
	($ in thousands)
Commercial	$	644,062	$	2,499,554	$	309,287	$	3,452,903
Real estate		215,773		617,640		118,213		951,626
Real estate — construction		662,090		178,944		—		841,034
Total	$	1,521,925	$	3,296,138	$	427,500	$	5,245,563

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As of December 31, 2009, the composition of Other Commercial Finance loan balances by index and by loan type was as follows:

	Loan Type
					Real Estate
	Commercial		Real Estate		Construction		Total
	($ in thousands)
1-Month LIBOR	$	592,345	$	688,968	$	566,089	$	1,847,402	35	%
2-Month LIBOR		23,955		—		—		23,955	1
3-Month LIBOR		68,213		—		56,647		124,860	2
6-Month LIBOR		4,909		—		—		4,909	—
1-Month EURIBOR		48,188		—		—		48,188	1
3-Month EURIBOR		16,755		—		—		16,755	—
Prime		1,099,155		31,775		159,588		1,290,518	25
Blended		1,393,019		42,386		—		1,435,405	27
Total adjustable rate loans		3,246,539		763,129		782,324		4,791,992	91
Fixed rate loans		206,364		188,497		58,710		453,571	9
Total loans	$	3,452,903	$	951,626	$	841,034	$	5,245,563	100	%

Approximately 55% of the adjustable rate loan portfolio is subject to an interest rate floor. Due to low market interest rates as of December 31, 2009, substantially all loans with interest rate floors were bearing interest at such floors. The weighted average spread between the floor rate and the fully indexed rate on the loans was 2.88% as of December 31, 2009. To the extent the underlying indices subsequently increase, the interest yield on these adjustable rate loans will not rise as quickly due to the effect of the interest rate floors.

As of December 31, 2009, the number of loans, average loan size, number of clients and average loan size per client by loan type were as follows:

							Average Loan
	Number		Average		Number of		Size per
	of Loans(1)		Loan Size		Clients		Client
	($ in thousands)
Composition of Other Commercial Finance loan portfolio by loan type:
Commercial		579	$	5,964		345	$	10,008
Real estate		78		12,200		71		13,403
Real estate — construction		36		23,362		30		28,034
Overall Other Commercial Finance loan portfolio		693		7,569		446		11,761

(1) Includes 58 loans shared with CapitalSource Bank.

Credit Quality and Allowance for Loan Losses

As of December 31, 2009 and 2008, the principal balances of contractually delinquent accruing loans and non-accrual loans in Other Commercial Finance loan portfolio were as follows:

	December 31,
	2009		2008
	($ in thousands)
Accruing loans 30-89 days contractually delinquent	$	94,211	$	245,380
Accruing loans 90 or more days contractually delinquent		49,298		31,618
Non-accrual loans		893,484		415,925

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Of our non-accrual loans, $153.9 million were 30-89 days delinquent and $303.7 million were over 90 days delinquent as of December 31, 2009. Of our non-accrual loans, $33.8 million were 30-89 days delinquent and $89.6 million were over 90 days delinquent as of December 31, 2008.

The activity in the allowance for loan losses for the years ended December 31, 2009 and 2008 was follows:

	Year Ended December 31,
	2009			2008
	($ in thousands)
Allowance for loan losses as of beginning of year	$	368,244		$	138,930
Provision for loan losses:
General		55,303			167,044
Specific		506,568			354,161
Total provision for loan losses		561,871			521,205
Charge offs, net of recoveries		(495,927	)		(291,891	)
Allowance for loan losses as of end of year	$	434,188		$	368,244
Total gross loans as of end of year	$	5,245,563		$	6,753,657
Allowance for loan losses ratio		8.28	%		5.45	%
Provision for loan losses ratio		10.71	%		7.72	%
Net charge off ratio		9.45	%		4.32	%

We consider a loan to be impaired when, based on current information, we determine that it is probable that we will be unable to collect all amounts due according to the contractual terms of the original loan agreement. In this regard, impaired loans include those loans where we expect to encounter a significant delay in the collection of, and/or shortfall in the amount of contractual payments due to us as well as loans that we have assessed as impaired, but for which we ultimately expect to collect all payments.

During the years ended December 31, 2009 and 2008, loans with an aggregate carrying value of $884.5 million and $589.1 million, respectively, as of their respective restructuring dates, were involved in troubled debt restructurings. Additionally, loans involved in these troubled debt restructurings are assessed as impaired, generally for a period of at least one year following the restructuring, assuming the loan performs under the restructured terms and the restructured terms were at market. The allocated reserves for loans that were involved in troubled debt restructurings were $22.8 million and $48.0 million, as of December 31, 2009 and 2008, respectively.

During the year ended December 31, 2009, continued stress experienced in our commercial real estate loan portfolio was largely responsible for driving the increase in provision for loan losses, charge offs, and delinquent and non-accrual loan categories. Refinancing options with commercial real estate loans are currently limited. Accordingly, most commercial real estate loans that mature require restructuring or extension and may become classified as impaired or be restructured through troubled debt restructurings.

Provision for loan losses and charge offs for the year ended December 31, 2009 were driven largely from charge offs in our commercial real estate portfolio. Due to the large individual credit exposures and characteristics of commercial real estate loans, we expect the level of charge offs in this area to be volatile.

Given our loss experience, we consider our higher-risk loans within the commercial real estate portfolio to be land, second lien and mortgage rediscount loans. As of December 31, 2009 and 2008, the total outstanding principal balance of these higher-risk loans was $561.5 million and $985.3 million, respectively.

Mortgage-related Receivables

As of December 31, 2008, we had $1.8 billion in mortgage-related receivables secured by prime residential mortgage loans. In December 2009, we sold our beneficial interest in these loans, and as such, there was no outstanding balance of these receivables as of December 31, 2009. For additional information, see Note 5,

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Mortgage-Related Receivables and Related Owner Trust Securitizations, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Other Investments

We have made investments in some of our borrowers in connection with the loans provided to them. These investments usually comprised equity interests such as common stock, preferred stock, limited liability company interests, limited partnership interests and warrants.

As of December 31, 2009 and 2008, the carrying values of our other investments in the Other Commercial Finance segment were $96.5 million and $127.7 million, respectively. Included in these balances were investments carried at fair value totaling $1.4 million and $4.7 million, respectively.

Healthcare Net Lease Segment

Direct Real Estate Investments

We own real estate for long-term investment purposes. These real estate investments are generally long-term healthcare facilities leased through long-term, triple-net operating leases. Under a typical triple-net lease, the client agrees to pay a base monthly operating lease payment and all facility operating expenses as well as make capital improvements. As of December 31, 2009 and 2008, we had $554.2 million and $989.7 million, respectively, in direct real estate investments, which consisted primarily of land and buildings. During the year ended December 31, 2009, our gross direct real estate investments decreased by $451.6 million. The decrease was due to the sales of 82 long-term healthcare facilities, with a total net book value of $400.3 million, realizing a pre-tax loss of $9.4 million and the impairment of one investment by $3.7 million. We anticipate selling our remaining facilities in 2010 and 2011. Upon the completion of these asset sales, we will exit the skilled nursing home ownership business, but continue to actively provide financing for owners and operators in the long-term healthcare industry. As a result, much of the Healthcare Net Lease segment activity and assets are classified as discontinued operations in our audited consolidated balance sheets and audit consolidated statements of operations. For additional information, see Note 3, Discontinued Operations, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Investments, Available-for-Sale

Included in investments, available-for-sale, were 2.7 million shares of common stock in Omega received as partial consideration for the sale of 40 long-term healthcare facilities and the option for Omega to purchase an additional 63 of our long-term healthcare facilities at any time through December 31, 2011. As of December 31, 2009, this stock had a fair value of $52.8 million.

Liquidity and Capital Resources

Liquidity is a measure of our sources of funds available to meet our obligations as they arise. We require cash to fund new and existing commercial loan commitments, repay and service indebtedness, make new investments, fund net deposit outflows and pay expenses related to general business operations. Our sources of liquidity are cash and cash equivalents, new borrowings and deposits, proceeds from asset sales, servicing fees on securitizations and credit facilities, principal and interest collections, lease payments and additional equity and debt financings. CapitalSource Bank is prohibited from paying dividends during its first three years of operations without consent from our regulators. Consequently, we do not anticipate that dividends from CapitalSource Bank will provide any liquidity to fund the operations of the Parent Company for the foreseeable future.

We separately manage the liquidity of CapitalSource Bank and the Parent Company. Our liquidity forecasts indicate that we have adequate liquidity to conduct our business. These forecasts are based on our business plans for the Parent Company and CapitalSource Bank and assumptions related to expected cash inflows and outflows that we believe are reasonable; however, we cannot assure you that our forecasts or assumptions will prove to be accurate. Some of our liquidity sources such as cash, deposits and net cash from operations are generally available on an immediate basis. Other sources of liquidity, such as proceeds from asset sales, borrowings on existing

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facilities and the ability to generate additional liquidity through new equity or debt financings, are less certain and less immediate, are in some cases restricted by our existing indebtedness or borrowing availability, and are dependent on and subject to market and economic conditions and the willingness of counterparties to enter into transactions with us. Accordingly, these sources of additional liquidity may not be sufficient or accessible at all or quickly enough to meet our needs.

Unless otherwise specified, the figures presented in the following paragraphs are based on current forecasts and take into account activity since December 31, 2009. The information contained in this section should be read in conjunction with, and is subject to and qualified by the information set forth under Item 1A, Risk Factors, and the Cautionary Note Regarding Forward Looking Statements in this Annual Report on Form 10-K.

CapitalSource Bank Liquidity — Our liquidity forecast is based on our business plan to originate substantially all new loans through CapitalSource Bank for the foreseeable future, and our expectations regarding the net growth in the commercial loan portfolio at CapitalSource Bank and the repayment of the “A” Participation Interest. Through deposits, cash flow from operations, payments of principal and interest from loans and the “A” Participation Interest, cash equivalents, investments, capital contributions from the Parent Company, borrowings from the FHLB SF and access to other funding sources, we intend to maintain sufficient liquidity at CapitalSource Bank to fund commercial loan commitments and operations as well as to maintain minimum ratios required by our regulators.

CapitalSource Bank uses its liquidity to fund new loans and investment securities fund commitments on existing loans, fund net deposit outflows and pay operating expenses, including intercompany payments to the Parent Company for origination and other services performed on its behalf. CapitalSource Bank operates in accordance with the conditions imposed in connection with regulatory approvals obtained upon its formation, including requirements that CapitalSource Bank maintain a total risk-based capital ratio of not less than 15%, capital levels required for a bank to be considered “well-capitalized” under relevant banking regulations, and a ratio of tangible equity to tangible assets of not less than 10% for its first three years of operations. In addition, we have a policy to maintain 10% of CapitalSource Bank’s assets in cash, cash equivalents and investments. In accordance with regulatory guidance, we have identified, modeled and planned for the financial, capital and liquidity impact of various events and scenarios that would cause a large outflow of deposits, a reduction in borrowing capacity, a material increase in loan funding obligations, a material increase in credit costs or any combination of these events for CapitalSource Bank. We anticipate that CapitalSource Bank would be able to maintain sufficient liquidity and ratios in excess of its required minimum ratios in these events and scenarios.

CapitalSource Bank’s primary source of liquidity is deposits, most of which are in the form of certificates of deposit. We expect CapitalSource Bank to be able to continue to generate sufficient deposits to meet its liquidity needs. At December 31, 2009, deposits at CapitalSource Bank were $4.5 billion, which is approximately 53% of the historical peak deposit levels of the retail deposit branches before we acquired them. We believe we will be able to maintain a sufficient level of deposits to fund CapitalSource Bank.

As of December 31, 2009, CapitalSource Bank had $822.0 million of cash and cash equivalents and restricted cash and $901.8 million in investment securities, available-for-sale. As of December 31, 2009, the amount of CapitalSource Bank’s unfunded commitments to extend credit with respect to existing loans was $914.9 million. Due to their nature, we cannot know with certainty the aggregate amounts we will be required to fund under these unfunded commitments. Our failure to satisfy our full contractual funding commitment to one or more of our clients could create breach of contract and lender liability for us and irreparably damage our reputation in the marketplace. We anticipate that CapitalSource Bank will have sufficient liquidity to satisfy these unfunded commitments.

Parent Company Liquidity — In 2009, despite the challenging economic environment, we improved our liquidity at the Parent Company. We reduced the number of our credit facilities and reduced the outstanding principal balances under these credit facilities by $902.3 million, extended the maturity dates on our credit facilities to dates between 2010 and 2012, and increased our Parent Company’s cash and immediately available funds under our committed facilities. We accomplished these things through amendments to our indebtedness, new equity and debt issuances, the sale of certain of our Healthcare Net Lease properties, proceeds from loan and asset sales and cash from operations.

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The Parent Company’s need for liquidity is less than in prior periods because our business plan is to make substantially all new commercial loans through CapitalSource Bank for the foreseeable future, and it is our expectation that the balances of our existing loan portfolio and other assets held in the Parent Company will run off over time. We intend to generate adequate liquidity at the Parent Company to cover our estimated funding obligations for commitments under existing loans, to repay recourse indebtedness due in 2010, and to pay operating expenses.

Subject to restrictions in our existing indebtedness, sources of liquidity for the Parent Company that we expect to be available include cash flows from operations, including, principal, interest, and lease payments, credit facility borrowings, servicing fees, equity and debt offerings, our ability to fund loans directly from our 2006-A term debt securitization, asset sales, including sales of REO, servicing fees on securitizations and credit facilities, and proceeds from the sale of Omega stock and, subject to the various conditions, Omega’s exercise of its option and future closings on asset sales to Omega. In most instances, a portion of the proceeds from some of these activities are required to be used to make mandatory repayments on our indebtedness.

Our current forecast of cash outflows for the Parent Company includes payments related to mandatory commitment reductions under our syndicated bank credit facility, debt service, operating expenses, any dividends that we may pay and the funding of unfunded commitments. For additional information, see Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

As of December 31, 2009, the amount of the Parent Company’s unfunded commitments to extend credit with respect to existing loans exceeded unused funding sources and unrestricted cash by $1.3 billion, a decrease of $57.7 million, or 4.1% from December 31, 2008. Due to their nature, we cannot know with certainty the aggregate amounts we will be required to fund under these unfunded commitments. We expect that these unfunded commitments will continue to exceed the Parent Company’s available funds. Our failure to satisfy our full contractual funding commitment to one or more of our clients could create breach of contract and lender liability for us and irreparably damage our reputation in the marketplace.

In many cases, our obligation to fund unfunded commitments is subject to our clients’ ability to provide collateral to secure the requested additional fundings, the collateral’s satisfaction of eligibility requirements, our clients’ ability to meet specified preconditions to borrowing, including compliance with all provisions of the loan agreements, and/or our discretion pursuant to the terms of the loan agreements. In other cases, however, there are no such prerequisites or discretion to future fundings by us, and our clients may draw on these unfunded commitments at any time. To the extent there are unfunded commitments with respect to a loan that is owned partially by CapitalSource Bank and the Parent Company, unless our client is in default, CapitalSource Bank is obligated in some cases pursuant to intercompany agreements to fund its portion of the unfunded commitment before the Parent Company is required to fund its portion. In addition, in some cases we may be able to borrow additional amounts under our existing financing sources as we fund these unfunded commitments.

In addition to these unfunded commitments, pursuant to agreements with our regulators, to the extent CapitalSource Bank independently is unable to do so, the Parent Company must maintain CapitalSource Bank’s total risk-based capital ratio at not less than 15% and must maintain the capital levels of CapitalSource Bank at all times to meet the levels required for a bank to be considered “well-capitalized” under the relevant banking regulations. Additionally, pursuant to requirements of our regulators, the Parent Company has provided a $150.0 million unsecured revolving credit facility to CapitalSource Bank that CapitalSource Bank may draw on at any time it or the FDIC deems necessary. As of December 31, 2009, this facility was undrawn, but we can make no assurance that the FDIC will not require funding under this facility in the future.

Cash and Cash Equivalents and Restricted Cash

As of December 31, 2009 and 2008, we had $1.2 billion and $1.3 billion, respectively, in cash and cash equivalents. We invest cash on hand in short-term liquid investments. We had $172.8 million and $404.0 million of restricted cash as of December 31, 2009 and 2008, respectively. For additional information, see Note 4, Cash and Cash Equivalents and Restricted Cash, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

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The restricted cash consists primarily of principal and interest collections on loans collateralizing our secured non-recourse debt. Restricted cash also includes client holdbacks and escrows. Principal repayments, interest rate swap payments, interest payable and servicing fees are deducted from the monthly principal and interest collections funded by loans collateralizing our credit facilities and term debt, and the remaining restricted cash is returned to us and becomes unrestricted at that time.

Deposits

Deposits gathered through 22 retail bank branches are the primary source of funding for CapitalSource Bank. As of December 31, 2009 and 2008, CapitalSource Bank had deposits totaling $4.5 billion and $5.0 billion, respectively. For additional information, see Note 11, Deposits, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Borrowings

As of December 31, 2009 and 2008, we had outstanding borrowings totaling $5.0 billion and $9.9 billion, respectively. For additional information, see Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Our maximum facility amounts, amounts outstanding and unused capacity as of December 31, 2009, were as follows:

	Maximum
	Facility		Amount		Unused
Funding Source	Amount		Outstanding		Capacity(1)(2)
	($ in thousands)
Credit Facilities	$	691,269	$	542,781	$	148,488
Term Debt		3,026,376		2,956,536		69,840
Other Borrowings		2,372,642		1,466,834		905,808
Total	$	6,090,287	$	4,966,151	$	1,124,136

(1)

Our ability to utilize $143.7 million of the unused capacity is limited by the amount of eligible collateral that we have available to pledge, which is limited. However, such unused capacity may become available to us to the extent we have additional eligible collateral in the future. For additional information, see Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

(2)

Amounts not reduced by issued and outstanding letters of credit totaling $55.7 million as of December 31, 2009, which further limit our ability to utilize capacity.

As of December 31, 2009 and 2008, approximately 80% and 88%, respectively, of our debt was secured by our assets.

Repurchase Agreements

During the first quarter of 2009, we repaid in full all borrowings outstanding under our master repurchase agreements and since then, we have not entered into any new agreements or borrowed under such agreements. As of December 31, 2008, we had borrowings outstanding in the aggregate amount of $1.6 billion under five master repurchase agreements with various financial institutions financing our purchases of RMBS and FHLB discount notes all of which were sold in first quarter of 2009.

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Credit Facilities

As of December 31, 2009, our credit facilities’ commitments and principal amounts outstanding, were as follows:

	Committed		Principal
	Capacity		Outstanding
	($ in thousands)
Credit Facilities:
CS Funding III secured credit facility scheduled to mature May 29, 2012(1)	$	41,287	$	41,287
CS Funding VII secured credit facility scheduled to mature April 17, 2012(2)		200,162		126,330
CS Europe secured credit facility scheduled to mature May 28, 2010(1)(3)		124,820		124,820
CS Inc. syndicated bank credit facility scheduled to mature March 31, 2012(4)		325,000		250,344
Total credit facilities	$	691,269	$	542,781

(1)	This credit facility is in its amortization period so that committed capacity equals principal outstanding. In the absence of a default and, until the final maturity date, amounts due under this facility are repaid from principal and interest proceeds from the respective collateral pools.
(2)	On maturity or termination of the revolving period under this credit facility, in the absence of a default, amounts due under this credit facility are to be repaid from principal and interest proceeds from the collateral pool.
(3)	CS Europe is a €86.4 million multi-currency facility with borrowings denominated in Euro or British Pound Sterling, and the amounts presented were translated to USD using the applicable spot rates on December 31, 2009.
(4)	As of December 31, 2009, commitments due March 31, 2012 were $258.9 million and commitments maturing March 13, 2010 were $66.1 million. In February 2010, we modified the maturity on certain commitments previously due March 31, 2012 to December 31, 2011, however, $66.1 million of commitments maturing March 13, 2010 remains unchanged. For additional information, see Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Term Debt

During 2009, we did not consummate any term debt securitizations, but we replenished some of our term debt securitizations with an aggregate of $127.2 million of loans. As of December 31, 2009 and 2008, the outstanding balances of our commercial term debt securitizations were $2.7 billion and $3.6 billion, respectively.

In July 2009, we issued $300.0 million principal amount of 2014 Senior Secured Notes at an issue price of 93.966%, which includes an issuance discount of approximately $18.1 million. As of December 31, 2009, the 2014 Senior Secured Notes had a balance of $282.9 million, which is net of unamortized discount of $17.1 million. For additional information, see Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Owner Trust Term Debt

As of December 31, 2008, the outstanding balance of our securitization trusts (the “Owner Trusts”) term debt was $1.7 billion. There was no outstanding balance at December 31, 2009. For additional information, see Note 5, Mortgage-Related Receivables and Related Owner Trust Securitizations, and Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

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Convertible Debt

As of December 31, 2009 and 2008, the outstanding aggregate balances of our convertible debt were $561.3 million and $729.5 million, respectively. In January 2010, we purchased and retired $19.3 million in aggregate principal of our outstanding convertible debentures. For additional information, see Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Subordinated Debt

As of December 31, 2009 and 2008, the outstanding balances of our subordinated debt were $439.7 million and $438.8 million, respectively. For additional information, see Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Mortgage Debt

As of December 31, 2009 and 2008, the outstanding balances of our mortgage debt were $262.8 million and $269.7 million, respectively. For additional information, see Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

FHLB SF Borrowings and Federal Reserve Bank Credit Program

As a member of the FHLB SF, CapitalSource Bank had financing availability with the FHLB SF as of December 31, 2009 equal to 20% of CapitalSource Bank’s total assets. As of December 31, 2009 and 2008, the maximum financing available was $1.1 billion and $915.4 million, respectively. The financing is subject to various terms and conditions including pledging acceptable collateral, satisfaction of the FHLB SF stock ownership requirement and certain limits regarding the maximum term of debt. As of December 31, 2009, collateral with an estimated fair value of $1.0 billion was pledged to the FHLB SF creating aggregate borrowing capacity of $965.2 million. As of December 31, 2009, unused borrowing capacity was $764.4 million, reflecting $200.0 million of principal outstanding and a letter of credit in the amount of $0.8 million. There were no outstanding FHLB SF borrowings as of December 31, 2008, but the letter of credit in the amount of $0.8 million was outstanding.

In June 2009, CapitalSource Bank was approved for the primary credit program of the FRB of San Francisco’s discount window under which approved depository institutions are eligible to borrow from the FRB for periods of up to 90 days. As of December 31, 2009, collateral with an estimated fair value of $209.9 million had been pledged under this program and there were no borrowings outstanding under this program.

Debt Covenants

The Parent Company is subject to financial and non-financial covenants under our indebtedness, including, with respect to restricted payments, interest coverage, minimum tangible net worth, leverage, maximum delinquent and charged-off loans, servicing standards, and limitations on incurring or guaranteeing indebtedness, refinancing existing indebtedness, repaying subordinated indebtedness, making investments, dividends, distributions, redemptions or repurchases of our capital stock, selling assets, creating liens and engaging in a merger, sale or consolidation. If we were to default under our indebtedness by violating these covenants or otherwise, our lenders’ remedies would include the ability to, among other things, transfer servicing to another servicer, foreclose on collateral, accelerate payment of all amounts payable under such indebtedness and/or terminate their commitments under such indebtedness.

In addition, upon the occurrence of specified servicer defaults, our lenders under our credit facilities and the holders of the asset-backed notes issued in our term debt may elect to terminate us as servicer of the loans under the applicable facility or term debt and appoint a successor servicer or replace us as cash manager for our secured facilities and term debt. If we were terminated as servicer, we would no longer receive our servicing fee. In addition, because there can be no assurance that any successor servicer would be able to service the loans according to our

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standards, the performance of our loans could be materially adversely affected and our income generated from those loans significantly reduced.

During the year ended December 31, 2009, we obtained waivers, extended previously obtained waivers and/or executed amendments with respect to some of our indebtedness to avoid potential events of default. In the past, we have received waivers to potential breaches of some of these provisions. In the future, we may have difficulty complying with some of these provisions if economic conditions fail to improve, and we may need to obtain additional waivers or amendments again in the future if we cannot satisfy all of the covenants and obligations under our debt.

In February 2010, to avoid potential events of default, we amended the tangible net worth covenant for our syndicated bank credit facility, CS Funding III, CS Funding VII, CS Europe facilities, and our 2007-A term debt securitization for the reporting period ending December 31, 2009 and future periods. The amendments were obtained to provide certainty that the net loss reported for the quarter and the year ended December 31, 2009, after making certain adjustments as provided for in the covenant definition, would not cause an event of default under these facilities. For additional information, see Note 28, Subsequent Events, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Equity

In February 2009, we entered into an agreement with an existing security holder and issued 19,815,752 shares of our common stock in exchange for approximately $61.6 million in aggregate principal amount of our outstanding 1.625% debentures held by the security holder, and our wholly owned subsidiary, CapitalSource Finance LLC, paid approximately $0.6 million in cash to the security holder in exchange for the guaranty on such notes by such subsidiary. We retired all of the debentures acquired in the exchange.

In July 2009, we sold approximately 20.1 million shares of our common stock in an underwritten public offering at a price of $4.10 per share, including the approximately 2.6 million shares purchased by the underwriters pursuant to their over-allotment option. In connection with this offering, we received net proceeds of approximately $77.0 million.

We terminated our Dividend Reinvestment and Stock Purchase Plan effective March 1, 2010. For additional information, see Note 13, Shareholders’ Equity, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Special Purpose Entities

We use special purpose entities (“SPEs”) as an integral part of our funding activities, and we service loans that we have transferred to these entities. The use of these special purpose entities is generally required in connection with our non-recourse secured debt financings to legally isolate from us loans that we transfer to these entities if we were to enter into a bankruptcy proceeding.

We also used special purpose entities to facilitate the issuance of collateralized loan obligation transactions that are further described below in Commitments, Guarantees & Contingencies. Additionally, we have purchased beneficial ownership interests in residential mortgage assets that are held by special purpose entities established by third parties.

We evaluate all SPEs with which we are affiliated to determine whether such entities must be consolidated for financial statement purposes. If we determine that such entities represent variable interest entities as defined in the Consolidation Topic of the Codification, we consolidate these entities if we also determine that we are the primary beneficiary of the entity. For special purpose entities for which we determine we are not the primary beneficiary, we account for our economic interests in these entities in accordance with the nature of our investments. As further discussed in Note 5, Mortgage-Related Receivables and Related Owner Trust Securitizations, in our accompanying audited consolidated financial statements for the year ended December 31, 2009. In February 2006, we acquired beneficial interests in two special purpose entities that acquired and securitized pools of residential mortgage loans. We determined that we were the primary beneficiary of these SPEs and, therefore, consolidated the assets and liabilities of such entities for financial statement purposes. Additionally, and as further discussed in Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

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The assets and related liabilities of all special purpose entities that we use to issue our term debt are recognized on our audited consolidated balance sheets as of December 31, 2009 and 2008.

Commitments, Guarantees & Contingencies

As of December 31, 2009 and 2008, we had unfunded commitments to extend credit to our clients of $2.8 billion and $3.6 billion, respectively, of which $86.5 million and $135.3 million, respectively, was to our related parties. For additional information, see Note 21, Related Party Transactions, in our accompanying audited consolidated financial statements for the year ended December 31, 2009. Due to their nature, we cannot know with certainty the aggregate amounts we will be required to fund under these unfunded commitments. We expect that these unfunded commitments will continue to exceed our Parent Company’s available funds. Our failure to satisfy our full contractual funding commitment to one or more of our clients could create breach of contract and lender liability for us and irreparably damage our reputation in the marketplace. In cases, our obligation to fund unfunded commitments is subject to our clients’ ability to provide collateral to secure the requested additional fundings, the collateral’s satisfaction of eligibility requirements, our clients’ ability to meet specified preconditions to borrowing, including compliance with all provisions of the loan agreements, and/or our discretion pursuant to the terms of the loan agreements. In many other cases, however, there are no such prerequisites to future fundings by us and our clients may draw on these unfunded commitments at any time. To the extent there are unfunded commitments with respect to a loan that is owned partially by CapitalSource Bank and the Parent Company, unless our client is in default, CapitalSource Bank is obligated in some cases pursuant to intercompany agreements to fund its portion of the unfunded commitment before the Parent Company is required to fund its portion. In addition, in some cases we may be able to borrow additional amounts under our secured credit facilities as we fund these unfunded commitments.

We have non-cancelable operating leases for office space and office equipment. The leases expire over the next 15 years and contain provisions for certain annual rent escalations. In June 2009, the lease for our new office space commenced, which requires estimated minimum payments of $5.6 million per annum. The lease term is 15 years with an option to renew for two additional five-year periods. In addition, the lease also includes a sublease to CapitalSource Bank for a portion of the space.

We are obligated to provide standby letters of credit in conjunction with several of our lending arrangements. As of December 31, 2009 and 2008, we had issued $182.5 million and $183.5 million, respectively, in letters of credit, which expire at various dates over the next six years. If a borrower defaults on its commitment(s) subject to any letter of credit issued under these arrangements, we would be responsible to meet the borrower’s financial obligation and would seek repayment of that financial obligation from the borrower. These arrangements had carrying amounts totaling $6.1 million and $5.9 million, as reported in other liabilities in our audited consolidated balance sheets as of December 31, 2009 and 2008, respectively. We also provide standby letters of credit under certain of our property leases.

As of December 31, 2009 and 2008, we had identified conditional asset retirement obligations primarily related to the future removal and disposal of asbestos that is contained within certain of our direct real estate investment properties. The asbestos is appropriately contained and we believe we are compliant with current environmental regulations. If these properties undergo major renovations or are demolished, certain environmental regulations are in place, which specify the manner in which asbestos must be handled and disposed. We are required to record the fair value of these conditional liabilities if they can be reasonably estimated. As of December 31, 2009 and 2008, sufficient information was not available to estimate our liability for conditional asset retirement obligations as the obligations to remove the asbestos from these properties have indeterminable settlement dates. As such, no liability for conditional asset retirement obligations was recorded in our audited consolidated balance sheet as of December 31, 2009 and 2008.

In July 2009, we entered into a limited guarantee for the principal balance and any accrued interest and unpaid fees with respect to indebtedness owing by a company in which we hold an investment. The guarantee can be called by the lender on the earlier of an acceleration of our syndicated bank credit facility and July 9, 2011. As of December 31, 2009, the principal amount guaranteed was $22.1 million. In accordance with the Consolidation

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Topic of the Codification, we have determined that we are not required to recognize the assets and liabilities of this special purpose entity for financial statement purposes as of December 31, 2009.

In connection with certain securitization transactions and secured financings, we have made customary representations and warranties regarding the characteristics of the underlying transferred assets and collateral. Prior to any securitization transaction and secured financing, we generally perform due diligence with respect to the assets to be included in the securitization transaction and the collateral to ensure that they satisfy the representations and warranties. In our capacity as originator and servicer in certain securitization transactions and secured financings, we may be required to repurchase or substitute loans which breach a representation and warranty as of their date of transfer to the securitization or financing vehicle.

From time to time we are party to legal proceedings. We do not believe that any currently pending or threatened proceeding, if determined adversely to us, would have a material adverse effect on our business, financial condition or results of operations, including our cash flows.

Contractual Obligations

In addition to our scheduled maturities on our debt, we have future cash obligations under various types of contracts. We lease office space and office equipment under long-term operating leases and we have committed to contribute up to an additional $12.3 million to 18 private equity funds, and $0.8 million to an equity investment. The contractual obligations under our debt are included in our audited consolidated balance sheet as of December 31, 2009. The expected contractual obligations under our certificates of deposit, debt, operating leases and commitments under non-cancelable contracts as of December 31, 2009, were as follows:

	Certificates of		Credit		Term		Convertible		Subordinated		Mortgage		Notes
	Deposit		Facilities(1)		Debt(2)		Debt(3)		Debt(4)		Debt		Payable		Other(5)		Total
	($ in thousands)
2010	$	3,372,378	$	179,220	$	115,302	$	—	$	—	$	7,566	$	40,000	$	16,063	$	3,730,529
2011		209,712		136,189		208,246		330,000		—		8,101		89,000		15,060		996,308
2012		20,577		227,372		496,632		250,000		—		254,696		48,000		14,067		1,311,344
2013		1,638		—		739,908		—		—		2,822		6,026		11,327		761,721
2014		22,207		—		300,000		—		—		2,977		20,000		8,876		354,060
Thereafter		—		—		1,183,645		—		439,701		171,521		20,000		58,500		1,873,367
Total	$	3,626,512	$	542,781	$	3,043,733	$	580,000	$	439,701	$	447,683	$	223,026	$	123,893	$	9,027,329

(1)	The contractual obligations for credit facilities are computed based on the stated maturities of the facilities including amortization periods but not considering optional annual renewals and assume utilization of available term-out features.
(2)	The amounts are presented gross of net unamortized discounts of $0.3 million on our term debt securitizations and $17.1 million on the 2014 Senior Secured Notes and include a liquidity tranche, of which $69.8 million is not drawn. Contractual obligations on our term debt securitizations are computed based on their estimated lives. The estimated lives are based upon the contractual amortization schedule of the underlying loans. These underlying loans are subject to prepayment, which could shorten the life of the term debt securitizations; conversely, the underlying loans may be amended to extend their term, which may lengthen the life of the term debt securitizations. At our option, we may substitute loans for prepaid loans up to specified limitations, which may also impact the life of the term debt securitizations.
(3)	The contractual obligations for convertible debt are computed based on the initial put/call date and are presented gross of net unamortized discount of $18.7 million. The legal maturities of the convertible debt are 2034 and 2037. For additional information, see Note 2, Summary of Significant Accounting Policies, and Note 12, Borrowings, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.
(4)	The contractual obligations for subordinated debt are computed based on the legal maturities, which are between 2035 and 2037.
(5)	Includes operating leases and non-cancelable contracts.

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We enter into derivative contracts under which we either receive cash or are required to pay cash to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on our audited consolidated balance sheet as of December 31, 2009, with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of the contracts changes daily as market interest rates change. Further discussion of derivative instruments is included in Note 2, Summary of Significant Accounting Policies, and Note 22, Derivative Instruments, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Credit Risk Management

Credit risk is the risk of loss arising from adverse changes in a client’s or counterparty’s ability to meet its financial obligations under agreed-upon terms. Credit risk exists primarily in our lending, leasing and derivative portfolios. The degree of credit risk will vary based on many factors including the size of the asset or transaction, the credit characteristics of the client, the contractual terms of the agreement and the availability and quality of collateral. We manage credit risk of our derivatives and credit-related arrangements by limiting the total amount of arrangements outstanding with an individual counterparty, by obtaining collateral based on management’s assessment of the client and by applying uniform credit standards maintained for all activities with credit risk.

As appropriate, the Parent Company and CapitalSource Bank credit committees evaluate and approve credit standards and oversee the credit risk management function related to our commercial loans, direct real estate investments and other investments. Their primary responsibilities include ensuring the adequacy of our credit risk management infrastructure, overseeing credit risk management strategies and methodologies, monitoring economic and market conditions having an impact on our credit-related activities, and evaluating and monitoring overall credit risk and monitoring our client’s financial condition and performance.

CapitalSource Bank and Other Commercial Finance Segments

Credit risk management for the commercial loan portfolios begins with an assessment of the credit risk profile of a client based on an analysis of the client’s financial position. As part of the overall credit risk assessment of a client, each commercial credit exposure or transaction is assigned a risk rating that is subject to approval based on defined credit approval standards. While rating criteria vary by product, each loan rating focuses on the same two factors: collateral and financial performance. Subsequent to loan origination, risk ratings are monitored on an ongoing basis. If necessary, risk ratings are adjusted to reflect changes in the client’s or counterparty’s financial condition, cash flow or financial situation. We use risk rating aggregations to measure and evaluate concentrations within portfolios. In making decisions regarding credit, we consider risk rating, collateral, industry and single name concentration limits.

We use a variety of tools to continuously monitor a client’s or counterparty’s ability to perform under its obligations. Additionally, we syndicate loan exposure to other lenders, sell loans and use other risk mitigation techniques to manage the size and risk profile of our loan portfolio.

Concentrations of Credit Risk

In our normal course of business, we engage in transactions with clients primarily throughout the United States. As of December 31, 2009, the single largest industry concentration was healthcare and social assistance, which made up approximately 20% of our commercial loan portfolio. As of December 31, 2009, taken in the aggregate, non-healthcare commercial real estate made up approximately 22% of our commercial loan portfolio. As of December 31, 2009, the largest geographical concentration was Florida, which made up approximately 12% of our commercial loan portfolio. As of December 31, 2009, the single largest industry concentration in our direct real estate investment portfolio was skilled nursing, which made up approximately 99% of the investments. As of December 31, 2009, the largest geographical concentration in our direct real estate investment portfolio was Florida, which made up approximately 45% of the investments.

As of December 31, 2009, $1.7 billion, or 20.2%, of our commercial loan portfolio consisted of loans to seven clients that are individually greater than $100 million. As of December 31, 2009, five of these loans were commercial real estate loans totaling $673.6 million. As of December 31, 2009, all of these loans were performing;

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however, if any of these loans were to experience problems, it could have a material adverse impact on our financial condition or results of operations.

Derivative Counterparty Credit Risk

Derivative financial instruments expose us to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where we are in a favorable position. Credit risk related to derivative financial instruments is considered and provided for separately from the allowance for loan losses. We manage the credit risk associated with various derivative agreements through counterparty credit review and monitoring procedures. We obtain collateral from all counterparties based on terms stipulated in the collateral support annex. We also monitor all exposure and collateral requirements daily on a per counterparty basis. We continually monitor the fair value of collateral received from counterparties and may request additional collateral from counterparties or return collateral pledged as deemed appropriate. Our agreements generally include master netting agreements whereby the counterparties are entitled to settle their derivative positions “net.” As of December 31, 2009 and 2008, the gross positive fair value of our derivative financial instruments was $14.3 million and $200.7 million, respectively. Our master netting agreements reduced the exposure to this gross positive fair value by $13.7 million and $166.4 million as of December 31, 2009 and 2008, respectively. We held $0.5 million and $24.2 million of collateral against derivative financial instruments as of December 31, 2009 and 2008, respectively. Accordingly, our net exposure to derivative counterparty credit risks as of December 31, 2009 and 2008, was $0.1 million and $10.1 million, respectively.

Market Risk Management

Market risk is the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions such as interest rate fluctuations. This risk is inherent in the financial instruments associated with our operations and/or activities, which result in the recognition of assets and liabilities in our consolidated financial statements, including loans, securities, short-term borrowings, long-term debt, trading account assets and liabilities and derivatives.

The primary market risk to which we are exposed is interest rate risk, which is inherent in the financial instruments associated with our operations, primarily including our loans and borrowings. Our traditional loan products are non-trading positions and are reported at amortized cost. Additionally, debt obligations that we incur to fund our business operations are recorded at historical cost. While U.S. generally accepted accounting principles (“GAAP”) requires a historical cost view of such assets and liabilities, these positions are still subject to changes in economic value based on varying market conditions.

Interest Rate Risk Management

Interest rate risk in our normal course of business refers to the change in earnings that may result from changes in interest rates, primarily various short-term interest rates, including LIBOR-based rates and the prime rate. We attempt to mitigate exposure to the earnings impact of interest rate changes by conducting the majority of our lending and borrowing on a variable rate basis. The majority of our commercial loan portfolio bears interest at a spread to the LIBOR rate or a prime-based rate with most of the remainder bearing interest at a fixed rate. The majority of our borrowings bear interest at a spread to LIBOR or CP, with the remainder bearing interest at a fixed rate. Our deposits are fixed rate, but at short terms. We are also exposed to changes in interest rates in certain of our fixed rate loans and investments. We attempt to mitigate our exposure to the earnings impact of the interest rate changes in these assets by engaging in hedging activities as discussed below. For additional information, see Note 22, Derivative Instruments, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

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The estimated decreases in net interest income for a 12-month period based on changes in the interest rates applied to our overall loan portfolio as of December 31, 2009, were as follows ($ in thousands):

Rate Change
(Basis Points)
−100	$	(9,240	)
−50		(8,880	)
+ 50		(27,360	)
+ 100		(49,200	)

For the purposes of the above analysis, we included related derivatives, excluded principal payments and assumed an 83% advance rate on our variable rate borrowings.

Approximately 59% of the aggregate outstanding principal amount of our commercial loans had interest rate floors as of December 31, 2009. Of the loans with interest rate floors, approximately 99% had contractual rates below the interest rate floor and the floor was providing a benefit to us. The loans with contractual interest rate floors as of December 31, 2009, were as follows:

	Amount		Percentage of
	Outstanding		Total Portfolio
	($ in thousands)
Loans with contractual interest rates:
Below the interest rate floor	$	4,767,105		57	%
Exceeding the interest rate floor		8,364		1
At the interest rate floor		54,592		1
Loans with no interest rate floor		3,491,769		41
Total	$	8,321,830		100	%

As of December 31, 2009, the composition of our commercial loan balances subject to interest rate floors by index and by the spread between the floor rate and the fully indexed rate were as follows:

			Basis Points
	Above Floor		0-100		101-200		201-300		300+		Total
			($ in thousands)
1-Month LIBOR	$	—	$	40,347	$	433,662	$	634,442	$	1,452,483	$	2,560,934
3-Month LIBOR		—		—		—		28,360		110,146		138,506
6-Month LIBOR		—		—		290		6,891		4,731		11,912
Prime		8,252		390,114		299,530		269,579		278,006		1,245,481
Canadian Prime		—		—		—		—		20,851		20,851
Blended		112		31,691		124,902		514,486		180,576		851,767
Total adjustable rate loans		8,364		462,152		858,384		1,453,758		2,046,793		4,829,451
Fixed rate loans		—		—		—		610		—		610
Total loans subject to interest rate floors	$	8,364	$	462,152	$	858,384	$	1,454,368	$	2,046,793		4,830,061
Loans not subject to interest rate floors												3,491,769
Total loans(1)											$	8,321,830

(1) Loans are calculated as principal balance less deferred loan fees and discounts and the allowance for loan losses. Includes lower of cost or fair value adjustments on loans held for sale.

We enter into interest rate swap agreements to minimize the economic effect of interest rate fluctuations specific to our fixed rate debt, certain fixed rate loans and certain sale-leaseback transactions. We also enter into

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additional basis swap agreements to hedge basis risk between our LIBOR-based term debt and the prime-based loans pledged as collateral for that debt. These basis swaps modify our exposure to interest rate risk by synthetically converting fixed rate and prime rate loans to one-month LIBOR. Our interest rate hedging activities partially protect us from the risk that interest collected under fixed-rate and prime rate loans will not be sufficient to service the interest due under the one-month LIBOR-based term debt.

We also use interest rate swaps to hedge the interest rate risk of certain fixed rate debt. These interest rate swaps modify our exposure to interest rate risk by synthetically converting fixed rate debt to one-month LIBOR.

We have also entered into relatively short-dated forward exchange agreements to minimize exposure to foreign currency risk arising from foreign currency denominated loans. For additional information, see Note 22, Derivative Instruments and Note 23, Credit Risk, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain of our assets and liabilities and to determine fair value disclosures. Investment securities, available-for-sale, mortgage-backed securities, warrants and derivatives are recorded at fair value on a recurring basis. In addition, we may be required, in specific circumstances, to measure certain of our assets at fair value on a nonrecurring basis, including investment securities, held-to-maturity, loans held for sale, loans held for investment, direct real estate investments, net of direct real estate investments held for sale, REO, goodwill and certain other investments. We follow the guidance in the Fair Value Measurements and Disclosures Topic of the Codification in determining the fair value of our assets and liabilities accounted for at fair value on a recurring and nonrecurring basis. Accordingly, we classify each of these assets and liabilities within Level 1, Level 2 or Level 3 of the fair value hierarchy. As of December 31, 2009, 7.97% and 0.82% of total assets and total liabilities, respectively, were recorded at fair value on a recurring basis. Of these assets carried at fair value on a recurring basis, $53.0 million (0.43% of total assets) were classified as Level 1, $916.1 million (7.48% of total assets) were classified as Level 2 and $7.2 million (0.06% of total assets) were classified as Level 3 as of December 31, 2009. From a liability perspective, $82.7 million (0.82% of total liabilities) were classified as Level 2 as of December 31, 2009. As of December 31, 2009, no liabilities were classified as Level 1 or Level 3 within the fair value hierarchy.

Fair Values of Level 1 or Level 2 Financial Instruments

Assets and liabilities that are actively traded in the marketplace or that have values based on readily available market value data require little, if any, subjectivity to be applied when determining the fair value. These are classified as either Level 1 or Level 2. Whether an asset or liability is classified as Level 1 or Level 2 depends largely on its similarity with other items in the marketplace and our ability to obtain corroborative data regarding whether the market in which the instrument trades is active.

Investment Securities, Available-for-Sale

Investment securities, available-for-sale, consist of publicly traded equity securities, which are valued using the stock price of the underlying company in which we hold our investment. Our equity securities are classified in Level 1 or 2 depending on the level of activity within the market.

Investment securities, available-for-sale that are classified within Level 2 of the fair value hierarchy consist of Agency discount notes, Agency callable notes, Agency debt, Agency MBS, and Non-agency MBS. These assets are carried at fair value on a recurring basis. The fair values of these securities are determined using quoted prices from external market participants, including pricing services. If quoted prices are not available, the fair values are determined using quoted prices of securities with similar characteristics or independent pricing models, which utilize observable market data such as benchmark yields, reported trades and issuer spreads. These securities are classified within Level 2 of the fair value hierarchy.

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Derivative Assets and Liabilities

Derivatives are carried at fair value on a recurring basis and primarily relate to our interest rate swaps, caps, floors, basis swaps and forward exchange contracts. Our derivatives are principally traded in over-the-counter markets where quoted market prices are not readily available. Instead, derivatives are measured using market observable inputs such as interest rate yield curves, volatilities and basis spreads. We also consider counterparty credit risk in valuing our derivatives. We typically classify our derivatives in Level 2 of the fair value hierarchy.

Fair Values of Level 3 Financial Instruments

When observable market prices and data do not exist, significant management judgment is necessary to estimate fair value. In those cases, small changes in assumptions could result in significant changes in valuation. Due to the unavailability of observable inputs for our Level 3 assets, management assumptions used in the valuation models play a significant role in these fair value estimates. In times of severe market volatility and illiquidity, there may be more uncertainty and variability with lack of market data to use in the valuation process. An illiquid market is one in which little or no observable activity has occurred or one that lacks willing buyers. To factor in market illiquidity, management makes adjustments to certain inputs in the valuation models and makes other assumptions to ensure fair values are reasonable and reflect current market conditions.

Loans Held for Investment

Fair value adjustments are recorded on our loans held for investment on a nonrecurring basis when we have determined that it is necessary to record a specific reserve against the loans by utilizing the fair value of collateral, less costs to sell, to measure the specific reserve for those loans that are collateral dependent. To determine the fair value of the collateral, we may employ different approaches depending on the type of collateral. Typically, we determine the fair value of the collateral using internally developed models, which require significant management judgment. The primary inputs of the valuation models vary based on the nature of the collateral and may include expected cash flows, recovery rates, performance multiples and risk premiums based on changing market conditions. Our models utilize industry valuation benchmarks, such as multiples of earnings before interest, taxes, depreciation, and amortization (“EBITDA”), depending on the industry, to determine a value for the underlying enterprise. Valuations consider comparable market transactions where available. In certain cases where our collateral is a fixed or other tangible asset, we will periodically obtain a third party appraisal to corroborate management’s estimates of fair value. When deemed necessary, we apply an additional liquidity discount to the valuation model to reflect current market conditions.

During the year ended December 31, 2009, we recognized losses of $276.7 million related to our loans held for investment measured at fair value on a nonrecurring basis. These losses were attributable to an increased number of loans requiring a specific reserve during the year, as well as declines in the fair value of collateral for these loans.

Available-for-Sale Investments

Investment securities, available-for-sale that are classified as Level 3 within the fair value hierarchy include a tranches in an unrelated collateralized loan obligation and corporate debt securities which consist primarily of corporate bonds whose values are determined using internally developed valuation models. These models may utilize discounted cash flow techniques for which key inputs include the timing and amount of future cash flows and market yields. Market yields are based on comparisons to other instruments for which market data is available. These models may also utilize industry valuation benchmarks, such as multiples of EBITDA, depending on the industry, to determine a value for the underlying enterprise. Given the lack of active and observable trading in the market, our corporate debt securities and tranches in an unrelated collateralized loan obligation are classified in Level 3. Significant unobservable inputs related to these investment securities include estimates of credit default, recovery and prepayment rates as well as assumptions surrounding the comparability to other investments for which observable price and spread data is available. Valuations may also be adjusted to reflect the illiquidity of the investment. Such adjustments are based on market available evidence and management’s best estimates.

During the year ended December 31, 2009, we recognized losses of $13.6 million related to other-than-temporary declines in the fair value of our debt securities classified as available-for-sale. We evaluate these investments

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for impairment by considering, among other factors, the length of time and extent to which the market value has been below its cost basis. During 2009, as a result of the current economic environment, the large majority of our unrealized losses on these debt securities were recognized in earnings as other-than-temporary impairment. For investments that were determined to be other-than-temporarily impaired as of December 31, 2009, at least a portion of the impairment recognized was attributable to deterioration in the credit quality of the issuer.

Equity Investments

Investments accounted for under the cost or equity methods of accounting are carried at fair value on a nonrecurring basis to the extent that they are impaired during the period. We impair these investments to fair value when we have determined that other-than-temporary impairment exists. As there is rarely an observable price or market for such investments, we determine fair value using internally developed models. Our models utilize industry valuation benchmarks, such as multiples of EBITDA, depending on the industry, to determine a value for the underlying enterprise. We reduce this value by the value of debt outstanding to arrive at an estimated equity value of the enterprise. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the pricing indicated by the external event will be used to corroborate our private equity valuation. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily ascertainable market value, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

The primary inputs utilized in our valuation models include borrower financial information, transaction multiples and liquidity discounts. Transaction multiples are based on observable market transactions, when available, or similar transactions for comparable companies. In determining the appropriate multiple to use, we typically review a range of comparable multiples and consider the amount of time elapsed since the transaction occurred, the similarity of the investment transacted to our investment and the similarity of comparable public companies to our investment. In cases where no comparable transactions are available, we use a comparable multiple within the respective company’s industry classification determined by Standard & Poor’s. When deemed necessary, we apply an additional liquidity discount to the valuation model. In certain cases, liquidity discounts are already embedded into the transaction multiple so no additional discount is applied.

During the year ended December 31, 2009, we recognized losses of $13.2 million and $2.8 million related to other-than-temporary declines in the fair value of our equity investments accounted for under the cost and equity method of accounting, respectively. We evaluate these investments for impairment by considering, among other factors, the length of time and extent to which the market value has been below its cost basis. During 2009, as a result of the current economic environment, the majority of our unrealized losses on these investments were recognized in earnings as other-than-temporary impairment.

Critical Accounting Estimates

Accounting policies are integral to understanding our Management’s Discussion and Analysis of Financial Condition and Results of Operations. The preparation of the consolidated financial statements in conformity with GAAP requires management to make certain judgments and assumptions based on information that is available at the time of the financial statements in determining accounting estimates used in the preparation of such statements. Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, in our audited consolidated financial statements for the year ended December 31, 2009, and our critical accounting estimates are described in this section. Accounting estimates are considered critical if the estimate requires management to make assumptions and judgments about matters that were highly uncertain at the time the accounting estimate was made and if different estimates reasonably could have been used in the reporting period, or if changes in the accounting estimate are reasonably likely to occur from period to period that would have a material impact on our financial condition, results of operations or cash flows. We have established detailed policies and procedures to ensure that the assumptions and judgments surrounding these areas are adequately controlled, independently reviewed and consistently applied from period to period. Management has discussed the development, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure related to these estimates.

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Allowance for Loan Losses

The allowance for loan losses is management’s estimate of probable losses inherent in the loan portfolio. Management performs detailed reviews of the portfolio quarterly to determine if impairment has occurred and to assess the adequacy of the allowance for loan losses, based on historical and current trends and other factors affecting loan losses. Additions to the allowance for loan losses are charged to current period earnings through the provision for loan losses. Amounts determined to be uncollectible are charged directly against the allowance for loan losses, while amounts recovered on previously charged-off accounts increase the allowance.

The commercial loan portfolio includes balances with non-homogeneous exposures. These loans are evaluated individually, and are risk-rated based upon borrower, collateral and industry-specific information that management believes is relevant to determining the occurrence of a loss event and measuring impairment. Loans are then segregated by risk according to our internal risk rating scale. Higher risk loans are individually analyzed for impairment. Management establishes specific allowances for loans determined to be individually impaired. All impaired loans are valued to determine if a specific allowance is warranted. The valuation analysis for the specific allowance is based upon one of the three valuation methods (i) the present value of expected future cash flows discounted at the loan’s initially contracted effective yield; (ii) the loan’s observable market price; or (iii) the fair value of the collateral. The appropriate valuation methodology generally reflects the chosen loan resolution strategy being pursued to maximize the loan recovery. Estimated costs to sell are considered in the impairment valuation when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the loan. Any guarantees provided by the borrower are typically not considered when determining our potential for specific loss.

In addition to the specific allowances for impaired loans, we maintain allowances that are based on an evaluation of inherent losses in our commercial loan portfolio. These allowances are based on an analysis of historical loss experience, current economic conditions and performance trends and any other pertinent information within specific portfolio segments. Certain considerations are made in relation to the length and severity of outstanding balances.

As set forth in detail below, the process for determining the reserve factors and the related level of loan loss reserves is subject to numerous estimates and assumptions that require judgment about the timing, frequency and severity of credit losses that could materially affect the provision for loan losses and, therefore, net income. Within this process, management is required to make judgments related, but not limited, to: (i) risk ratings for loans; (ii) market and collateral values and discount rates for individually evaluated loans; (iii) loss rates used for commercial loans; and (iv) adjustments made to assess certain , including overall credit and economic conditions.

Our allowance for loan losses is sensitive to the risk ratings assigned to loans and to corresponding reserve factors that we use to estimate the allowance and that are reflective of historical losses. We assign reserve factors to the loans in our portfolio, which dictate the percentage of the total outstanding loan balance that we reserve. We review the loan portfolio information regularly to determine whether it is necessary for us to further revise our reserve factors. The reserve factors used in the calculation are determined by analyzing the following elements:

•  the types of loans, for example, land, commercial real estate, healthcare receivables or cash flow;

•  our historical losses with regard to the loan types;

•  borrower industry;

•  the relative seniority of our security interest;

•  our expected losses with regard to the loan types; and

•  the internal credit rating assigned to the loans.

We update these reserve factors periodically to capture actual and recent behavioral characteristics of the portfolios. We estimate the allowance by applying historical loss factors derived from loss tracking mechanisms associated with actual portfolio activity over a specified period of time. These estimates are adjusted when necessary based on additional analysis of long-term average loss experience, external loan loss data and other risks identified from current and expected credit market conditions and trends, including management’s judgment for estimate inaccuracy and uncertainty.

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We also consider the need for qualitative factors which we use to provide for uncertainties surrounding our estimation process including changes in the volume of our problem loans, changes in the value of collateral for our collateral dependent loans, and the existence of certain loan concentrations.

The sensitivity of our allowance for loan losses to potential changes in our reserve factors (in terms of percentage) applied to our overall loan portfolio as of December 31, 2009, was as follows:

	Estimated Increase
	(Decrease) in the
Change in Reserve Factors	Allowance for Loan Losses
	($ in thousands)
+ 25%	$	93,114
+ 10%		37,245
−10%		(36,489	)
−25%		(91,224	)

These sensitivity analyses do not represent management’s expectations of the deterioration, or improvement, in risk ratings, but are provided as hypothetical scenarios to assess the sensitivity of the allowance for loan losses to changes in key inputs. We believe the reserve factors currently in use are appropriate. The process of determining the level of allowance for loan losses involves a high degree of judgment. If our internal credit ratings, reserve factors or specific reserves for impaired loans are not accurate, our allowance for loan losses may be misstated. In addition, our operating results are sensitive to changes in the reserve factors utilized to determine our related provision for loan losses.

We also consider whether losses might be incurred in connection with unfunded commitments to lend although, in making this assessment, we exclude from consideration those commitments for which funding is subject to our approval based on the adequacy of underlying collateral that is required to be presented by a borrower or other terms and conditions.

For detailed analysis on the historical loan loss experience and the roll-forwards of the allowance for loan losses for the last five fiscal years, see Table 9, Summary of Loan Loss Experience, within the Statistical Disclosures included in Item 1, Business of this Form 10-K.

Fair Value Measurements

The Fair Value Measurements and Disclosures Topic of the Codification defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

The Fair Value Measurements and Disclosures Topic of the Codification establishes a fair value hierarchy which prioritizes the inputs into valuation techniques used to measure fair value. The hierarchy prioritizes observable data from active markets, placing measurements using those inputs in Level 1 of the fair value hierarchy, and gives the lowest priority to unobservable inputs and classifies these as Level 3 measurements. The three levels of the fair value hierarchy are described below:

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date;

Level 2 — Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or inputs that are observable in the market either directly or indirectly;

Level 3 — Valuations based on models that use inputs that are unobservable in the market and significant to the overall fair value measurement.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Fair value hierarchy classifications are reviewed on a quarterly basis. Changes related to the observability of inputs to a fair value measurement may result in a reclassification between hierarchy levels.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measurement. Therefore, even when market assumptions are not readily

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available, management’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. For additional information, see Note 24, Fair Value Measurements, in our accompanying audited consolidated financial statements for the year ended December 31, 2009.

It is our policy to maximize the use of observable market based inputs, when appropriate, to value our assets and liabilities carried at fair value on a recurring basis or to determine whether an adjustment to fair value is needed for assets and liabilities carried at fair value on a non-recurring basis. Given the nature of some of our assets carried at fair value, whether on a recurring or nonrecurring basis, clearly determinable market based valuation inputs are often not available. Therefore, these instruments are valued using internal assumptions and classified as Level 3. We may be required to apply significant judgments in determining our fair value estimates for these assets.

The estimates of fair values reflect our best judgments regarding the appropriate valuation methods and assumptions that market participants would use in determining fair value. The amount of judgment involved in estimating the fair value of an asset or liability is affected by a number of factors, such as the type of instrument, the liquidity of the markets for the instrument and the contractual characteristics of the instrument. The selection of a method to estimate fair value for each type of financial instrument depends on the reliability and availability of relevant market data. Judgments in these cases include, but are not limited to:

•  Selection of third-party market data sources;

•  Evaluation of the expected reliability of the estimate;

•  Reliability, timeliness and cost of alternative valuation methodologies; and

•  Selection of proxy instruments, as necessary.

Due to the lack of observability of significant inputs, we must make assumptions in deriving our valuation inputs based on relevant empirical data surrounding interest rates, asset prices, timing of future cash flows and credit performance. In addition, assumptions must be made to reflect constraints on liquidity, counterparty credit quality and other unobservable factors. Imprecision surrounding our assumptions related to unobservable market inputs may impact the fair value of our assets and liabilities. Furthermore, use of different methods to derive the fair value of our assets and liabilities could result in different fair value estimates at the measurement date.

See Fair Value Measurements above for additional discussion surrounding the specific methods and assumptions we use to estimate the fair value of our assets and liabilities carried at fair value on a recurring and nonrecurring basis.

Income Taxes

We are subject to the income tax laws of the United States, its states and municipalities and the foreign jurisdictions in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions, both domestic and foreign.

Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.

We provide for income taxes as a “C” corporation on income earned from operations. Currently, our subsidiaries cannot participate in the filing of a consolidated federal tax return. As a result, certain subsidiaries may have taxable income that cannot be offset by taxable losses or loss carryforwards of other entities. We are subject to federal, foreign, state and local taxation in various jurisdictions.

We use the asset and liability method of accounting. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the change.

From 2006 through 2008, we operated as a REIT. Effective January 1, 2009, we revoked our REIT election and recognized the deferred tax effects in our audited consolidated financial statements as of December 31, 2008.

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During the period we operated as a REIT, we were generally not subject to federal income tax at the REIT level on our net taxable income distributed to shareholders, but we were subject to federal corporate-level tax on the net taxable income of our taxable REIT subsidiaries, and we were subject to taxation in various foreign, state and local jurisdictions. In addition, we were required to distribute at least 90% of our REIT taxable income to our shareholders and meet various other requirements imposed by the Internal Revenue Code, through actual operating results, asset holdings, distribution levels, and diversity of stock ownership.

Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. All evidence, both positive and negative, is evaluated when making this determination. Items considered in this analysis include the ability to carry back losses to recoup taxes previously paid, the reversal of temporary differences, tax planning strategies, historical financial performance, expectations of future earnings and the length of statutory carryforward periods. Significant judgment is required in assessing future earning trends and the timing of reversals of temporary differences.

In 2009, we established a valuation allowance against a substantial portion of our net deferred tax assets for subsidiaries where we determined that there was significant negative evidence with respect to our ability to realize such assets. Negative evidence we considered in making this determination included the incurrence of operating losses at several of our subsidiaries, and uncertainty regarding the realization of a portion of the deferred tax assets at future points in time. As of December 31, 2009, the total valuation allowance was $385.9 million. Although realization is not assured, we believe it is more likely than not that the remaining recognized net deferred tax assets of $107.1 million as of December 31, 2009 will be realized. We intend to maintain a valuation allowance with respect to our deferred tax assets until sufficient positive evidence exists to support its reduction or reversal. As of December 31, 2008, we recorded no valuation allowance against our deferred tax assets.

We have net operating loss carryforwards for federal and state income tax purposes that can be utilized to offset future taxable income. If we were to experience a change of control as defined in Section 382 of the Internal Revenue Code, more specifically, if we were to undergo a change in ownership of more than 50% of our capital stock over a three-year period as measured under Section 382 of the Internal Revenue Code, our ability to utilize our net operating loss carryforwards, certain built-in losses and other tax attributes recognized in years after the ownership change would be limited. The annual limit would equal the product of (a) the applicable long-term tax exempt rate and (b) the value of the relevant taxable entity’s capital stock immediately before the ownership change. These change of ownership rules generally focus on ownership changes involving stockholders owning directly or indirectly 5% or more of a company’s outstanding stock, including certain public groups as set forth under Section 382 of the Internal Revenue Code, and those arising from new stock issuances and other equity transactions. The determination of whether an ownership change occurs is complex and not entirely within our control. No assurance can be given as to whether we have undergone, or in the future will undergo, an ownership change under Section 382 of the Internal Revenue Code.

During the years ended December 31, 2009 and 2008, we recorded $136.3 million of income tax expense and $190.6 million of income tax benefit, respectively, with respect to our income from continuing operations. The effective income tax rate for these periods was (18.0)% and 43.5%, respectively.

We file income tax returns with the United States and various state, local and foreign jurisdictions and generally remain subject to examinations by these tax jurisdictions for tax years 2004 through 2008. In 2008, we settled an Internal Revenue Service examination for the tax years 2005 and 2004 and concluded certain state examinations in 2009 and 2008 of tax years 2005, 2004 and 2003. We incurred penalty and interest expense of $1.0 million and $3.3 million in 2009 and 2008, respectively. In addition, we paid taxes in connection with the settlement and conclusion of these examinations of $4.3 million and $16.7 million in 2009 and 2008, respectively. We are currently under examination by the Internal Revenue Service for the tax years 2006 to 2008, and certain states for the tax years 2004 and 2005.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain financial market risks, which are discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Market Risk Management section. In addition, for a detailed discussion of our derivatives, see Note 22, Derivative Instruments and Note 23, Credit Risk, in an accompanying audited consolidated financial statements for the year ended December 31, 2009.

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MANAGEMENT REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING

The management of CapitalSource Inc. (“CapitalSource”) is responsible for establishing and maintaining adequate internal control over financial reporting. CapitalSource’s internal control system was designed to provide reasonable assurance to CapitalSource’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

CapitalSource’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on such assessment management believes that, as of December 31, 2009, the company’s internal control over financial reporting is effective based on those criteria.

CapitalSource’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report appears on page 107.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders of CapitalSource Inc.

We have audited CapitalSource Inc.’s (“CapitalSource”) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). CapitalSource’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, CapitalSource Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CapitalSource Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2009 and our report dated March 1, 2010 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

McLean, Virginia

March 1, 2010

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements
For the Years Ended December 31, 2009, 2008 and 2007

Report of Independent Registered Public Accounting Firm	109
Consolidated Balance Sheets as of December 31, 2009 and 2008	110
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007	111
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2009, 2008 and 2007	112
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007	113
Notes to the Consolidated Financial Statements	114

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of CapitalSource Inc.

We have audited the consolidated balance sheets of CapitalSource Inc. (“CapitalSource”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of CapitalSource’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CapitalSource Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, CapitalSource adopted the provisions of accounting for uncertain tax positions in accordance with the current Income Taxes Topic of the Accounting Standards Codification on January 1, 2007. In addition, as discussed in Note 2, CapitalSource adopted new accounting pronouncements related to its non-controlling interests and convertible debt and retrospectively adjusted all periods presented in the consolidated financial statements for the changes.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CapitalSource’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2010 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

McLean, Virginia

March 1, 2010

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CapitalSource Inc.

Consolidated Balance Sheets

	December 31,
	2009			2008
	($ in thousands, except share amounts)
ASSETS
Cash and cash equivalents	$	1,172,785		$	1,335,916
Restricted cash		172,765			404,019
Investment securities:
Available-for-sale, at fair value		960,591			679,551
Held-to-maturity, at amortized cost		242,078			14,389
Total investment securities		1,202,669			693,940
Mortgage-backed securities pledged, trading		—			1,489,291
Mortgage-related receivables, net		—			1,801,535
Commercial real estate “A” Participation Interest, net		530,560			1,396,611
Loans:
Loans held for sale		670			8,543
Loans held for investment		8,321,160			9,447,249
Less deferred loan fees and discounts		(146,329	)		(174,317	)
Less allowance for loan losses		(586,696	)		(423,844	)
Loans held for investment, net		7,588,135			8,849,088
Total loans		7,588,805			8,857,631
Interest receivable		33,949			67,018
Direct real estate investments, net		336,007			346,167
Other investments		96,517			127,746
Goodwill		173,135			173,135
Other assets		679,209			1,040,157
Assets of discontinued operations, held for sale		260,541			686,466
Total assets	$	12,246,942		$	18,419,632
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	4,483,879		$	5,043,695
Repurchase agreements		—			1,595,750
Credit facilities		542,781			1,445,062
Term debt		2,956,536			5,338,456
Other borrowings		1,466,834			1,493,243
Other liabilities		390,504			542,533
Liabilities of discontinued operations		223,149			130,173
Total liabilities		10,063,683			15,588,912
Shareholders’ equity:
Preferred stock (50,000,000 shares authorized; no shares outstanding)		—			—
Common stock ($0.01 par value, 1,200,000,000 shares authorized; 323,042,613 and 282,804,211 shares issued and outstanding, respectively)		3,230			2,828
Additional paid-in capital		3,909,364			3,686,765
Accumulated deficit		(1,748,822	)		(868,425	)
Accumulated other comprehensive income, net		19,361			9,095
Total CapitalSource Inc. shareholders’ equity		2,183,133			2,830,263
Noncontrolling interests		126			457
Total shareholders’ equity		2,183,259			2,830,720
Total liabilities and shareholders’ equity	$	12,246,942		$	18,419,632

See accompanying notes.

110

CapitalSource Inc.

Consolidated Statements of Operations

	Year Ended December 31,
	2009			2008			2007
	($ in thousands, except per share data)
Net investment income:
Interest income:
Loans	$	796,976		$	1,037,561		$	1,128,091
Investment securities		60,959			138,102			217,162
Other		4,651			23,866			21,208
Total interest income		862,586			1,199,529			1,366,461
Fee income		22,884			33,099			63,346
Total interest and fee income		885,470			1,232,628			1,429,807
Operating lease income		33,985			31,896			33,444
Total investment income		919,455			1,264,524			1,463,251
Interest expense:
Deposits		109,430			76,245			—
Borrowings		328,283			617,112			859,180
Total interest expense		437,713			693,357			859,180
Net investment income		481,742			571,167			604,071
Provision for loan losses		845,986			593,046			78,641
Net investment (loss) income after provision for loan losses		(364,244	)		(21,879	)		525,430
Operating expenses:
Compensation and benefits		139,607			143,401			157,755
Depreciation of direct real estate investments		10,160			10,110			10,379
Professional fees		57,072			52,578			29,375
Other administrative expenses		81,029			58,947			47,493
Total operating expenses		287,868			265,036			245,002
Other income (expense):
(Loss) gain on investments, net		(30,724	)		(73,569	)		20,270
Loss on derivatives		(13,055	)		(41,082	)		(46,150	)
Gain (loss) on residential mortgage investment portfolio		15,308			(102,779	)		(75,164	)
(Loss) gain on debt extinguishment, net		(40,514	)		58,856			678
Other (expenses) income, net		(36,900	)		(5,185	)		36,545
Total other expense		(105,885	)		(163,759	)		(63,821	)
Net (loss) income from continuing operations before income taxes		(757,997	)		(450,674	)		216,607
Income tax expense (benefit)		136,314			(190,583	)		87,563
Net (loss) income from continuing operations		(894,311	)		(260,091	)		129,044
Net income from discontinued operations, net of taxes		33,335			41,310			35,027
(Loss) gain from sale of discontinued operations, net of taxes		(8,071	)		104			156
Net (loss) income		(869,047	)		(218,677	)		164,227
Net (loss) income attributable to noncontrolling interests (includes income related to discontinued operations of $9 and $4,951 for 2008 and 2007, respectively)		(28	)		1,426			4,938
Net (loss) income attributable to CapitalSource Inc.	$	(869,019	)	$	(220,103	)	$	159,289
Net (loss) income per share attributable to CapitalSource Inc.:
Basic (loss) income per share:
From continuing operations	$	(2.92	)	$	(1.04	)	$	0.67
From discontinued operations		0.08			0.16			0.18
Attributable to CapitalSource Inc.	$	(2.84	)	$	(0.88	)	$	0.83
Diluted (loss) income per share:
From continuing operations	$	(2.92	)	$	(1.04	)	$	0.67
From discontinued operations		0.08			0.16			0.18
Attributable to CapitalSource Inc.	$	(2.84	)	$	(0.88	)	$	0.82
Average shares outstanding:
Basic		306,417,394			251,213,699			191,697,254
Diluted		306,417,394			251,213,699			193,282,656

See accompanying notes.

111

CapitalSource Inc.

Consolidated Statements of Shareholders’ Equity

										Accumulated
										Other			Treasury						Total
	Common			Additional			Accumulated			Comprehensive			Stock,			Noncontrolling			Shareholders’
	Stock			Paid-in Capital			Deficit			Income, net			at cost			Interests			Equity
	($ in thousands)
Total shareholders’ equity as of December 31, 2006	$	1,815		$	2,198,426		$	(18,816	)	$	2,465		$	(29,926	)	$	56,350		$	2,210,314
Purchase of subsidiary		—			—			—			—			—			635			635
Conversation of noncontrolling interests into CapitalSource Inc. common stock		5			11,528			—			—			—			(11,533	)		—
Net income		—			—			159,289			—			—			4,938			164,227
Other comprehensive income:
Unrealized gain, net of tax		—			—			—			2,485			—			—			2,485
Total comprehensive income																				166,712
Cumulative effect of adoption of FIN 48		—			—			(5,702	)		—			—			—			(5,702	)
Dividends paid		—			10,064			(477,237	)		—			—			(4,944	)		(472,117	)
Issuance of common stock, net		374			684,190			—			—			29,926			—			714,490
Stock option expense		—			7,569			—			—			—			—			7,569
Exercise of options		4			4,746			—			—			—			—			4,750
Restricted stock activity		9			22,752			—			—			—			—			22,761
Tax benefit on exercise of options		—			1,077			—			—			—			—			1,077
Tax benefit on vesting of restricted stock grants		—			977			—			—			—			—			977
Total shareholders’ equity as of December 31, 2007		2,207			2,941,329			(342,466	)		4,950			—			45,446			2,651,466
Conversation of noncontrolling interests into CapitalSource Inc. common stock		20			44,969			—			—			—			(44,989	)		—
Net (loss) income		—			—			(220,103	)		—			—			1,426			(218,677	)
Other comprehensive loss:
Unrealized gain, net of tax		—			—			—			4,145			—			—			4,145
Total comprehensive loss																				(214,532	)
Dividends paid		—			4,463			(305,856	)		—			—			(1,426	)		(302,819	)
Proceeds from issuance of common stock, net		539			601,047			—			—			—			—			601,586
Exchange of convertible debt		62			73,078			—			—			—			—			73,140
Stock option expense		—			1,019			—			—			—			—			1,019
Exercise of options		1			361			—			—			—			—			362
Restricted stock activity		(1	)		31,140			—			—			—			—			31,139
Tax benefit on exercise of options		—			109			—			—			—			—			109
Tax benefit on vesting of restricted stock grants		—			(10,750	)		—			—			—			—			(10,750	)
Total shareholders’ equity as of December 31, 2008		2,828			3,686,765			(868,425	)		9,095			—			457			2,830,720
Net loss		—			—			(869,019	)		—			—			(28	)		(869,047	)
Other comprehensive loss:
Cumulative effect of adoption of investment valuation guidance		—			—			397			(397	)					—			—
Unrealized gain, net of tax		—			—			—			10,663			—			—			10,663
Total comprehensive loss																				(858,384	)
Divestiture of noncontrolling interests		—			—			—			—						(303	)		(303	)
Repurchase of common stock		(6	)		(794	)		—			—						—			(800	)
Dividends paid		—			(724	)		(11,775	)		—			—			—			(12,499	)
Proceeds from issuance of common stock, net		203			76,902			—			—						—			77,105
Exchange of convertible debt		198			118,358												—			118,556
Stock option expense		—			5,898			—			—			—			—			5,898
Restricted stock activity		7			22,959			—			—			—			—			22,966
Total shareholders’ equity as of December 31, 2009	$	3,230		$	3,909,364		$	(1,748,822	)	$	19,361		$	—		$	126		$	2,183,259

See accompanying notes.

112

CapitalSource Inc.

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2009			2008			2007
	($ in thousands)
Operating activities:
Net (loss) income	$	(869,047	)	$	(218,677	)	$	164,227
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Stock option expense		5,898			1,019			7,569
Restricted stock expense		24,997			42,575			36,921
Loss (gain) on extinguishment of debt		40,610			(58,856	)		(678	)
Amortization of deferred loan fees and discounts		(77,534	)		(90,967	)		(88,558	)
Paid-in-kind interest on loans		(12,676	)		15,852			(30,053	)
Provision for loan losses		845,986			593,046			78,641
Provision for unfunded commitments		3,704			—			—
Amortization of deferred financing fees and discounts		63,538			118,140			64,676
Depreciation and amortization		31,701			39,457			35,891
Provision (benefit) for deferred income taxes		67,397			(152,451	)		41,793
Non-cash loss (gain) on investments, net		31,765			82,250			(865	)
Impairment of Parent Company goodwill		—			5,344			—
Non-cash loss on foreclosed assets and other property and equipment disposals		46,818			17,202			1,037
Unrealized loss on derivatives and foreign currencies, net		16,721			41,093			42,599
Unrealized (gain) loss on residential mortgage investment portfolio, net		(66,676	)		50,085			75,507
Net decrease (increase) in mortgage-backed securities pledged, trading		1,485,144			2,559,389			(494,153	)
Amortization of discount on residential mortgage investments		—			(8,619	)		(39,380	)
Accretion of discount on commercial real estate “A” participation interest		(29,781	)		(23,777	)		—
Decrease (increase) in interest receivable		35,385			33,983			(23,673	)
Decrease (increase) in loans held for sale, net		20,936			269,983			(598,897	)
Decrease (increase) in other assets		458,583			(483,124	)		(234,964	)
(Decrease) increase in other liabilities		(213,183	)		123,943			194,974
Cash provided by (used in) operating activities, net of impact of acquisitions		1,910,286			2,956,890			(767,386	)
Investing activities:
Decrease (increase) in restricted cash		237,141			94,420			(272,899	)
Decrease in mortgage-related receivables, net		1,754,555			214,298			265,839
Decrease in commercial real estate “A” participation interest, net		895,832			447,804			—
Acquisition of CS Advisors CLO II		—			(18,619	)		—
Decrease in receivables under reverse-repurchase agreements, net		—			—			51,892
Decrease (increase) in loans, net		422,446			(63,049	)		(1,434,109	)
Cash received (paid) for real estate		292,837			(10,121	)		(248,120	)
Acquisition of marketable securities, available for sale, net		(241,018	)		(639,116	)		—
Acquisition of marketable securities, held to maturity, net		(213,048	)		—			—
Reduction (acquisition) of other investments, net		19,612			(48,956	)		(28,724	)
Net cash acquired in FIL transaction		—			3,187,037			—
Acquisition of property and equipment, net		(18,537	)		(5,594	)		(5,379	)
Cash provided by (used in) investing activities		3,149,820			3,158,104			(1,671,500	)
Financing activities:
Payment of deferred financing fees		(45,573	)		(75,931	)		(53,107	)
Deposits accepted, net of repayments		(560,497	)		(126,773	)		—
(Repayments) borrowings under repurchase agreements, net		(1,595,750	)		(2,314,277	)		399,259
Repayments on credit facilities, net		(910,281	)		(912,276	)		(47,414	)
Borrowings of term debt		326,449			56,108			2,860,607
Repayments of term debt		(2,698,918	)		(1,808,720	)		(1,503,018	)
Borrowings (repayments) under other borrowings, net		199,071			(74,177	)		320,630
Proceeds from issuance of common stock, net of offering costs		77,105			601,755			714,490
Repurchase of common stock		(800	)		—			—
Proceeds from exercise of options		—			362			4,750
Tax expense on share-based payments		—			(10,641	)		2,054
Payment of dividends		(12,455	)		(290,560	)		(476,817	)
Cash (used in) provided by financing activities		(5,221,649	)		(4,955,130	)		2,221,434
(Decrease) increase in cash and cash equivalents		(161,543	)		1,159,864			(217,452	)
Cash and cash equivalents as of beginning of year		1,338,563			178,699			396,151
Cash and cash equivalents as of end of year(1)	$	1,177,020		$	1,338,563		$	178,699
Supplemental information:
Cash paid (received) during the year for:
Interest	$	405,524		$	641,312		$	768,259
Income taxes, net		(146,119	)		65,992			93,221
Noncash transactions from investing and financing activities:
Stock received from Omega Healthcare Investors, Inc.	$	50,561		$	—		$	—
Receivable from Omega Healthcare Investors, Inc.		59,354			—			—
Assumption of FIL assets and liabilities		—			3,292,185			—
Exchange of common stock for convertible debentures		61,618			44,880			—
Assets acquired through foreclosure		219,745			127,315			20,225
Assumption of note payable		—			25,729			—
Acquisition of real estate		—			2,120			110,675
Conversion of noncontrolling interests into common stock		—			44,989			11,533
Dividends declared but not paid		—			13,827			—
Assumption of intangible lease liability		—			—			30,476
Assumption of term debt		—			—			71,027
Acquisition of investments in unconsolidated trusts		—			—			2,544

(1) Cash and cash equivalents as of December 31, 2009 and 2008 include $4.2 million and $2.6 million, respectively, of cash reported with assets of discontinued operations in the accompanying consolidated balance sheet.

See accompanying notes.

113

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1.   Organization

We are a commercial lender which, primarily through our wholly owned subsidiary, CapitalSource Bank, provides financial products to small and middle market businesses nationwide and provides depository products and services in southern and central California. Prior to the formation of CapitalSource Bank, CapitalSource Inc. (“CapitalSource,” and together with its subsidiaries other than CapitalSource Bank, the “Parent Company”) conducted its commercial lending business through our other subsidiaries. Subsequent to CapitalSource Bank’s formation, substantially all new loans have been originated at CapitalSource Bank, and we expect this will continue to be the case for the foreseeable future. Our commercial lending activities at the Parent Company consist primarily of satisfying existing commitments made prior to CapitalSource Bank’s formation and receiving payments on our existing loan portfolio. Consequently, we expect that our loans at the Parent Company will gradually run off, while CapitalSource Bank’s loan portfolio will continue to grow.

Our primary commercial lending products and depository and services include:

•  Senior Secured Loans.  We make senior secured, asset-backed, mortgage, and leveraged loans, which have a first priority lien in the collateral securing the loan. Asset-based loans are collateralized by specified assets of the client, generally the client’s accounts receivable and/or inventory. Mortgage loans are secured by senior mortgages on real property. We make mortgage loans to clients including owners and operators of senior housing and skilled nursing facilities; owners and operators of office, industrial, hospitality and multifamily properties; resort and residential developers; hospitals and companies backed by private equity firms that frequently obtain mortgage-related financing in connection with buyout transactions. We make leveraged loans based on our assessment of a client’s ability to generate cash flows sufficient to repay the loan and to maintain or increase its enterprise value during the term of the loan. Our leveraged loans generally are secured by a security interest in all or substantially all of a client’s assets. In some cases, the equity owners of a client pledge their stock in the client to us as further collateral for the loan.

•  Depository Products and Services.  Through CapitalSource Bank’s 22 branches in southern and central California, we provide savings and money market accounts, individual retirement account products and certificates of deposit. These products are insured up to the maximum amounts permitted by the Federal Deposit Insurance Corporation (“FDIC”).

We currently operate as three reportable segments: 1) CapitalSource Bank, 2) Other Commercial Finance, and 3) Healthcare Net Lease. Our CapitalSource Bank segment comprises our commercial lending and banking business activities; our Other Commercial Finance segment comprises our loan portfolio and residential mortgage and other business activities in the Parent Company; and our Healthcare Net Lease segment comprises our direct real estate investment business activities.

For the years ended December 31, 2008 and 2007, we presented financial results through three reportable segments: 1) Commercial Banking, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Beginning in the first quarter of 2009, changes were made in the way management organizes financial information to make operating decisions, resulting in the activities previously reported in the Commercial Banking segment being disaggregated into the CapitalSource Bank and Other Commercial Finance segments and the results of our Residential Mortgage Investment segment being combined into the Other Commercial Finance segment. We have reclassified all comparative prior period segment information to reflect our current segments. For additional information, see Note 25, Segment Data.

Note 2.   Summary of Significant Accounting Policies

Our financial reporting and accounting policies conform to U.S. generally accepted accounting principles (“GAAP”).

114

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Use of Estimates

The preparation of our audited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management has made significant estimates in certain areas, including valuing certain financial instruments and other assets, assessing financial instruments and other assets for impairment, assessing the realization of deferred tax assets and determining the allowance for loan losses. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying financial statements reflect our consolidated accounts, including those of our majority-owned subsidiaries and variable interest entities (“VIEs”) where we determined that we are the primary beneficiary. All significant intercompany accounts and transactions have been eliminated.

Discontinued Operations

On November 17, 2009, we announced the intent to sell certain direct real estate investments, currently included in our Healthcare Net Lease segment. As of December 31, 2009, we have closed on the sale of the first group of properties and anticipate closing on a second group in 2010. Accordingly, the financial position and results of operations of these direct real estate investments have been removed from the detail line items and separately presented as “discontinued operations.” For additional information, see Note 3, Discontinued Operations.

Fair Value Measurements

Effective January 1, 2008, we adopted the guidance in the Fair Value Measurements and Disclosures Topic of the Accounting Standards Codification (the “Codification”), which established a framework for measuring fair value in generally accepted accounting principles, clarified the definition of fair value within that framework, and expanded disclosures about the use of fair value measurements. The guidance applies whenever other accounting standards require or permit fair value measurement. Under this guidance, 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.

The Fair Value Measurement and Disclosure Topic of the Codification establishes a fair value hierarchy which prioritizes the inputs into valuation techniques used to measure fair value. The hierarchy prioritizes observable data from active markets, placing measurements using those inputs in Level 1 of the fair value hierarchy, and gives the lowest priority to unobservable inputs and classifies these as Level 3 measurements. The three levels of the fair value hierarchy are described below:

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date;

Level 2 — Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or models for which all significant inputs are observable in the market either directly or indirectly; and

Level 3 — Valuations based on models that use inputs that are unobservable in the market and significant to the overall fair value measurement.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Fair value hierarchy classifications are reviewed on a quarterly basis. Changes related to the observability of inputs to a fair value measurement may result in a reclassification between hierarchy levels.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measurement. Therefore, even when market assumptions are

115

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

not readily available, management’s own assumptions attempt to reflect those that market participants would use in pricing the asset or liability at the measurement date. For additional information, see 24, Fair Value Measurements.

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. For the purpose of reporting cash flows, cash and cash equivalents include collections from our borrowers, amounts due from banks, U.S. Treasury securities, short-term investments and commercial paper with an initial maturity of three months or less.

Loans

Loans held in our portfolio are recorded at the principal amount outstanding, net of deferred loan costs or fees and any discounts received or premiums paid on purchased loans. Deferred costs or fees, discounts and premiums are amortized over the contractual term of the loan, adjusted for actual prepayments, using the interest method. We use contractual payment terms to determine the constant yield needed to apply the interest method.

Loans held for sale are accounted for at the lower of cost or fair value, which is determined on an individual loan basis, and include loans we originated or purchased that we intend to sell all or part of that loan in the secondary market. Direct loan origination costs or fees, discounts and premiums are deferred at origination of the loan and not amortized into income.

As part of our management of the loans held in our portfolio, we will occasionally transfer loans from held for investment to held for sale. Upon transfer, any associated allowance for loan loss is charged-off and the carrying value of the loans is adjusted to the estimated fair value less costs to sell. The loans are subsequently accounted for at the lower of cost or fair value, with valuation changes recorded in other (expense) income, net of expenses in our audited consolidated statements of operations. Gains or losses on the sale of these loans are also recorded in other income, net of expenses in our audited consolidated statements of operations. In certain circumstances, loans designated as held for sale may later be transferred back to the loan portfolio based upon our intent to retain the loan. We transfer these loans to our portfolio at the lower of cost or fair value.

Allowance for Loan Losses

Our allowance for loan losses represents management’s estimate of incurred loan losses inherent in our loan portfolio as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of our borrowers, adverse situations that have occurred that may affect the borrowers’ ability to repay, the estimated value of underlying collateral and general economic conditions. Losses are recognized when available information indicates that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.

We perform periodic and systematic detailed reviews of our loan portfolios to identify credit risks and to assess the overall collectability of those portfolios. The allowance on certain pools of loans with similar characteristics is based on aggregated portfolio segment evaluations generally by loan type and is estimated using reserve factors that are reflective of estimated historical and industry loss rates.

The commercial portfolios are reviewed regularly on an individual loan basis. Loans subject to individual reviews are analyzed and segregated by risk according to our internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, industry performance trends, and any other pertinent information, including individual valuations on impaired loans, are factored in the estimation of the allowance for loan losses. The historical loss experience is updated quarterly to incorporate the most recent data reflective of the current economic environment.

If necessary, a specific allowance for loan losses is established for individual impaired commercial loans. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement.

116

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Individually impaired loans are measured based on the present value of payments expected to be received, observable market prices for the loan, or the estimated fair value of the collateral. If the recorded investment in an impaired loan exceeds the present value of payments expected to be received or the fair value of the collateral, a specific allowance is established as a component of the allowance for loan losses.

When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged off against the allowance for loan losses. To the extent we later collect amounts previously charged off, we will recognize a recovery by increasing the allowance for loan losses for the amount received.

We also consider whether losses may have been incurred in connection with unfunded commitments to lend although, in making this assessment, we exclude from consideration those commitments for which funding is subject to our approval based on the adequacy of underlying collateral that is required to be presented by a client or other terms and conditions.

Foreclosed Assets

Foreclosed assets, includes foreclosed property and other assets received in full or partial satisfaction of a loan. We recognize foreclosed assets upon the earlier of the loan foreclosure event or when we take physical possession of the asset (i.e., through a deed in lieu of foreclosure transaction). Foreclosed assets are initially measured at their fair value less estimated cost to sell. We treat any excess of our recorded investment in the loan over the fair value less estimated cost to sell the asset as a charge-off to the loan.

Real estate owned (“REO”) represents property obtained through foreclosure. REO that we do not intend to sell is classified separately as held for use, is depreciated and is recorded in other assets in our audited consolidated balance sheets. We report REO that we intend to sell, are actively marketing and that are available for immediate sale in their current condition as held for sale. These REO are reported at the lower of their carrying amount or fair value less estimated selling costs, from the date of foreclosure, and are not depreciated. The fair value of our REO is determined by third party appraisals, when available. When third party appraisals are not available, we estimate fair value based on factors such as prices for similar properties in similar geographical areas and/or assessment through observation of such properties. We recognize a loss for any subsequent write-down of the REO to its fair value less its estimated costs to sell through a valuation allowance with an offsetting charge to other (expense) income in our audited consolidated statements of operations. A recovery is recognized for any subsequent increase in fair value less estimated costs to sell up to the cumulative loss previously recognized through the valuation allowance. We recognize cost of operating and gains or losses on sales of REO through other (expense) income in our audited consolidated statements of operations.

Goodwill Impairment

Goodwill must be allocated to reporting units and tested for impairment. We test goodwill for impairment at least annually, and more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. Impairment testing is performed at the reporting unit level. The first step of the test is a comparison of the fair value of each reporting unit to its carrying amount, including goodwill. The fair values of each reporting unit are determined using either independent third party or internal valuations. If the fair value is less than the carrying value, then the second step of the test is needed to measure the amount of potential goodwill impairment. The implied fair value of the goodwill is calculated and compared with the carrying amount of goodwill. If the carrying value of goodwill exceeds the implied fair value of that goodwill, then we would recognize an impairment loss in the amount of the difference, which would be recorded as a charge against net (loss) income.

During the year ended December 31, 2009, we did not record any goodwill impairment. During the year ended December 31, 2008, we recorded goodwill impairment of $5.3 million included in other (expense) income on our audited consolidated statements of operations. The remaining balance of goodwill of $173.1 million as of both December 31, 2009 and 2008 was entirely attributable to the acquisition of CapitalSource Bank and was not considered to be impaired.

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Investments in Debt Securities and Equity Securities That Have Readily Determinable Fair Values

All debt securities, as well as all purchased equity securities that have readily determinable fair values, are classified in our consolidated balance sheets based on management’s intention on the date of purchase. Debt securities which management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Debt securities not classified as held-to-maturity or trading, as well as equity investments in publicly traded entities, are classified as available-for-sale and carried at fair value with net unrealized gains and losses included in accumulated other comprehensive income (loss) on our audited consolidated balance sheets on an after-tax basis.

Investments in Equity Securities That Do Not Have Readily Determinable Fair Values

Purchased common stock or preferred stock that is not publicly traded and/or does not have a readily determinable fair value is accounted for pursuant to the equity method of accounting if our ownership position is large enough to significantly influence the operating and financial policies of an investee. This is generally presumed to exist when we own between 20% and 50% of a corporation, or when we own greater than 5% of a limited partnership or similarly structured entity. Our share of earnings and losses in equity method investees is included in other income, net of expenses in our audited consolidated statements of operations. If our ownership position is too small to provide such influence, the cost method is used to account for the equity interest.

For investments accounted for using the cost or equity method of accounting, management evaluates information such as budgets, business plans, and financial statements of the investee in addition to quoted market prices, if any, in determining whether an other than temporary decline in value exists. Factors indicative of an other-than-temporary decline in value include, but are not limited to, recurring operating losses and credit defaults. We compare the estimated fair value of each investment to its carrying value quarterly. For any of our investments in which the estimated fair value is less than its carrying value, we consider whether the impairment of that investment is other than temporary.

If it has been determined that an investment has sustained an other-than-temporary decline in its value, the equity interest is written down to its fair value through income and a new carrying value for the investment is established.

Realized gains or losses resulting from the sale of investments are calculated using the specific identification method and are included in (loss) gain on investments, net in our audited consolidated statements of operations.

Mortgage-Related Receivables

Investments in mortgage-related receivables are recorded at amortized cost. Premiums and discounts that relate to such receivables are amortized into interest income over the estimated lives of such assets using the interest method.

Transfers of Financial Assets

We account for transfers of loans and other financial assets to third parties or special purpose entities (“SPEs”) that we establish as sales if we determine that we have relinquished effective control over the assets. In such transactions, we allocate the recorded carrying amount of transferred assets between retained and sold interests based upon their fair values. We record gains and losses based upon the difference of proceeds received and the carrying amount of transferred assets that are allocated to sold interests.

We account for transfers of financial assets in which we receive cash consideration, but for which we determine that we have not relinquished control, as secured borrowings.

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Investments in Warrants and Options

In connection with certain lending arrangements, we sometimes receive warrants or options to purchase shares of common stock or other equity interests from a client without any payment of cash in connection with certain lending arrangements. These investments are initially recorded at estimated fair value. The carrying value of the related loan is adjusted to reflect an original issue discount equal to the estimated fair value ascribed to the equity interest. Such original issue discount is accreted to fee income over the contractual life of the loan in accordance with our income recognition policy.

Warrants and options that are assessed as derivatives are subsequently measured at fair value through earnings as a component of (loss) gain on investments, net on our audited consolidated statements of operations.

Deferred Financing Fees

Deferred financing fees represent fees and other direct incremental costs incurred in connection with our borrowings. These amounts are amortized into income as interest expense over the estimated life of the borrowing using the interest method.

Property and Equipment

Property and equipment are stated at cost and depreciated or amortized using the straight-line method over the following estimated useful lives:

Buildings and improvements	10 to 40 years
Leasehold improvements	remaining lease term
Computer software	3 years
Equipment	5 years
Furniture	7 years

Direct Real Estate Investments

We lease our direct real estate investments through long-term, triple-net operating leases. Under these triple-net leases, the client agrees to pay all facility operating expenses, as well as make capital improvements.

We allocate the purchase price of our direct real estate investments to net tangible and identified intangible assets acquired, primarily lease intangibles, based on their estimated fair values at the time of acquisition. In making estimates of fair values for purposes of allocating the purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. When valuing the acquired properties, we do not include the value of any in-place leases. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired and liabilities assumed.

Depreciation is computed on a straight-line basis over the estimated useful lives ranging from 10 to 40 years for buildings. Equipment related to our direct real estate investments is depreciated in accordance with our property and equipment policy, as outlined above.

In assessing lease intangibles, we recognize above-market and below-market in-place lease values for acquired operating leases based on the present value of the difference between: (1) the contractual amounts to be received pursuant to the leases negotiated and in-place at the time of acquisition of the facilities; and (2) management’s estimate of fair market lease rates for the facility or equivalent facility, measured over a period equal to the remaining non-cancelable term of the lease. Factors to be considered for lease intangibles also include estimates of carrying costs during hypothetical lease-up periods, market conditions, and costs to execute similar leases. The capitalized above-market or below-market lease values are classified as intangible assets, net and lease obligations, net, respectively, and are amortized to operating lease income over the remaining non-cancelable term of each lease.

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We also acquired select direct real estate investments through transactions in which we typically execute long-term triple-net leases, at market rates, simultaneously with such acquisitions.

We assess our real estate investments and the related intangible assets for impairment indicators whenever events or changes in circumstances indicate the carrying amount may not be recoverable; such assessment is performed not less than annually. Our assessment of the existence of impairment indicators is based on factors such as, but not limited to, market conditions, operator performance and the lessee’s compliance with lease terms. If we determine that indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying facilities. Provisions for impairment losses related to long-lived assets may be recognized when expected future undiscounted cash flows are determined to be less than the carrying values of the assets. An adjustment is made to the net carrying value of the leased properties and other long-lived assets for the excess over their estimated fair value. The fair value of the real estate investment is determined by market research, which includes valuing the property as a healthcare facility as well as other alternative uses. All impairments are taken as a period cost at that time, and depreciation is adjusted going forward to reflect the new value assigned to the asset.

If we decide to sell a real estate investment, we evaluate the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell. Our estimates of cash flows and fair values of the properties are based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers.

Interest and Fee Income Recognition on Loans

Interest and fee income, including income on impaired loans, fees due at maturity and paid-in-kind (“PIK”) interest, is recorded on an accrual basis to the extent that such amounts are expected to be collected. Carrying value adjustments of revolving lines of credit are amortized into interest and fee income over the contractual life of a loan on a straight line basis, while carrying value adjustments of all other loans are amortized into earnings over the contractual life of a loan using the interest method.

Loan origination fees are deferred and amortized as adjustments to the related loan’s yield over the contractual life of the loan. We do not take loan fees into income when a loan closes. In connection with the prepayment of a loan, any remaining unamortized deferred fees for that loan are accelerated and, depending upon the terms of the loan, there may be an additional fee that is charged based upon the prepayment and recognized in the period of the prepayment.

We accrete any discount from purchased loans into interest income in accordance with our policies up to the amount of contractual interest and principal payments expected to be collected. If management assesses that, upon purchase, a portion of contractual interest and principal payments are not expected to be collected, a portion of the discount will not be accreted (non-accretable difference).

We will generally place a loan on non-accrual status if we expect that the borrower will not be able to service its debt and other obligations or if the loan is 90 or more days past due and is not well-secured and in the process of collection. When a loan is placed on non-accrual status, accrued and unpaid interest is reversed and the recognition of interest and fee income on that loan will stop until factors indicating doubtful collection no longer exist and the loan has been brought current. Payments received on non-accrual loans are generally first applied to principal. A loan may be returned to accrual status when its interest or principal is current, repayment of the remaining contractual principal and interest is expected or when the loan otherwise becomes well-secured and is in the process of collection. On the date the borrower pays all overdue amounts in full, the borrower’s loan will emerge from non-accrual status and all overdue charges (including those from prior years) are recognized as interest income in the current period.

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Operating Lease Income Recognition

Substantially all of our direct real estate investments are leased through long-term, triple-net operating leases and typically include fixed rental payments, subject to escalation over the life of the lease. We recognize operating lease income on a straight-line basis over the life of the lease when collectability is reasonably assured. We do not recognize any income on contingent rents until payments are received and all contingencies have been eliminated.

Income Recognition and Impairment Recognition on Securities

For our investments in debt securities, we use the interest method to amortize deferred items, including premiums, discounts and other basis adjustments, into interest income. For debt securities representing non-investment grade beneficial interests in securitizations, the effective yield is determined based on the estimated cash flows of the security. Changes in the effective yield of these securities due to changes in estimated cash flows are recognized on a prospective basis as adjustments to interest income in future periods. The effective yield on all other debt securities that have not experienced an other than temporary impairment is based on the contractual cash flows of the security.

Declines in the fair value of debt securities classified as available-for-sale or held-to-maturity are reviewed to determine whether the impairment is other than temporary. This review considers a number of factors, including the severity of the decline in fair value, current market conditions, historical performance of the security, credit ratings and the length of time the investment has been in an unrealized loss position. If we do not expect to recover the entire amortized cost basis of the security, an other than temporary impairment is considered to have occurred. In assessing whether the entire amortized cost basis of the security will be recovered, we compare the present value of cash flows expected to be collected from the security with its amortized cost. The present value of cash flows is determined using a discount rate equal to the effective yield on the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, then the impairment is considered to be other than temporary. Determination of whether an impairment is other than temporary requires significant judgment surrounding the collectability of the investment including such factors as the financial condition of the issuer, expected prepayments and expected defaults.

When we have determined that an other than temporary impairment has occurred, we separate the impairment amount into a component representing the credit loss and a component representing all other factors. The credit loss component is recognized in earnings and is determined by discounting the expected future cash flows of the security by the effective yield of the security. The previous amortized cost basis less the credit component of the impairment becomes the new amortized cost basis of the security. Any remaining impairment, representing the difference between the new amortized cost of the security and its fair value is recognized through other comprehensive income. We also consider impairment of a security to be other than temporary if we have the intent to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. In these situations, the entire amount of the impairment represents the credit component and is recognized through earnings.

In periods following the recognition of an other than temporary impairment, the difference between the new amortized cost basis and the cash flows expected to be collected on the security are accreted as interest income. Any subsequent changes to estimated cash flows are recognized as prospective adjustments to the effective yield of the security.

Derivative Instruments

We enter into derivative contracts primarily to manage the interest rate risk associated with certain assets, liabilities, or probable forecasted transactions. As of December 31, 2009 and 2008, all of our derivatives were held for risk management purposes and none were designated as accounting hedges.

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Our derivatives are recorded in other assets or other liabilities, as appropriate, on our audited consolidated balance sheets. The changes in fair value of our derivatives and the related interest accrued are recognized in other income, net of expenses on our audited consolidated statements of operations.

Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase

Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. Our policy is to obtain the use of securities purchased under agreements to resell. The market value of the underlying securities that collateralize the related receivable on agreements to resell is monitored, including accrued interest. We may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.

Income Taxes

We provide for income taxes as a “C” corporation on income earned from operations. Currently our subsidiaries cannot participate in the filing of a consolidated federal tax return. As a result, certain subsidiaries may have taxable income that cannot be offset by taxable losses or loss carryforwards of other entities. We are subject to federal, foreign, state and local taxation in various jurisdictions.

We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the change.

From 2006 through 2008, we operated as a real estate investment trust (“REIT”). Effective January 1, 2009, we revoked our REIT election and recognized the deferred tax effects in our audited consolidated financial statements as of December 31, 2008. During the period we operated as a REIT, we were generally not subject to federal income tax at the REIT level on our net taxable income distributed to shareholders, but we were subject to federal corporate-level tax on the net taxable income of our taxable REIT subsidiaries, and we were subject to taxation in various foreign, state and local jurisdictions. In addition, we were required to distribute at least 90% of our REIT taxable income to our shareholders and meet various other requirements imposed by the Internal Revenue Code (the “Code”), through actual operating results, asset holdings, distribution levels, and diversity of stock ownership.

Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. All evidence, both positive and negative, is evaluated when making this determination. Items considered in this analysis include the ability to carry back losses to recoup taxes previously paid, the reversal of temporary differences, tax planning strategies, historical financial performance, expectations of future earnings and the length of statutory carryforward periods. Significant judgment is required in assessing future earning trends and the timing of reversals of temporary differences.

We adopted the provisions for accounting for uncertain tax positions in accordance with the current Income Taxes Topic of the Codification on January 1, 2007. As a result of the adoption, we recognized an increase of approximately $5.7 million in the liability for unrecognized tax benefits, which was accounted for as an increase to accumulated deficit as of January 1, 2007. This increase was accounted for as an increase to the January 1, 2007 balance of accumulated deficit. For additional information, see Note 15, Income Taxes.

Net Income per Share

Basic net income per share is based on the weighted-average number of common shares outstanding during each period. Diluted net income per share is based on the weighted average number of common shares outstanding

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during each period, plus common share equivalents computed for stock options, stock units, stock dividends declared, restricted stock and convertible debt. Diluted net income per share is adjusted for the effects of other potentially dilutive financial instruments only in the periods in which such effect is dilutive.

Bonuses

Bonuses are accrued ratably, pursuant to a variable methodology partially based on our performance, over the annual performance period.

On a quarterly basis, management recommends a bonus accrual to the Compensation Committee of our Board of Directors pursuant to our variable bonus methodology. This recommendation is in the form of a percentage of regular salary paid and is based upon the cumulative regular salary paid from the start of the annual performance period through the end of the particular quarterly reporting period. In developing its recommendation to the Compensation Committee, management analyzes certain key performance metrics. The actual bonus accrual recorded is that amount approved each quarter by the Compensation Committee.

Segment Reporting

The Segment Reporting Topic of the Codification requires that a public business enterprise report financial and descriptive information about its reportable operating segments including a measure of segment profit or loss, certain specific revenue and expense items and segment assets. We currently operate as three reportable segments: 1) CapitalSource Bank, 2) Other Commercial Finance, and 3) Healthcare Net Lease. Our CapitalSource Bank segment comprises our commercial lending and banking business activities; our Other Commercial Finance segment comprises our loan portfolio and residential mortgage and other business activities in the Parent Company; and our Healthcare Net Lease segment comprises our direct real estate investment business activities.

New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) issued Topic 105, Generally Accepted Accounting Principles, which established the Codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. The Codification was made effective by the FASB for periods ending on or after September 15, 2009. This annual report reflects the guidance in the Codification.

In December 2007, the FASB issued guidance establishing principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. It also provided a framework for recognizing and measuring the goodwill acquired in the business combination and determined what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The effective date of adoption is for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted this guidance and it did not have a material impact on our audited consolidated financial statements.

In February 2008, the FASB issued guidance delaying the effective date of fair value measurement disclosures for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until years beginning after November 15, 2008. We adopted this guidance and it did not have a material impact on our audited consolidated financial statements.

In April 2009, the FASB issued further guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly when compared with normal market activity for the asset or liability (or similar assets or liabilities) and, further, identifying circumstances that indicate a transaction is not orderly. It applies to all assets and liabilities within the

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scope of accounting guidance that require or permit fair value measurements, except items cited as scope exceptions in the Codification. The guidance is effective prospectively for interim and annual reporting periods ending after June 15, 2009. We adopted this guidance and it did not have a material impact on our audited consolidated financial statements.

In March 2008, the FASB issued guidance related to disclosures about derivative instruments and hedging activities, which was intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. The guidance applies to all derivative instruments within the scope of the Derivatives and Hedging Topic of the Codification. It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under this topic. The effective date of adoption is the beginning of the first fiscal year beginning after November 15, 2008. We adopted this guidance, and it did not have a material impact on our audited consolidated financial statements.

In April 2009, the FASB issued guidance to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. It applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of existing guidance on accounting for contingencies, if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are outside the scope of this new guidance. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted this guidance and it did not have a material impact on our audited consolidated financial statements.

In April 2009, the FASB amended its guidance on other than temporary impairment for debt securities to make the guidance more operational and to improve the presentation and disclosure of other than temporary impairments on debt and equity securities in the financial statements. The additional guidance does not amend existing recognition and measurement guidance related to other than temporary impairments of equity securities. It is effective for interim and annual reporting periods ending after June 15, 2009. We adopted this guidance and it did not have a material impact on our audited consolidated financial statements.

In April 2009, the FASB amended its guidance on the fair value of financial instruments to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This also amended existing guidance on interim financial reporting to require those disclosures in summarized financial information at interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009. We adopted this guidance and it did not have a material impact on our audited consolidated financial statements. For additional information, see Note 24, Fair Value Measurements.

In May 2009, the FASB issued guidance establishing principles and requirements for subsequent events accounting and disclosure, setting forth general principles of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide specific guidance on the accounting treatment for subsequent events or transactions. This is effective prospectively for interim or annual financial periods ending after June 15, 2009. We adopted this guidance and it did not have a material impact on our audited consolidated financial statements.

In June 2009, the FASB amended its guidance on the accounting for transfers and servicing of financial assets and extinguishments of liabilities and established additional disclosures about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It applies to all entities and eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009 for all transfers occurring subsequent to the adoption date. We adopted this guidance on January 1, 2010 and do not expect its adoption to have a material impact on our financial statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In June 2009, the FASB issued new guidance changing how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This requires enhanced disclosures about variable interest entities that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. This guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. It does not change the existing scope for accounting and assessment of variable interest entities, however it adds entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated. This guidance is effective for the first annual reporting period that begins after November 15, 2009. We adopted this guidance on January 1, 2010 and expect that our adoption will result in an increased number of entities with which we are involved to be considered variable interest entities. This increase is primarily the result of borrowers that have undergone troubled debt restructuring transactions, requiring us to reconsider whether the borrowers qualify as variable interest entities. However, we generally do not expect to meet the characteristics of a primary beneficiary with respect to these entities, and thus, generally do not expect to consolidate them. As a result, we do not expect our adoption of this new guidance to have a material impact on our financial position or results of operations.

In August 2009, the FASB issued guidance on measuring the fair value of liabilities. This guidance clarifies that the quoted price for an identical liability, when traded as an asset in an active market, is also a Level 1 measurement for that liability when no adjustment to the quoted price is required. In the absence of a Level 1 measurement, an entity must use one or more of the following valuation techniques to estimate fair value: a valuation technique that uses a quoted price of an identical or similar liability when traded as an asset, a technique based on the amount an entity would have to pay to transfer the identical liability or a technique based on the amount an entity would receive to enter into an identical liability. This guidance is effective for our first interim or annual reporting period beginning after its issuance. We adopted this guidance and it did not have a material impact on our audited consolidated financial statements.

In November 2009, the FASB ratified a consensus requiring that when distributions are made that include a shareholder election to receive cash or stock, with a limitation on total cash distributed, the distribution should be recognized as a share issuance. Since the distribution will be settled in a variable number of shares, a liability should be recognized at the later of the declaration date or when the entity is obligated to make payment. When the shares have been issued, the liability will be reclassified to equity. The consensus was effective retrospectively for interim and annual periods ending on or after December 15, 2009. We adopted this guidance, and it did not have a material impact on our audited consolidated financial statements

Reclassifications

Certain amounts in prior year’s audited consolidated financial statements have been reclassified to conform to the current year presentation, including the reclassification of certain deferred fees and loan discounts from fee income to interest income or other income in our audited consolidated statements of operations and the reclassification of PIK interest from interest receivable to loans held for investment in our audited consolidated balance sheet. Accordingly, the reclassifications have been appropriately reflected throughout our audited consolidated financial statements.

Retrospective Application of Accounting Pronouncements

In December 2007, the FASB issued guidance, which established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary and clarified that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the audited consolidated financial statements. The guidance also amended certain consolidation procedures for consistency with the requirements of the Consolidation Topic of the Codification. The effective date for application of this guidance was the beginning of the first fiscal year beginning after December 15, 2008.

In May 2008, the FASB issued guidance clarifying the requirements for accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) and specifying that

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issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and requires retroactive application for all periods presented in the audited consolidated financial statements.

On January 1, 2009, we adopted these two new accounting pronouncements and applied this guidance to our non-controlling interests and convertible debt, retrospectively. The adoption of this guidance affected financial statement line items for the periods presented below as follows:

Consolidated Balance Sheets

	December 31, 2009
	As Computed			As Reported
	Prior to			after			Effect of
	Adoption			Adoption			Change
	($ in thousands)
Other assets	$	674,162		$	679,209		$	5,047
Other borrowings		1,480,195			1,466,834			(13,361	)
Additional paid-in capital		3,892,299			3,909,364			17,065
Accumulated deficit		(1,750,165	)		(1,748,822	)		1,343

	December 31, 2008
	As Computed			As Reported
	Prior to			after			Effect of
	Adoption			Adoption			Change
	($ in thousands)
Other assets	$	1,035,426		$	1,040,157		$	4,731
Other borrowings		1,479,654			1,493,243			13,589
Additional paid-in capital		3,683,065			3,686,765			3,700
Accumulated deficit		(855,867	)		(868,425	)		(12,558	)

Consolidated Statements of Income

	Year Ended December 31, 2009
	As Computed			As Reported
	Prior to			after			Effect of
	Adoption			Adoption			Change
	($ in thousands, except per share amounts)
Interest expense: borrowings	$	342,184		$	328,283		$	(13,901	)
Net loss from continuing operations		(908,240	)		(894,311	)		13,929
Net loss		(882,976	)		(869,047	)		13,929
Net loss attributable to noncontrolling interests(1)		(28	)		(28	)		—
Net loss attributable to CapitalSource Inc.		—			(869,019	)		(869,019	)
Basic loss per share:
Net loss per share from continuing operations	$	(2.96	)	$	(2.92	)	$	0.04
Net loss per share attributable to CapitalSource Inc.(2)		(2.88	)		(2.84	)		0.04
Diluted loss per share:
Net loss per share from continuing operations		(2.96	)		(2.92	)		0.04
Net loss per share attributable to CapitalSource Inc.(2)		(2.88	)		(2.84	)		0.04

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Year Ended December 31, 2008
	As Computed			As Reported
	Prior to			after			Effect of
	Adoption			Adoption			Change
	($ in thousands, except per share amounts)
Interest expense: borrowings	$	630,179		$	617,112		$	(13,067	)
Income tax benefit		(201,129	)		(190,583	)		10,546
Net loss from continuing operations		(264,038	)		(260,091	)		3,947
Net loss		(222,624	)		(218,677	)		3,947
Net income attributable to noncontrolling interests(1)		1,426			1,426			—
Net loss attributable to CapitalSource Inc.		—			(220,103	)		(220,103	)
Basic loss per share:
Net loss per share from continuing operations	$	(1.05	)	$	(1.04	)	$	0.01
Net loss per share attributable to CapitalSource Inc.(2)		(0.89	)		(0.88	)		0.01
Diluted loss per share:
Net loss per share from continuing operations		(1.05	)		(1.04	)		0.01
Net loss per share attributable to CapitalSource Inc.(2)		(0.89	)		(0.88	)		0.01

	Year Ended December 31, 2007
	As Computed		As Reported
	Prior to		after		Effect of
	Adoption		Adoption		Change
	($ in thousands, except per share amounts)
Interest expense: borrowings	$	842,182	$	859,180	$	16,998
Net income from continuing operations		141,104		129,044		(12,060	)
Net income		176,287		164,227		(12,060	)
Net income attributable to noncontrolling interests(1)		4,938		4,938		—
Net income attributable to CapitalSource Inc.		—		159,289		159,289
Basic loss per share:
Net income per share from continuing operations	$	0.74	$	0.67	$	(0.07	)
Net loss per share attributable to CapitalSource Inc.(2)		0.92		0.83		(0.09	)
Diluted loss per share:
Net income per share from continuing operations		0.73		0.67		(0.06	)
Net loss per share attributable to CapitalSource Inc.(2)		0.91		0.82		(0.09	)

(1)	The caption “Noncontrolling interests expense” was changed to “Net (loss) income attributable to noncontrolling interests” to conform to the presentation requirements of the Consolidation Topic of the Codification.
(2)	The caption “Net (loss) income per share” was changed to “Net (loss) income per share attributable to CapitalSource Inc.” to conform to the presentation requirements of the Consolidation Topic of the Codification.

127

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidated Statements of Cash Flows

	Year Ended December 31, 2009
	As Computed			As Reported
	Prior to			after			Effect of
	Adoption			Adoption			Change
	($ in thousands)
Net loss	$	(882,976	)	$	(869,047	)	$	13,929
Operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of deferred financing fees and discounts		77,439			63,538			(13,901	)
Financing activities:
Payment of dividends		(12,483	)		(12,455	)		28

	Year Ended December 31, 2008
	As Computed			As Reported
	Prior to			after			Effect of
	Adoption			Adoption			Change
				($ in thousands)
Net loss	$	(222,624	)	$	(218,677	)	$	3,947
Operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities, net of impact of acquisitions:
Amortization of deferred financing fees and discounts		131,207			118,140			(13,067	)
Benefit for deferred income taxes		(162,997	)		(152,451	)		10,546
Financing activities:
Payment of dividends		(289,134	)		(290,560	)		(1,426	)

	Year Ended December 31, 2007
	As Computed			As Reported
	Prior to			after			Effect of
	Adoption			Adoption			Change
	($ in thousands)
Net income	$	176,287		$	164,227		$	(12,060	)
Operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of impact of acquisitions:
Amortization of deferred financing fees and discounts		47,672			64,676			17,004
Financing activities:
Payment of dividends		(471,873	)		(476,817	)		(4,944	)

Note 3.   Discontinued Operations

During the year ended December 31, 2009, we sold 82 long-term healthcare facilities with a total net book value of $400.3 million, realizing a pre-tax loss of $9.4 million. Two transactions comprised 77 of the facilities sold. In November 2009, we sold 37 long-term healthcare facilities (the “November Sale Assets”) for approximately $100.0 million in cash. In December 2009, in the first step of a multi-step transaction, we sold 40 long-term healthcare facilities (the “Step 1 Assets”) to Omega Healthcare Investors, Inc. (“Omega”) for approximately $184.2 million in cash and approximately 1.4 million shares of Omega common stock valued at $25.6 million. In addition, by acquiring our facilities in the December 2009 closing, Omega became obligated to pay us $59.4 million

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of indebtedness associated with the Step 1 Assets. Step two of the transaction with Omega will include the sale of an additional 40 long-term healthcare facilities (the “Step 2 Assets”), which we expect to complete in 2010.

In December 2009, we also received approximately 1.3 million shares of Omega common stock valued at $25.0 million in consideration for a non-refundable option that can be exercised by Omega to acquire an additional 63 of our long-term healthcare facilities (the “Step 3 Assets”) at any time through December 31, 2011. This common stock, in addition to the stock acquired in connection with the sale of the Step 1 Assets, has been recorded in investment securities, available-for-sale on our audited consolidated balance sheet. A corresponding liability of $25.0 million was also recorded on our accompanying consolidated audited balance sheet as of December 31, 2009. Upon the completion of the sale of Step 2 Assets and Step 3 Assets, we will exit the skilled nursing home ownership business, but continue to actively provide financing for owners and operators in the long-term healthcare industry.

We have presented the financial condition and results of operations of all assets within our Healthcare Net Lease segment, with the exception of the Step 3 Assets, as discontinued operations for all periods presented. Additionally, the results of the discontinued operations include the activities of other healthcare facilities that have been sold since the inception of the business. The Step 3 Assets have been included in our continuing operations as they do not meet the criteria to be held for sale as of December 31, 2009.

The condensed balance sheets as of December 31, 2009 and 2008 for our discontinued operations were as follows:

	December 31,
	2009		2008
	($ in thousands)
Assets:
Cash and cash equivalents and restricted cash	$	13,712	$	18,011
Direct real estate investments, net		218,149		643,549
Other assets		28,680		24,906
Total assets	$	260,541	$	686,466
Liabilities:
Mortgage debt	$	184,923	$	60,570
Notes payable		20,000		20,000
Other liabilities		18,226		49,603
Total liabilities	$	223,149	$	130,173

129

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The condensed statements of operations for the years ended December 31, 2009, 2008 and 2007 for our discontinued operations were as follows:

	Year Ended December 31,
	2009			2008		2007
	($ in thousands)
Revenue:
Operating lease income	$	73,311		$	75,852	$	63,569
Expenses:
Interest		5,532			5,686		5,059
Depreciation		21,360			25,779		21,625
General and administrative		3,627			380		1,364
Other expense		3,659			1,349		494
Total expenses		34,178			33,194		28,542
(Loss) gain from sale of discontinued operations		(9,411	)		104		156
Income tax expense		4,458			1,348		—
Net income attributable to discontinued operations	$	25,264		$	41,414	$	35,183

For further information about our direct real estate investments as of December 31, 2009, see Note 9, Direct Real Estate Investments.

Note 4.   Cash and Cash Equivalents and Restricted Cash

As of December 31, 2009 and 2008, our cash and cash equivalents and restricted cash balances were as follows:

	December 31,
	2009		2008
	($ in thousands)
Cash and cash equivalents and restricted cash from continuing operations:
Cash and due from banks(1)	$	592,793	$	231,599
Interest-bearing deposits in other banks(2)		27,723		19,963
Other short-term investments(3)		555,057		984,237
Investment securities(4)		169,977		504,136
Total cash and cash equivalents and restricted cash from continuing operations		1,345,550		1,739,935
Cash and cash equivalents and restricted cash from discontinued operations:
Cash and due from banks		13,712		18,011
Total cash and cash equivalents and restricted cash	$	1,359,262	$	1,757,946

(1) Represents principal and interest collections on loan assets held by securitization trusts or pledged to credit facilities and escrows for future expenses related to our direct real estate investments. A portion of these collections are invested in money market funds that invest primarily in U.S. Treasury securities, and in 2008, repurchase agreements secured by U.S. Treasury securities. The restricted portion of the balance was $24.5 million and $45.6 million as of December 31, 2009 and 2008, respectively. Cash and due from bank accounts for CapitalSource Bank were $235.6 million and $132.3 million as of December 31, 2009 and 2008, respectively. Included in this balance for CapitalSource Bank were $119.1 million and $52.1 million in deposits

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	at the Federal Reserve Bank (“FRB”) as of December 31, 2009 and 2008, respectively. The cash and due from bank accounts for CapitalSource Bank were not restricted.
(2)	Represents principal and interest collections on loan assets pledged to credit facilities. The restricted portion was $11.4 million and $8.4 million as of December 31, 2009 and 2008, respectively.
(3)	Represents principal and interest collections on loan assets held by securitization trusts or pledged to credit facilities and also includes short-term investments held by CapitalSource Bank. Principal and interest collections are invested in money market funds that invest primarily in U.S. Treasury securities, and in 2008, repurchase agreements secured by U.S. Treasury securities. The restricted portion was $136.9 million and $150.0 million as of December 31, 2009 and 2008, respectively. The CapitalSource Bank cash is invested in (i) short term investment grade commercial paper which is rated by at least two of the three major rating agencies (S&P, Moody’s or Fitch) and has a rating of A1 (S&P), P1 (Moody’s) or F1 (Fitch), and (ii) in money market funds that invest primarily in U.S. Treasury and Agency securities and repurchase agreements secured by the same.
(4)	Includes discount notes with AAA ratings totaling $170.0 million and $303.0 million as of December 31, 2009 and 2008, respectively, issued by the Federal Home Loan Bank System (“FHLB”), Fannie Mae or Freddie Mac. These investments have a remaining weighted average maturity of 61 days as of December 31, 2009 and 2008. As of December 31, 2009, CapitalSource Bank had pledged these notes to the FHLB of San Francisco (“FHLB SF”), together with certain investment securities as outlined in Note 7. “Investments”, as collateral for borrowing capacity. As of December 31, 2009, no portion of the discount notes with AAA ratings totaling $170.0 million were restricted. As of December 31, 2008, $200.0 million of the discount notes with AAA ratings totaling $303.0 million was restricted and held under custody of our prime broker as collateral for various financings under our repurchase agreements and derivatives contracts.

Note 5.   Mortgage-Related Receivables and Related Owner Trust Securitizations

In February 2006, we purchased beneficial interests in SPEs that acquired and securitized pools of adjustable rate, prime residential mortgage loans. These beneficial interests are subordinate to other interests issued by the SPEs that are held by third parties. We determined that the SPEs were variable interest entities designed to create and pass along risks related to the credit performance of the underlying residential mortgage loan portfolio.

We concluded that we were the primary beneficiary of the SPEs as we expected that our subordinated interests would absorb a majority of the expected losses related to these risks. As a result, we consolidated the assets and liabilities of such entities for financial statement purposes. In so doing, we also determined that the SPEs’ interest in the underlying mortgage loans constituted, for accounting purposes, receivables secured by underlying mortgage loans.

We recorded mortgage-related receivables, as well as the principal amount of related debt obligations incurred by the SPEs to fund these receivables, in our audited consolidated balance sheets as of December 31, 2008. The carrying amounts of the assets and liabilities of the SPEs reported in our consolidated balance sheet were $1.8 billion and $1.7 billion, respectively, as of December 31, 2008. We sold all of our beneficial interests on December 15, 2009 and realized a gain of $6.1 million upon the sale, which was included in other (expense) income in our audited consolidated statements of operations. As a result of the sale, we no longer hold variable interests in the SPEs. Consequently, upon the sale of the beneficial interests, we deconsolidated the SPEs.

As of December 31, 2008, the carrying amount of our residential mortgage-related receivables, net, including accrued interest, the allowance for loan losses, and the balance of unamortized purchase discounts, was $1.8 billion. As of December 31, 2008, approximately 95% of mortgage-related receivables were financed with permanent term debt in the amount of $1.7 billion, and was recognized by us through the consolidation of SPEs. This term debt was recorded as a component of term debt in our audited consolidated balance sheets.

The SPEs also held foreclosed assets, representing real estate property acquired in satisfaction of certain of the underlying mortgage loans. As of December 31, 2009, there were no foreclosed assets related to mortgage related receivables due to the sale of the beneficial interests and the deconsolidation of the SPEs. During the years ended December 31, 2008 and 2007, the carrying value of foreclosed assets increased by $4.5 million and $2.8 million,

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

respectively. As of December 31, 2008 and 2007, the carrying values of the foreclosed assets were $7.3 million and $2.8 million, respectively.

The activity in the allowance for loan losses on mortgage-related receivables for the years ended December 31, 2009 and 2008, was as follows:

	Year Ended
	December 31,
	2009			2008
Balance as of beginning of year	$	9,266		$	796
Provision for loan losses		67,121			16,241
Charge offs, net of recoveries		(46,513	)		(7,771	)
Reversal of remaining balance due to disposition		(29,874	)		—
Balance as of end of year	$	—		$	9,266

During the years ended December 31, 2009, 2008 and 2007, we recognized interest income on our mortgage-related receivables of $74.3 million, $94.5 million and $127.3 million, respectively, as a component of interest income on loans in the consolidated statements of operations.

Note 6.   Commercial Lending Assets and Credit Quality

As of December 31, 2009 and 2008, our total commercial loan portfolio had an outstanding balance of $8.9 billion and $10.9 billion, respectively. Included in these amounts were loans held for investment, loans held for sale, and a commercial real estate participation interest (“the “A” Participation Interest”). As of December 31, 2009 and 2008, interest and fee receivables totaled $29.6 million and $42.8 million, respectively.

Also included in loans on our audited consolidated balance sheets are purchased loans, which totaled $2.7 billion and $841.2 million as of December 31, 2009 and 2008, respectively. The accretable discount on purchased loans as of December 31, 2009 and 2008 totaled $61.6 million and $77.5 million, respectively, which is reflected in deferred loan fees and discounts in our audited consolidated balance sheets. During the years ended December 31, 2009 and 2008, we accreted $26.3 million and $19.3 million, respectively, into interest income from purchased loan discounts. For the year ended December 31, 2009, we had $13.3 million of additions to accretable discounts.

Our commercial loan balances, including loans held for sale, by type of loans, as of December 31, 2009 and 2008 were as follows:

	December 31,
	2009				2008
	($ in thousands)
Commercial loans	$	5,052,570	61	%	$	6,118,609	64	%
Real estate		2,047,406	24			1,959,426	21
Real estate — construction		1,221,854	15			1,377,757	15
Total(1)	$	8,321,830	100	%	$	9,455,792	100	%

(1) Excludes unamortized premiums and discounts and the allowance for loan losses. Includes lower of cost or fair value adjustments on loans held for sale.

Commercial Real Estate “A” Participation Interest

As of December 31, 2009, the carrying value of the “A” Participation Interest was $530.6 million, representing our share of a $3.3 billion pool of commercial real estate loans and related assets, net of a remaining purchase discount of $9.5 million.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The activity with respect to the “A” Participation Interest for the years ended December 31, 2009 and 2008 was as follows ($ in thousands):

Balance as of December 31, 2007	$	—
Acquisition of the “A” Participation Interest as of July 25, 2008		1,820,638
Principal payments		(447,804	)
Discount accretion		23,777
Balance as of December 31, 2008		1,396,611
Principal payments		(895,832	)
Discount accretion		29,781
Balance as of December 31, 2009	$	530,560

The “A” Participation Interest is reported at the outstanding principal balance less the associated discount. Interest income on the “A” Participation Interest is accrued as earned and recorded as a component of interest income on loans in our audited consolidated statements of operations. The discount is accreted into interest income over the estimated life of the instrument using the interest method. For the years ended December 31, 2009, and 2008, we recognized $47.5 million and $54.2 million, respectively, in interest income (including accretion) on the “A” Participation Interest.

The “A” Participation Interest is governed by a participation agreement that is structured to minimize our exposure to credit risk. We have pari passu rights in the underlying loans pursuant to which we receive 70% of all borrower principal repayments from the underlying loans and properties. In addition, under the participation agreement, iStar FM Loans, LLC, the holder of the “B” Participation Interest, assumed all future funding obligations with respect to the loans underlying the participation agreement. Accordingly, although the holder of the “B” Participation Interest continues to increase its percentage of the overall funding of the underlying loans, we continue to receive 70% of all borrower repayments. Thus, the structure of the “A” Participation Interest accelerates the paydown of the “A” Participation Interest, relative to the paydown of the overall underlying portfolio of assets. This accelerated paydown serves to reduce our exposure to credit risk. Additionally, the “A” Participation Interest is structured so that we do not have loan and property-level risk. We receive payments based on the cash flows of the entire underlying pool of assets and not any one asset in particular. Therefore, we will incur a loss only if the portfolio, as a whole, fails to repay at least to the extent of the “A” Participation Interest balance.

As of December 31, 2009 and 2008, no allowance for loan losses was deemed necessary with respect to the “A” Participation Interest.

Loans Held for Sale

Loans held for sale are recorded at the lower of cost or fair value in our audited consolidated balance sheets. During the years ended December 31, 2009, 2008 and 2007, we recognized net (losses)/gains on the sale of loans of $7.9 million, $2.8 million, and $9.1 million, respectively. As of December 31, 2009 and 2008, loans held for sale with an outstanding balance of $0.7 million and $8.5 million, respectively, were classified as non-accrual loans.

During the year ended December 31, 2009, loans held for investment with a carrying amount of $130.7 million were transferred to loans held for sale based on management’s intent with respect to the loans, resulting in $33.9 million losses for the year due to valuation adjustments. During the year ended December 31, 2009, we transferred $6.9 million of loans designated as held for sale back to the loan held for investment portfolio based upon our intent to retain the loans for investment. No loans were transferred between loans held for sale and loans held for investment during the year ended December 31, 2008.

Loans Held for Investment

Loans held for investment are recorded at the principal amount outstanding, net of deferred loan costs or fees and any discounts received or premiums paid on purchased loans. We maintain an allowance for loan losses for

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

loans held for investment, which is calculated based on management’s estimate of incurred loan losses inherent in our loan portfolio as of the balance sheet date. Activity in the allowance for loan losses related to our loans held for investment for the years ended December 31, 2009, 2008, and 2007 was as follows:

	Year Ended December 31,
	2009			2008			2007
	($ in thousands)
Balance as of beginning of year	$	423,844		$	138,930		$	120,575
Provision for loan losses		775,252			576,805			77,576
Charge offs, net of recoveries		(578,493	)		(270,900	)		(57,489	)
Transfers to held for sale		(33,907	)		(20,991	)		(1,732	)
Balance as of end of year	$	586,696		$	423,844		$	138,930

As of December 31, 2009 and 2008, the principal balances of contractually delinquent accruing loans and non-accrual loans were as follows:

	December 31,
	2009		2008
	($ in thousands)
Accruing loans 30-89 days contractually delinquent	$	95,268	$	260,659
Accruing loans 90 or more days contractually delinquent		66,993		31,564
Non-accrual loans		1,067,415		408,521

Of our non-accrual loans, $182.5 million were 30-89 days delinquent and $387.8 million were over 90 days delinquent as of December 31, 2009. Of our non-accrual loans, $33.8 million were 30-89 days delinquent and $89.6 million were over 90 days delinquent as of December 31, 2008.

We consider a loan to be impaired when, based on current information, we determine that it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement. In this regard, impaired loans include loans where we expect to encounter a significant delay in the collection of, and/or shortfall in the amount of contractual payments due to us. As of December 31, 2009 and 2008, we had $597.4 million and $261.7 million, respectively, of impaired commercial loans with allocated reserves of $116.5 million and $87.4 million, respectively. As of December 31, 2009 and 2008, we had $517.1 million and $324.0 million, respectively, of commercial loans that we assessed as impaired and for which we did not record any allocated reserves based upon our belief that it is probable that we ultimately will collect all principal and interest amounts due.

The average balances of impaired commercial loans during the years ended December 31, 2009, 2008 and 2007 were $927.4 million, $455.7 million and $271.3 million, respectively. The total amounts of interest income that were recognized on impaired commercial loans during the years ended December 31, 2009, 2008 and 2007, were $29.0 million, $29.0 million and $19.7 million, respectively. If the non-accrual commercial loans had performed in accordance with their original terms, interest income would have been increased by $127.0 million, $50.3 million and $35.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.

During the years ended December 31, 2009 and 2008, commercial loans with an aggregate carrying value of $921.3 million and $589.1 million, respectively, as of their respective restructuring dates, were involved in troubled debt restructurings. As of December 31, 2009 and December 31, 2008, the balances of loans that had been restructured in troubled debt restructurings were $426.4 million and $381.4 million, respectively. Additionally, loans involved in these troubled debt restructurings are assessed as impaired, generally for a period of at least one year following the restructuring. A loan that has been involved in a troubled debt restructuring might no longer be assessed as impaired one year subsequent to the restructuring, assuming the loan performs under the restructured terms and the restructured terms were at market. The allocated reserves for loans that were involved in troubled debt restructurings were $25.1 million and $48.0 million, as of December 31, 2009 and December 31, 2008, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreclosed Assets

Real Estate Owned

When we foreclose on real estate assets that collateralized a loan, we record the assets at their estimated fair value less costs to sell at the time of foreclosure. Upon foreclosure, we evaluate the asset’s fair value as compared to the loan’s carrying amount and record a charge off when the carrying amount of the loan exceeds fair value less costs to sell. Subsequent valuation adjustments are recorded as a valuation allowance which are recorded as a component of other (expense) income, net in our audited consolidated statements of operations. We estimate fair value at the asset’s liquidation value, based on market conditions.

As of December 31, 2009 and 2008, we had $101.4 million and $84.4 million, respectively, of REO, which was recorded in other assets in our audited consolidated balance sheets. Activity in REO for the year ended December 31, 2009 and 2008 was as follows:

	Year Ended December 31,
	2009			2008
	($ in thousands)
Balance as of beginning of year	$	84,437		$	19,741
Transfers from loans held for investment		102,974			88,657
Fair value adjustments		(32,033	)		(16,677	)
Transfers to property held for investment		(11,259	)		—
Real estate sold		(42,718	)		(7,284	)
Balance as of end of year	$	101,401		$	84,437

During the years ended December 31, 2009 and 2008, we recognized a loss of $15.0 million and a gain of $0.5 million, respectively, on the sales of REO included as a component of other income (expense) in the consolidated statements of operations. There were no such sales in 2007.

Other Foreclosed Assets

When we foreclose on a borrower whose underlying collateral consists of consumer loans, we record the acquired loans at the estimated fair value at the time of foreclosure. At the time of foreclosure, we record charge offs, which totaled $33.9 million on these assets for the year ended December 31, 2009. As of December 31, 2009, we had $127.2 million of loans acquired through foreclosure, net of a valuation allowance of $2.8 million, which were recorded in other assets in our audited consolidated balance sheets. As of December 31, 2008, there were no loans that had been acquired as a result of foreclosure.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 7.   Investments

Investment Securities, Available-for-Sale

As of December 31, 2009 and 2008, our investment securities, available-for-sale were as follows:

	December 31,
	2009									2008
			Gross		Gross							Gross		Gross
			Unrealized		Unrealized			Fair				Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
								($ in thousands)
Agency discount notes	$	49,988	$	8	$	—		$	49,996	$	149,383	$	562	$	—		$	149,945
Agency callable notes		252,175		143		(1,788	)		250,530		312,829		2,249		—			315,078
Agency debt		24,430		315		(273	)		24,472		30,697		—		(383	)		30,314
Agency MBS		412,853		5,999		(462	)		418,390		141,213		1,023		—			142,236
Non-agency MBS		152,913		1,031		(669	)		153,275		325		52		—			377
Equity securities		51,074		2,246		(336	)		52,984		514		—		(301	)		213
Corporate debt		12,349		877		(3,608	)		9,618		39,100		147		(219	)		39,028
Collateralized loan obligation		1,018		308		—			1,326		2,360		—		—			2,360
Total	$	956,800	$	10,927	$	(7,136	)	$	960,591	$	676,421	$	4,033	$	(903	)	$	679,551

Included in investment securities, available-for-sale, were discount notes issued by Fannie Mae, Freddie Mac and the FHLB (“Agency discount notes”), callable notes issued by Fannie Mae, Freddie Mac, the FHLB and Federal Farm Credit Bank (“Agency callable notes”), bonds issued by the FHLB (“Agency debt”), commercial and residential mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae (“Agency MBS”), commercial and residential mortgage-backed securities issued by non-government agencies (“Non-agency MBS”), corporate debt, an investment in a subordinated note of a collateralized loan obligation and equity securities. CapitalSource Bank pledged investment securities, available-for-sale with an estimated fair value of $786.4 million and $18.1 million, respectively, to the FHLB SF and FRB as sources of borrowing capacity as of December 31, 2009.

During the years ended December 31, 2009, 2008 and 2007, we sold investment securities, available-for-sale for $45.6 million, $82.3 million and $7.1 million, respectively, recognizing net pre-tax gains of $0.5 million, $0.2 million and $5.2 million, respectively.

During the year ended December 31, 2009, we recorded no other than temporary impairment on our Non-agency MBS. During the years ended December 31, 2008 and 2007, we recorded $4.1 million and $30.4 million, respectively, as a component of gain (loss) on residential mortgage investment portfolio in the consolidated statements of operations. Additionally, we recorded $11.8 million and $17.9 million other than temporary impairment during the years ended December 31, 2009 and 2008 related to corporate debt, included as a component of loss on investments, net in the consolidated statements of operations. We did not record any other than temporary declines in the fair value of corporate debt during the year ended December 31, 2007. During the years ended December 31, 2009, 2008 and 2007, we recorded other than temporary impairments in the fair value of the collateralized loan obligation of $1.8 million, $3.0 million and $0.7 million, respectively, included as a component of loss on investments, net in the consolidated statements of operations.

During the years ended December 31, 2009 and 2008, we recognized $5.0 million and $7.5 million, respectively, of net unrealized after-tax gains, related to our available-for-sale investment securities, included as a component of accumulated other comprehensive income, net in our audited consolidated balance sheets.

136

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2009 and 2008, the gross unrealized losses and fair value of investment securities, available-for-sale, that were in an unrealized loss position, were as follows:

	Less Than 12 Months					12 Months or More					Total
	Gross					Gross					Gross
	Unrealized					Unrealized					Unrealized
	Losses			Fair Value		Losses			Fair Value		Losses			Fair Value
	($ in thousands)
As of December 31, 2009
Agency callable notes	$	(1,788	)	$	209,397	$	—		$	—	$	(1,788	)	$	209,397
Agency debt		—			—		(273	)		15,167		(273	)		15,167
Agency MBS		(462	)		49,118		—			—		(462	)		49,118
Non-agency MBS		(669	)		48,868		—			—		(669	)		48,868
Equity security		—			—		(336	)		178		(336	)		178
Corporate debt		(3,608	)		—		—			—		(3,608	)		—
Total	$	(6,527	)	$	307,383	$	(609	)	$	15,345	$	(7,136	)	$	322,728
As of December 31, 2008
Agency debt	$	(383	)	$	30,314	$	—		$	—	$	(383	)	$	30,314
Equity security		—			—		(301	)		213		(301	)		213
Corporate debt		(219	)		2,781		—			—		(219	)		2,781
Total	$	(602	)	$	33,095	$	(301	)	$	213	$	(903	)	$	33,308

We do not believe that any unrealized losses greater than twelve months in our available-for-sale portfolio as of December 31, 2009 and 2008 represent an other than temporary impairment. These losses are related to agency debt securities and an equity security and are attributable to fluctuations in their market price due to current market conditions.

Investment Securities, Held-to-Maturity

As of December 31, 2009 and 2008, the amortized cost of investment securities, held-to-maturity, was $242.1 million and $14.4 million, respectively and consisted of AAA-rated commercial mortgage-backed securities. In addition, CapitalSource Bank pledged investment securities, held-to-maturity, with an amortized cost of $68.4 million and $173.7 million, respectively, and estimated fair value of $70.3 million and $191.8 million, respectively, to the FHLB SF and FRB as sources of borrowing capacity as of December 31, 2009.

Contractual Maturities

As of December 31, 2009, the contractual maturities of our investment securities, available-for-sale, and investment securities, held-to-maturity, were as follows:

	Investment Securities,				Investment Securities,
	Available-for-Sale				Held-to-Maturity
			Estimated				Estimated
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	($ in thousands)
Due in one year or less	$	75,035	$	75,007	$	27,221	$	27,291
Due after one year through five years		182,364		182,178		214,857		234,890
Due after five years through ten years		160,256		156,924		—		—
Due after ten years(1)(2)		539,145		546,482		—		—
Total	$	956,800	$	960,591	$	242,078	$	262,181

(1)	Included in this category are Agency and Non-agency MBS with weighted-average expected maturities of approximately 3.3 years and 2.4 years, respectively, based on interest rates and expected prepayment speeds as of December 31, 2009.
(2)	Includes securities with no stated maturity.

137

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other Investments

As of December 31, 2009 and 2008, our other investments were as follows:

	December 31,
	2009		2008
	($ in thousands)
Investments carried at cost	$	53,205	$	61,279
Investments carried at fair value		1,392		4,661
Investments accounted for under the equity method		41,920		61,806
Total	$	96,517	$	127,746

During the years ended December 31, 2009, 2008 and 2007, we sold other investments for $23.3 million, $14.3 million and $31.4 million, respectively, recognizing a net pre-tax loss of $2.3 million, a net pre-tax gain of $5.9 million and a net pre-tax gain of $26.1 million, respectively, included as a component of loss on investments, net in the consolidated statements of operations. During the years ended December 31, 2009, 2008 and 2007, we recorded other than temporary impairments of $13.2 million, $60.0 million and $8.5 million, respectively, relating to our investments carried at cost, included as a component of loss on investments, net in the consolidated statements of operations.

Residential Mortgage-Backed Securities

Prior to the second quarter of 2009, we invested in residential mortgage-backed securities that were issued and guaranteed by Fannie Mae or Freddie Mac (“Agency RMBS”), which were included in mortgage-backed securities pledged, trading in our audited consolidated balance sheets as of December 31, 2008. All our Agency RMBS were collateralized by adjustable rate residential mortgage loans, including hybrid adjustable rate mortgage loans.

During the first quarter of 2009, we sold all of our Agency RMBS and unwound all of the related derivatives remaining in our residential mortgage investment portfolio, realizing a gain of $15.3 million included as a component of (loss) gain on residential mortgage investment portfolio in the consolidated statements of operations.

Note 8.   Guarantor Information

The following represents the supplemental consolidating condensed financial information as of December 31 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007 of (i) CapitalSource Inc., which as discussed in Note 12, Borrowings, is the issuer of our 2014 Senior Secured Notes, as defined in Note 12, Borrowings, as well as our Senior Debentures and Subordinated Debentures (together, the “Debentures”), (ii) CapitalSource Finance LLC (“CapitalSource Finance”), which is a guarantor of our 2014 Senior Secured Notes and the Debentures, and (iii) our subsidiaries that are not guarantors of the 2014 Senior Secured Notes or the Debentures. CapitalSource Finance, a wholly owned indirect subsidiary of CapitalSource Inc., has guaranteed our 2014 Senior Secured Notes and the Senior Debentures, fully and unconditionally, on a senior basis and has guaranteed the Subordinated Debentures, fully and unconditionally, on a senior subordinate basis. Separate audited consolidated financial statements of the guarantor are not presented, as we have determined that they would not be material to investors.

138

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Balance Sheet

December 31, 2009

				CapitalSource Finance LLC
				Combined			Combined			Other
				Non-Guarantor			Guarantor			Non-Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
ASSETS
Cash and cash equivalents	$	99,103		$	760,343		$	265,977		$	47,362		$	—		$	1,172,785
Restricted cash		—			72,754			58,250			41,761			—			172,765
Investment securities:
Available-for-sale, at fair value		—			902,427			663			57,501			—			960,591
Held-to-maturity, at amortized cost		—			242,078			—			—			—			242,078
Total investment securities		—			1,144,505			663			57,501			—			1,202,669
Commercial real estate “A” participation interest, net		—			530,560			—			—			—			530,560
Loans:
Loans held for sale		—			—			670			—			—			670
Loans held for investment		—			5,323,957			286,709			2,710,500			(6	)		8,321,160
Less deferred loan fees and discounts		—			(77,853	)		(10,428	)		(38,154	)		(19,894	)		(146,329	)
Less allowance for loan losses		—			(285,863	)		(76,800	)		(224,033	)		—			(586,696	)
Loans held for investment, net		—			4,960,241			199,481			2,448,313			(19,900	)		7,588,135
Total loans		—			4,960,241			200,151			2,448,313			(19,900	)		7,588,805
Interest receivable		—			14,143			15,850			3,956			—			33,949
Direct real estate investments, net		—			—			—			336,007			—			336,007
Investment in subsidiaries		2,716,099			10,702			1,522,375			1,347,149			(5,596,325	)		—
Intercompany note receivable		375,000			9			133,674			319,249			(827,932	)		—
Other investments		—			66,068			14,400			16,049			—			96,517
Goodwill		—			173,135			—			—			—			173,135
Other assets		63,214			221,990			108,071			417,239			(131,305	)		679,209
Assets of discontinued operations, held for sale		—			—			—			260,541			—			260,541
Total assets	$	3,253,416		$	7,954,450		$	2,319,411		$	5,295,127		$	(6,575,462	)	$	12,246,942
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	—		$	4,483,879		$	—		$	—		$	—		$	4,483,879
Credit facilities		193,637			166,107			56,707			126,330			—			542,781
Term debt		282,938			1,539,915			—			1,133,683			—			2,956,536
Other borrowings		561,347			200,000			442,727			262,760			—			1,466,834
Other liabilities		32,328			129,604			134,460			240,270			(146,158	)		390,504
Intercompany note payable		—			46,850			319,249			447,730			(813,829	)		—
Liabilities of discontinued operations		—			—			—			223,149			—			223,149
Total liabilities		1,070,250			6,566,355			953,143			2,433,922			(959,987	)		10,063,683
Shareholders’ equity:
Common stock		3,230			921,000			—			—			(921,000	)		3,230
Additional paid-in capital		3,909,366			(224,375	)		705,847			3,082,775			(3,564,249	)		3,909,364
(Accumulated deficit) retained earnings		(1,748,791	)		676,881			641,102			(235,374	)		(1,082,640	)		(1,748,822	)
Accumulated other comprehensive income, net		19,361			14,589			19,319			13,680			(47,588	)		19,361
Total CapitalSource Inc. shareholders’ equity		2,183,166			1,388,095			1,366,268			2,861,081			(5,615,477	)		2,183,133
Noncontrolling interests		—			—			—			124			2			126
Total shareholders’ equity		2,183,166			1,388,095			1,366,268			2,861,205			(5,615,475	)		2,183,259
Total liabilities and shareholders’ equity	$	3,253,416		$	7,954,450		$	2,319,411		$	5,295,127		$	(6,575,462	)	$	12,246,942

139

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Balance Sheet

December 31, 2008

				CapitalSource Finance LLC
				Combined			Combined			Other
				Non-Guarantor			Guarantor			Non-Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
ASSETS
Cash and cash equivalents	$	11		$	1,230,254		$	38,866		$	66,785		$	—		$	1,335,916
Restricted cash		—			35,695			81,337			286,987			—			404,019
Investment securities:
Available-for-sale, at fair value		—			646,675			1,236			31,640			—			679,551
Held-to-maturity, at amortized cost		—			14,389			—			—			—			14,389
Total investment securities		—			661,064			1,236			31,640			—			693,940
Mortgage-backed securities pledged, trading		—			—			—			1,489,291			—			1,489,291
Mortgage-related receivables, net		—			—			—			1,801,535			—			1,801,535
Commercial real estate “A” participation interest, net		—			1,396,611			—			—			—			1,396,611
Loans:
Loans held for sale		—			1,561			—			6,982			—			8,543
Loans held for investment		—			6,071,675			398,509			2,977,071			(6	)		9,447,249
Less deferred loan fees and discounts		—			(85,245	)		(32,950	)		(45,052	)		(11,070	)		(174,317	)
Less allowance for loan losses		—			(55,600	)		(295,002	)		(73,242	)		—			(423,844	)
Loans held for investment, net		—			5,930,830			70,557			2,858,777			(11,076	)		8,849,088
Total loans		—			5,932,391			70,557			2,865,759			(11,076	)		8,857,631
Interest receivable		—			24,093			2,178			40,747			—			67,018
Direct real estate investments, net		—			—			—			346,167			—			346,167
Investment in subsidiaries		4,397,772			—			1,657,532			1,602,354			(7,657,658	)		—
Intercompany note receivable		75,000			9			185,765			264,000			(524,774	)		—
Other investments		—			86,239			21,098			20,409			—			127,746
Goodwill		—			173,135			—			—			—			173,135
Other assets		39,169			102,213			253,270			828,640			(183,135	)		1,040,157
Assests of discontinued operations, held-for-sale		—			—			—			686,466			—			686,466
Total assets	$	4,511,952		$	9,641,704		$	2,311,839		$	10,330,780		$	(8,376,643	)	$	18,419,632
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	—		$	5,043,695		$	—		$	—		$	—		$	5,043,695
Repurchase agreements		—			—			—			1,595,750			—			1,595,750
Credit facilities		890,000			456,999			82,462			15,601			—			1,445,062
Term debt		—			2,238,382			—			3,100,074			—			5,338,456
Other borrowings		729,474			—			441,899			321,870			—			1,493,243
Other liabilities		62,181			198,272			52,552			414,053			(184,525	)		542,533
Intercompany note payable		—			46,850			122,917			355,007			(524,774	)		—
Liabilities of discontinued operations		—			—			—			130,173						130,173
Total liabilities		1,681,655			7,984,198			699,830			5,932,528			(709,299	)		15,588,912
Shareholders’ equity:
Common stock		2,828			921,000			—			—			(921,000	)		2,828
Additional paid-in capital		3,686,965			146,019			699,806			3,926,123			(4,772,148	)		3,686,765
(Accumulated deficit) retained earnings		(868,394	)		587,837			908,731			468,063			(1,964,662	)		(868,425	)
Accumulated other comprehensive income, net		8,898			2,650			3,472			3,586			(9,511	)		9,095
Total CapitalSource Inc. shareholders’ equity		2,830,297			1,657,506			1,612,009			4,397,772			(7,667,321	)		2,830,263
Noncontrolling interests		—			—			—			480			(23	)		457
Total shareholders’ equity		2,830,297			1,657,506			1,612,009			4,398,252			(7,667,344	)		2,830,720
Total liabilities and shareholders’ equity	$	4,511,952		$	9,641,704		$	2,311,839		$	10,330,780		$	(8,376,643	)	$	18,419,632

140

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Operations

Year Ended December 31, 2009

				CapitalSource Finance LLC
				Combined			Combined			Other
				Non-Guarantor			Guarantor			Non-Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
				($ in thousands)
Net investment income:
Interest income:
Loans	$	19,326		$	481,569		$	55,453		$	273,442		$	(32,814	)	$	796,976
Investment securities		—			46,868			368			13,723			—			60,959
Other		—			4,390			110			151			—			4,651
Total interest income		19,326			532,827			55,931			287,316			(32,814	)		862,586
Fee income		—			7,078			10,375			5,431			—			22,884
Total interest and fee income		19,326			539,905			66,306			292,747			(32,814	)		885,470
Operating lease income		—			—			—			33,985			—			33,985
Total investment income		19,326			539,905			66,306			326,732			(32,814	)		919,455
Interest expense:
Deposits		—			109,430			—			—			—			109,430
Borrowings		121,537			49,816			32,354			150,974			(26,398	)		328,283
Total interest expense		121,537			159,246			32,354			150,974			(26,398	)		437,713
Net investment (loss) income		(102,211	)		380,659			33,952			175,758			(6,416	)		481,742
Provision for loan losses		—			277,570			140,640			427,776			—			845,986
Net investment (loss) income after provision for loan losses		(102,211	)		103,089			(106,688	)		(252,018	)		(6,416	)		(364,244	)
Operating expenses:
Compensation and benefits		1,321			51,917			86,369			—			—			139,607
Depreciation of direct real estate investments		—			—			—			10,160			—			10,160
Professional fees		7,762			3,450			38,016			7,844			—			57,072
Other administrative expenses		4,163			54,503			57,479			49,492			(84,608	)		81,029
Total operating expenses		13,246			109,870			181,864			67,496			(84,608	)		287,868
Other (expense) income:
Loss on investments, net		—			(10,452	)		(2,778	)		(17,494	)		—			(30,724	)
Loss on derivatives		—			(9,669	)		(1,302	)		(732	)		(1,352	)		(13,055	)
Loss on residential mortgage investment portfolio		—			—			—			15,308			—			15,308
(Loss) gain on debt extinguishment		(57,128	)		1,617			—			14,997			—			(40,514	)
Other income (expense), net		33			28,275			50,454			(29,592	)		(86,070	)		(36,900	)
Earnings in subsidiaries		(706,908	)		(794	)		(16,272	)		(264,346	)		988,320			—
Intercompany		—			—			3,558			(3,558	)		—			—
Total other (expense) income		(764,003	)		8,977			33,660			(285,417	)		900,898			(105,885	)
Net (loss) income from continuing operations before income taxes		(879,460	)		2,196			(254,892	)		(604,931	)		979,090			(757,997	)
Income tax (benefit) expense		(10,441	)		(8,483	)		224			155,014			—			136,314
Net (loss) income from continuing operations		(869,019	)		10,679			(255,116	)		(759,945	)		979,090			(894,311	)
Net income from discontinued operations, net of taxes		—			—			—			33,335			—			33,335
Loss from sale of discontinued operations, net of taxes		—			—			—			(8,071	)		—			(8,071	)
Net (loss) income		(869,019	)		10,679			(255,116	)		(734,681	)		979,090			(869,047	)
Net loss attributable to noncontrolling interests		—			—			—			(28	)		—			(28	)
Net (loss) income attributable to CapitalSource Inc.	$	(869,019	)	$	10,679		$	(255,116	)	$	(734,653	)	$	979,090		$	(869,019	)

141

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Operations

Year Ended December 31, 2008

				CapitalSource Finance LLC
				Combined			Combined			Other
				Non-Guarantor			Guarantor			Non-Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Net investment income:
Interest income:
Loans	$	4,335		$	507,936		$	67,899		$	466,345		$	(8,954	)	$	1,037,561
Investment securities		—			8,406			828			128,868			—			138,102
Other		—			12,029			2,879			8,958			—			23,866
Total interest income		4,335			528,371			71,606			604,171			(8,954	)		1,199,529
Fee income		—			6,751			20,336			6,012			—			33,099
Total interest and fee income		4,335			535,122			91,942			610,183			(8,954	)		1,232,628
Operating lease income		—			—			—			31,896			—			31,896
Total investment income		4,335			535,122			91,942			642,079			(8,954	)		1,264,524
Interest expense:
Deposits		—			76,245			—			—			—			76,245
Borrowings		95,253			142,132			47,456			345,646			(13,375	)		617,112
Total interest expense		95,253			218,377			47,456			345,646			(13,375	)		693,357
Net investment (loss) income		(90,918	)		316,745			44,486			296,433			4,421			571,167
Provision for loan losses		—			55,600			479,281			58,165			—			593,046
Net investment (loss) income after provision for loan losses		(90,918	)		261,145			(434,795	)		238,268			4,421			(21,879	)
Operating expenses:
Compensation and benefits		1,061			29,446			112,890			4			—			143,401
Depreciation of direct real estate investments		—			—			—			10,110			—			10,110
Professional fees		3,577			5,596			34,668			10,728			(1,991	)		52,578
Other administrative expenses		38,175			24,765			48,480			4,740			(57,213	)		58,947
Total operating expenses		42,813			59,807			196,038			25,582			(59,204	)		265,036
Other (expense) income:
Loss on investments, net		—			(10,492	)		(9,147	)		(53,716	)		(214	)		(73,569	)
(Loss) gain on derivatives		—			(7,449	)		36,829			(66,179	)		(4,283	)		(41,082	)
Loss on residential mortgage investment portfolio		—			—			—			(102,779	)		—			(102,779	)
(Loss) gain on debt extinguishment		(28,296	)		4,160			29,854			53,138			—			58,856
Other income (expense), net		54			8,847			61,759			(5,998	)		(69,847	)		(5,185	)
Earnings in subsidiaries		(47,939	)		—			96,776			(288,141	)		239,304			—
Intercompany		—			(83,213	)		137,126			(53,913	)		—			—
Total other (expense) income		(76,181	)		(88,147	)		353,197			(517,588	)		164,960			(163,759	)
Net (loss) income from continuing operations before income taxes		(209,912	)		113,191			(277,636	)		(304,902	)		228,585			(450,674	)
Income tax expense (benefit)		9,977			16,417			—			(216,977	)		—			(190,583	)
Net (loss) income from continuing operations		(219,889	)		96,774			(277,636	)		(87,925	)		228,585			(260,091	)
Net income from discontinued operations, net of taxes		—			—			—			41,310			—			41,310
Gain from sale of discontinued operations, net of taxes		—			—			—			104			—			104
Net (loss) income		(219,889	)		96,774			(277,636	)		(46,511	)		228,585			(218,677	)
Net income attributable to noncontrolling interests		—			4			—			1,428			(6	)		1,426
Net (loss) income attributable to CapitalSource Inc.	$	(219,889	)	$	96,770		$	(277,636	)	$	(47,939	)	$	228,591		$	(220,103	)

142

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Operations

Year Ended December 31, 2007

				CapitalSource Finance LLC
				Combined			Combined			Other
				Non-Guarantor			Guarantor			Non-Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Net investment income:
Interest income:
Loans	$	12,203		$	497,098		$	110,702		$	523,895		$	(15,807	)	$	1,128,091
Investment securities		—			207			80			216,875			—			217,162
Other		2			5,587			8,487			7,132			—			21,208
Total interest income		12,205			502,892			119,269			747,902			(15,807	)		1,366,461
Fee income		—			41,123			16,219			6,004			—			63,346
Total interest and fee income		12,205			544,015			135,488			753,906			(15,807	)		1,429,807
Operating lease income		—			—			—			33,444			—			33,444
Total investment income		12,205			544,015			135,488			787,350			(15,807	)		1,463,251
Interest expense:
Deposits		—			—			—			—			—			—
Borrowings		72,050			236,533			46,171			520,197			(15,771	)		859,180
Total interest expense		72,050			236,533			46,171			520,197			(15,771	)		859,180
Net investment (loss) income		(59,845	)		307,482			89,317			267,153			(36	)		604,071
Provision for loan losses		—			—			64,657			13,984			—			78,641
Net investment (loss) income after provision for loan losses		(59,845	)		307,482			24,660			253,169			(36	)		525,430
Operating expenses:
Compensation and benefits		1,194			20,781			135,676			104			—			157,755
Depreciation of direct real estate investments		—			—			—			10,379			—			10,379
Professional fees		2,905			2,890			17,546			6,034			—			29,375
Other administrative expenses		48,074			3,429			39,725			2,553			(46,288	)		47,493
Total operating expenses		52,173			27,100			192,947			19,070			(46,288	)		245,002
Other income (expense):
Gain (loss) on investments, net		—			22,028			(2,192	)		434			—			20,270
Gain (loss) on derivatives		—			544			8,534			(55,228	)		—			(46,150	)
Loss on residential mortgage investment portfolio		—			—			—			(75,164	)		—			(75,164	)
Gain on debt extinguishment		—			—			—			678			—			678
Other income, net		—			23,730			57,655			904			(45,744	)		36,545
Earnings in subsidiaries		271,307			—			297,473			225,698			(794,478	)		—
Intercompany		—			(29,195	)		32,007			(2,812	)		—			—
Total other income (expense)		271,307			17,107			393,477			94,510			(840,222	)		(63,821	)
Net income from continuing operations before income taxes		159,289			297,489			225,190			328,609			(793,970	)		216,607
Income tax expense		—			—			—			87,563			—			87,563
Net income from continuing operations		159,289			297,489			225,190			241,046			(793,970	)		129,044
Net income from discontinued operations, net of taxes		—			—			—			35,027			—			35,027
Gain from sale of discontinued operations, net of taxes		—			—			—			156			—			156
Net income		159,289			297,489			225,190			276,229			(793,970	)		164,227
Net income attributable to noncontrolling interests		—			26			—			4,922			(10	)		4,938
Net income attributable to CapitalSource Inc.	$	159,289		$	297,463		$	225,190		$	271,307		$	(793,960	)	$	159,289

143

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Cash Flows

For the Year Ended December 31, 2009

				CapitalSource Finance LLC
				Combined Non-			Combined			Other Non-
				Guarantor			Guarantor			Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Operating activities:
Net (loss) income	$	(869,019	)	$	10,679		$	(255,116	)	$	(734,681	)	$	979,090		$	(869,047	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Stock option expense		—			1,103			4,795			—			—			5,898
Restricted stock expense		—			3,491			21,506			—			—			24,997
Loss (gain) loss on extinguishment of debt		57,128			(1,617	)		—			(14,901	)		—			40,610
Amortization of deferred loan fees and discounts		—			(17,244	)		(34,478	)		(25,812	)		—			(77,534	)
Paid-in-kind interest on loans		—			(13,838	)		358			804			—			(12,676	)
Provision for unfunded commitments		—			278,042			140,640			427,304			—			845,986
Provision for loan losses		—			3,704			—			—			—			3,704
Amortization of deferred financing fees and discounts		32,214			14,926			418			15,980			—			63,538
Depreciation and amortization		—			(9,107	)		3,691			37,117			—			31,701
Provision (benefit) for deferred income taxes		6,879			(21,924	)		7			82,435			—			67,397
Non-cash loss on investments, net		—			18,825			2,847			10,093			—			31,765
Non-cash loss on foreclosed assets and other property and equipment disposals		—			4,391			4,637			37,790			—			46,818
Unrealized loss on derivatives and foreign currencies, net		—			7,459			17			9,245			—			16,721
Unrealized gain on residential mortgage investment portfolio, net		—			—			—			(66,676	)		—			(66,676	)
Net decrease in mortgage-backed securities pledged, trading		—			—			—			1,485,144			—			1,485,144
Accretion of discount on commercial real estate “A” participation interest		—			(29,781	)		—			—			—			(29,781	)
Decrease (increase) in interest receivable		—			10,068			(5,501	)		30,818			—			35,385
Decrease in loans held for sale, net		—			3,606			17,330			—			—			20,936
(Increase) decrease in intercompany note receivable		(300,000	)		—			52,091			(55,249	)		303,158			—
(Increase) decrease in other assets		(18,072	)		(118,624	)		141,378			505,731			(51,830	)		458,583
(Decrease) increase in other liabilities		(30,886	)		(93,649	)		81,849			(208,864	)		38,367			(213,183	)
Net transfers with subsidiaries		1,722,522			(304,190	)		127,430			(557,207	)		(988,555	)		—
Cash provided by (used in) operating activities, net of impact of acquisitions		600,766			(253,680	)		303,899			979,071			280,230			1,910,286
Investing activities:
(Increase) decrease in restricted cash		—			(37,059	)		23,087			251,113			—			237,141
Decrease in mortgage-related receivables, net		—			—			—			1,754,555			—			1,754,555
Decrease in commercial real estate “A” participation interest		—			895,832			—			—			—			895,832
Decrease (increase) in loans, net		—			741,435			(261,577	)		(66,237	)		8,825			422,446
Cash received for real estate		—			—			—			292,837			—			292,837
Acquisition of marketable securities, available-for-sale, net		—			(241,018	)		—			—			—			(241,018	)
Acquisition of marketable securities, held-to-maturity, net		—			(213,048	)		—			—			—			(213,048	)
Reductions of other investments, net		—			5,055			2,835			11,722			—			19,612
(Acquisition) disposal of property and equipment, net		—			(12,656	)		(7,867	)		1,986			—			(18,537	)
Cash provided by (used in) investing activities		—			1,138,541			(243,522	)		2,245,976			8,825			3,149,820
Financing activities:
Payment of deferred financing fees		(32,556	)		(641	)		177			(12,553	)		—			(45,573	)
Deposits accepted, net of repayments		—			(560,497	)		—			—			—			(560,497	)
Increase in intercompany note payable		—			—			196,332			92,723			(289,055	)		—
Repayments under repurchase agreements, net		—			—			—			(1,595,750	)		—			(1,595,750	)
(Repayments of) borrowings on credit facilities, net		(696,363	)		(294,946	)		(29,701	)		110,729			—			(910,281	)
Borrowings of term debt		281,898			6,000			—			38,551			—			326,449
Repayments of term debt		—			(704,688	)		—			(1,994,230	)		—			(2,698,918	)
(Repayments of) borrowings under other borrowings		(118,503	)		200,000			(74	)		117,648			—			199,071
Proceeds from issuance of common stock, net of offering costs		77,105			—			—			—			—			77,105
Repurchase of common stock		(800	)		—			—			—			—			(800	)
Payment of dividends		(12,455	)		—			—			—			—			(12,455	)
Cash (used in) provided by financing activities		(501,674	)		(1,354,772	)		166,734			(3,242,882	)		(289,055	)		(5,221,649	)
Increase (decrease) in cash and cash equivalents		99,092			(469,911	)		227,111			(17,835	)		—			(161,543	)
Cash and cash equivalents as of beginning of year		11			1,230,254			38,866			69,432			—			1,338,563
Cash and cash equivalents as of end of year	$	99,103		$	760,343		$	265,977		$	51,597		$	—		$	1,177,020

144

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Cash Flows

Year Ended December 31, 2008

				CapitalSource Finance LLC
				Combined			Combined			Other
				Non-Guarantor			Guarantor			Non-Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Operating activities:
Net (loss) income	$	(219,889	)	$	96,774		$	(277,636	)	$	(46,511	)	$	228,585		$	(218,677	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Stock option expense		—			53			966			—			—			1,019
Restricted stock expense		—			3,385			39,190			—			—			42,575
Loss (gain) loss on extinguishment of debt		28,296			(4,160	)		(29,854	)		(53,138	)		—			(58,856	)
Amortization of deferred loan fees and discounts		—			(38,544	)		(33,738	)		(18,685	)		—			(90,967	)
Paid-in-kind interest on loans		—			7,887			5,276			2,689			—			15,852
Provision for loan losses		—			55,600			479,281			58,165			—			593,046
Amortization of deferred financing fees and discounts		55,216			28,059			2,600			32,265			—			118,140
Depreciation and amortization		—			2,717			3,639			33,101			—			39,457
Provision (benefit) for deferred income taxes		3,689			(34,096	)		(3,071	)		(118,973	)		—			(152,451	)
Non-cash loss on investments, net		—			55,542			26,789			(81	)		—			82,250
Impairment of Parent Company goodwill		—			—			5,344			—			—			5,344
Non-cash loss on foreclosed assets and other property and equipment disposals		—			—			17,202			—			—			17,202
Unrealized loss on derivatives and foreign currencies, net		—			26,202			3,632			11,259			—			41,093
Unrealized gain on residential mortgage investment portfolio, net		—			—			—			50,085			—			50,085
Net decrease in mortgage-backed securities pledged, trading		—			—			—			2,559,389			—			2,559,389
Amortization of discount on residential mortgage investments		—			—			—			(8,619	)		—			(8,619	)
Accretion of discount on commercial real estate “A” participation interest		—			(23,777	)		—			—			—			(23,777	)
(Increase) decrease in interest receivable		—			(18,849	)		20,600			32,232			—			33,983
Decrease in loans held for sale, net		—			52,788			10,470			206,725			—			269,983
Decrease (increase) in intercompany note receivable		—			—			100,336			(56,194	)		(44,142	)		—
Increase in other assets		(4,627	)		(40,242	)		(90,391	)		(509,843	)		161,979			(483,124	)
Increase (decrease) in other liabilities		19,864			168,221			(28,783	)		128,004			(163,363	)		123,943
Net transfers with subsidiaries		(564,742	)		462,131			48,010			293,380			(238,779	)		—
Cash (used in) provided by operating activities, net of impact of acquisitions		(682,193	)		799,691			299,862			2,595,250			(55,720	)		2,956,890
Investing activities:
Decrease (increase) in restricted cash		—			45,087			87,591			(38,258	)		—			94,420
Decrease in mortgage-related receivables, net		—			—			—			214,298			—			214,298
Decrease in commercial real estate “A” participation interest		—			447,804			—			—			—			447,804
Acquisition of CS Advisors CLO II		—			—			—			(18,619	)		—			(18,619	)
(Increase) decrease in loans, net		—			(1,768,175	)		(316,348	)		2,010,447			11,027			(63,049	)
Cash paid for real estate		—			—			—			(10,121	)		—			(10,121	)
Acquisition of marketable securities, available-for-sale, net		—			(639,116	)		—			—			—			(639,116	)
Acquisition of other investments, net		—			(43,269	)		(514	)		(5,173	)		—			(48,956	)
Net cash acquired in FIL transaction		—			3,187,037			—			—			—			3,187,037
Acquisition of property and equipment, net		—			(1,644	)		(3,373	)		(577	)		—			(5,594	)
Cash provided by (used in) investing activities		—			1,227,724			(232,644	)		2,151,997			11,027			3,158,104
Financing activities:
Payment of deferred financing fees		(42,110	)		(20,754	)		273			(13,340	)		—			(75,931	)
Deposits accepted, net of repayments		—			(126,773	)		—			—			—			(126,773	)
(Decrease) increase in intercompany note payable		—			—			(84,889	)		40,747			44,142			—
Repayments under repurchase agreements, net		—			(12,673	)		—			(2,301,604	)		—			(2,314,277	)
Borrowings on (repayments of) credit facilities, net		409,763			(456,591	)		100,712			(966,160	)		—			(912,276	)
Borrowings of term debt		—			—			—			56,108			—			56,108
Repayments of term debt		—			(331,881	)		—			(1,477,390	)		551			(1,808,720	)
Repayments of other borrowings		—			—			(63,453	)		(10,724	)		—			(74,177	)
Proceeds from issuance of common stock, net of offering costs		601,755			—			—			—			—			601,755
Proceeds from exercise of options		362			—			—			—			—			362
Tax expense on share based-payments		—			—			—			(10,641	)		—			(10,641	)
Payment of dividends		(287,566	)		—			—			(2,994	)		—			(290,560	)
Cash provided by (used in) financing activities		682,204			(948,672	)		(47,357	)		(4,685,998	)		44,693			(4,955,130	)
Increase (decrease) in cash and cash equivalents		11			1,078,743			19,861			61,249			—			1,159,864
Cash and cash equivalents as of beginning of year		—			151,511			19,005			8,183			—			178,699
Cash and cash equivalents as of end of year	$	11		$	1,230,254		$	38,866		$	69,432		$	—		$	1,338,563

145

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Consolidating Statement of Cash Flows

Year Ended December 31, 2007

				CapitalSource Finance LLC
				Combined			Combined			Other
				Non-Guarantor			Guarantor			Non-Guarantor						Consolidated
	CapitalSource Inc.			Subsidiaries			Subsidiaries			Subsidiaries			Eliminations			CapitalSource Inc.
	($ in thousands)
Operating activities:
Net income	$	159,289		$	297,489		$	225,190		$	276,229		$	(793,970	)	$	164,227
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock option expense		—			475			7,094			—			—			7,569
Restricted stock expense		—			4,082			32,839			—			—			36,921
Gain loss on extinguishment of debt		—			—			—			(678	)		—			(678	)
Amortization of deferred loan fees and discounts		—			(26,287	)		(34,368	)		(27,903	)		—			(88,558	)
Paid-in-kind interest on loans		—			(7,839	)		(14,390	)		(7,824	)		—			(30,053	)
Provision for loan losses		—			—			64,658			13,983			—			78,641
Amortization of deferred financing fees and discounts		22,172			15,926			474			26,104			—			64,676
Depreciation and amortization		—			325			3,388			32,178			—			35,891
Provision for deferred income taxes		—			—			—			41,793			—			41,793
Non-cash (gain) loss on investments, net		—			(4,018	)		3,125			28			—			(865	)
Non-cash (gain) loss on foreclosed assets and other property and equipment disposals		—			(1,372	)		1,254			1,155			—			1,037
Unrealized (gain) loss on derivatives and foreign currencies, net		—			(7,476	)		(7,084	)		57,159			—			42,599
Unrealized loss on residential mortgage investment portfolio, net		—			—			—			75,507			—			75,507
Net increase in mortgage-backed securities pledged, trading		—			—			—			(494,153	)		—			(494,153	)
Amortization of discount on residential mortgage investments		—			—			—			(39,380	)		—			(39,380	)
Decrease (increase) in interest receivable		52			4,412			(2,321	)		(25,816	)		—			(23,673	)
Increase in loans held for sale, net		—			(174,006	)		(53,781	)		(371,110	)		—			(598,897	)
Decrease (increase) in intercompany note receivable		—			2,128			(67,101	)		239,261			(174,288	)		—
Decrease (increase) in other assets		1,219			(2,419	)		(11,186	)		(218,088	)		(4,490	)		(234,964	)
Increase (decrease) in other liabilities		3,004			(9,541	)		(17,033	)		204,490			14,054			194,974
Net transfers with subsidiaries		(804,649	)		(191,111	)		(418,103	)		619,893			793,970			—
Cash (used in) provided by operating activities, net of impact of acquisitions		(618,913	)		(99,232	)		(287,345	)		402,828			(164,724	)		(767,386	)
Investing activities:
Increase in restricted cash		—			(25,151	)		(46,273	)		(201,475	)		—			(272,899	)
Decrease in mortgage-related receivables, net		—			—			—			265,839			—			265,839
Decrease in receivables under reverse-repurchase agreements, net		—			51,892			—			—			—			51,892
(Increase) decrease in loans, net		—			(7,359	)		245,446			(1,662,109	)		(10,087	)		(1,434,109	)
Cash paid for real estate		—			—			—			(248,120	)		—			(248,120	)
Disposal (acquisition) of other investments, net		—			38,771			(3,012	)		(64,483	)		—			(28,724	)
Acquisition of property and equipment, net		—			(45	)		(5,334	)		—			—			(5,379	)
Cash provided by (used in) investing activities		—			58,108			190,827			(1,910,348	)		(10,087	)		(1,671,500	)
Financing activities:
Payment of deferred financing fees		(2,862	)		(27,259	)		(2,215	)		(20,771	)		—			(53,107	)
Increase (decrease) in intercompany note payable		—			33,518			—			(207,806	)		174,288			—
(Repayments of) borrowings under repurchase agreements, net		—			(50,586	)		—			449,845			—			399,259
Borrowings on (repayments of) credit facilities, net		124,551			(66,776	)		—			(105,189	)		—			(47,414	)
Borrowings of term debt		—			1,137,477			232			1,722,375			523			2,860,607
Repayments of term debt		—			(1,071,963	)		(4,847	)		(426,208	)		—			(1,503,018	)
Borrowings under other borrowings		245,000			—			75,630			—			—			320,630
Proceeds from issuance of common stock, net of offering costs		714,490			—			—			—			—			714,490
Proceeds from exercise of options		4,750			—			—			—			—			4,750
Tax expense on share-based payments		—			—			—			2,054			—			2,054
Payment of dividends		(467,173	)		—			—			(9,644	)		—			(476,817	)
Cash provided by (used in) financing activities		618,756			(45,589	)		68,800			1,404,656			174,811			2,221,434
Decrease in cash and cash equivalents		(157	)		(86,713	)		(27,718	)		(102,864	)		—			(217,452	)
Cash and cash equivalents as of beginning of year		157			238,224			46,723			111,047			—			396,151
Cash and cash equivalents as of end of year	$	—		$	151,511		$	19,005		$	8,183		$	—		$	178,699

146

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9.   Direct Real Estate Investments

Our direct real estate investments primarily consist of long-term healthcare facilities generally leased through long-term, triple-net operating leases. As of December 31, 2009 and 2008, our direct real estate investments were as follows:

	December 31,
	2009			2008
	($ in thousands)
Continuing Operations:
Land	$	37,760		$	37,760
Buildings		313,576			313,576
Furniture and equipment		16,020			16,020
Accumulated depreciation		(31,349	)		(21,189	)
Total direct real estate investments from continuing operations		336,007			346,167
Discontinued Operations:
Direct real estate investments, net		218,149			643,549
Total	$	554,156		$	989,716

The decrease in the carrying amount of our direct real estate investments from $989.7 million as of December 31, 2008 to $554.2 million as of December 31, 2009 was due to the sale of 82 long-term healthcare facilities in 2009, with a total net book value of $400.3 million, realizing a pre-tax loss of $9.4 million. The classification of $218.1 million of assets classified as discontinued operations relates to assets which we expect to be sold in the second quarter of 2010. For additional information, see Note 3, Discontinued Operations.

Depreciation of direct real estate investments totaled $10.2 million, $10.1 million and $10.4 million for the years ended December 31, 2009, 2008 and 2007, respectively. During the years ended December 31, 2009 and 2007, we recognized $3.7 million and $1.2 million, respectively, in impairments, which were recorded as a component of other income (expense) in our audited consolidated statements of operations for the years ended December 31, 2009 and 2007. We did not incur impairments on our direct real estate investments during the year ended December 31, 2008.

As of December 31, 2009, all of our direct real estate investments were pledged either directly or indirectly as collateral for certain of our borrowings. For additional information, see Note 12, Borrowings.

The leases on our direct real estate investments expire at various dates through 2026 and typically include fixed rental payments, subject to escalation over the life of the lease. As of December 31, 2009, we expect to receive future minimum rental payments from our non-cancelable operating leases as follows ($ in thousands):

2010	$	53,285
2011		49,607
2012		46,788
2013		43,394
2014		42,017
Thereafter		115,629
	$	350,720

Of the total amount above, $148.3 million of future rental income relates to assets held for sale, which are classified as discontinued operations.

147

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 10.   Property and Equipment

We own property and equipment for use in our operations or that was acquired through foreclosure that we intend to hold and use. As of December 31, 2009 and 2008, property and equipment included in other assets on our audited consolidated balance sheets consisted of the following:

	December 31,
	2009			2008
	($ in thousands)
Land	$	12,009		$	9,558
Buildings		8,384			55,833
Equipment		19,410			15,268
Computer software		4,977			4,691
Furniture		7,066			7,279
Leasehold improvements		25,664			15,245
Accumulated depreciation and amortization		(26,013	)		(19,601	)
Total	$	51,497		$	88,273

Depreciation of property and equipment totaled $10.7 million, $6.9 million and $3.7 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Note 11.   Deposits

As of December 31, 2009 and 2008, CapitalSource Bank had $4.5 billion and $5.0 billion, respectively, in deposits insured up to the maximum legal limit by the FDIC. In 2009, the United States Congress temporarily increased, until the end of 2013, the deposit insurance level from $100,000 to $250,000. As of December 31, 2009 and 2008, CapitalSource Bank had $1.5 billion and $1.6 billion of time certificates of deposit in the amount of $100,000 or more. As of December 31, 2009 and 2008, CapitalSource Bank had $199.7 million and $209.7 million, respectively, of certificates of deposit in the amount of $250,000 or more.

As of December 31, 2009 and 2008, the weighted-average interest rates for savings and money market deposit accounts were 1.06% and 2.66%, respectively, and for certificates of deposit (including brokered), were 1.68% and 3.55%, respectively. The weighted-average interest rate for all deposits as of December 31, 2009 and 2008 was 1.56% and 3.42%, respectively.

As of December 31, 2009 and 2008, interest-bearing deposits at CapitalSource Bank were as follows:

	December 31,
	2009		2008
	($ in thousands)
Interest-bearing deposits:
Money market	$	258,283	$	279,577
Savings		599,084		471,014
Certificates of deposit		3,626,512		4,259,153
Brokered certificates of deposit		—		33,951
Total interest-bearing deposits	$	4,483,879	$	5,043,695

148

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2009, certificates of deposit at CapitalSource Bank detailed by maturity were as follows:

			Weighted
	Amount		Average Rate
	($ in thousands)
2010	$	3,372,378		1.63	%
2011		209,712		2.14
2012		20,577		3.04
2013		1,638		2.78
2014		22,207		3.08
Total	$	3,626,512		1.68	%

For the years ended December 31, 2009 and 2008, interest expense on deposits were as follows:

	Year Ended December 31,
	2009			2008(1)
	($ in thousands)
Savings and money market deposit accounts	$	11,014		$	7,887
Certificates of deposit		98,309			67,498
Brokered certificates of deposit		456			1,137
Fees for early withdrawal		(349	)		(277	)
Total interest expense on deposits	$	109,430		$	76,245

(1) CapitalSource Bank commenced operations on July 25, 2008. The interest expense incurred in 2008 includes only the transactions within the period from July 25, 2008 to December 31, 2008.

149

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 12.  Borrowings

As of December 31, 2009 and 2008, the composition of our outstanding borrowings from continuing and discontinued operations was as follows:

	December 31,
	2009		2008
	($ in thousands)
Outstanding borrowings from continuing operations:
Repurchase agreements(1)	$	—	$	1,595,750
Credit facilities		542,781		1,445,062
Term debt		2,956,536		5,338,456
Other borrowings:
Convertible debt, net(2)		561,347		729,474
Subordinated debt		439,701		438,799
Mortgage debt(3)		262,760		269,741
FHLB SF borrowings		200,000		—
Notes payable		3,026		55,229
Total other borrowings		1,466,834		1,493,243
Total outstanding borrowings from continuing operations		4,966,151		9,872,511
Outstanding borrowings from discontinued operations:
Mortgage debt		184,923		60,570
Notes payable		20,000		20,000
Total outstanding borrowings from discontinued operations		204,923		80,570
Total borrowings	$	5,171,074	$	9,953,081

(1)	In the first quarter of 2009, we repaid in full all borrowings outstanding under our master repurchase agreements.
(2)	Amounts presented are net of debt discounts of $18.7 million and $30.6 million as of December 31, 2009 and 2008, respectively.
(3)	In February 2010, we exercised the second of the three one-year extensions to extend the maturity of the loans to April 9, 2011. The extension was approved by the master servicer subject to our compliance with the terms and conditions of the loan agreements as of April 9, 2010.

Credit Facilities

We utilize secured credit facilities to finance our commercial loans and for general corporate purposes. Our committed credit facility capacities were $691.3 million and $2.6 billion as of December 31, 2009 and 2008, respectively. Interest on our credit facility borrowings is charged at variable rates that may be based on one or more of one-month LIBOR, one-month EURIBOR, and/or the applicable Commercial Paper (“CP”) rate. As of December 31, 2009 and 2008, total undrawn capacities under our credit facilities were $148.5 million and $1.2 billion, respectively, which is limited by the amount of letters of credit outstanding under such facilities and the amount of eligible collateral that we have available to pledge in order to utilize such unused capacity. We have limited available collateral to pledge to use this unused capacity. However, such unused capacity may become available to us to the extent we have additional eligible collateral in the future.

150

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	December 31, 2009						December 31, 2008						December 31, 2009
					Aggregate						Aggregate
					Outstanding						Outstanding
	Committed		Principal		Collateral		Committed		Principal		Collateral		Interest			Maturity
	Capacity		Outstanding		Balance(1)		Capacity		Outstanding		Balance(1)		Rate(2)			Date
			($ in thousands)						($ in thousands)
Credit Facilities:
CS Funding III(3)	$	41,287	$	41,287	$	119,354	$	150,000	$	74,000	$	113,572		LIBOR + 4.00	%		May 29, 2012
CS Funding VII(4)		200,162		126,330		237,742		285,000		176,600		261,175		CP+ 3.50	%		April 17, 2012
CS Funding VIII		—		—		—		40,450		40,450		115,397		—			—
CSE QRS Funding I		—		—		—		815,000		15,600		144,549		—			—
CS Europe(5)		124,820		124,820		314,870		279,420		165,949		315,796		EURIBOR + 4.0	%(6)		May 28, 2010
CS Inc.(7)		325,000		250,344		1,872,627		1,070,000		972,463		1,780,200		LIBOR + 6.50	%(8)		March 31, 2012	(9)
Total credit facilities	$	691,269	$	542,781	$	2,544,593	$	2,639,870	$	1,445,062	$	2,730,689

(1)	Represents the outstanding balances of assets which are pledged as collateral to the credit facility, including $1.4 billion and $2.0 billion, as of December 31, 2009 and 2008, respectively, of loans.
(2)	As of December 31, 2009, the one-month LIBOR was 0.23%; the one-month EURIBOR was 0.45%; and the CP rate for CS Funding VII was 0.30%.
(3)	Our CS Funding III facility is cross collateralized to CS Europe and requires that principal and interest collections previously payable to us are used to reduce the obligations under the credit facility.
(4)	The undrawn revolving capacity under our CS Funding VII credit facility can be used during a one-year revolving period ending on April 19, 2010 to finance a specified pool of loans as long as certain conditions are met, including limits on required pool and portfolio charge off levels, following which the facility provides for an amortization period of up to two years. The CS Funding VII credit facility also requires conditional prepayments if we modify or renew other debt facilities to include periodic principal payment obligations, or if we make optional prepayments to our other lenders, and is cross collateralized to our 2007-A term debt securitization.
(5)	CS Europe is a €86.4 million multi-currency facility with principal outstanding in Euro or British Pound Sterling (“GBP”). Our CS Europe credit facility is cross collateralized to CS Funding III and is an amortizing facility requiring that principal and interest collections previously payable to us are used to reduce the obligations. The amounts presented were translated into USD using the applicable spot rates as of December 31, 2009.
(6)	Borrowings in Euro or GBP are at EURIBOR or GBP LIBOR + 4.00%, respectively, and borrowings in USD are at LIBOR + 4.00%.
(7)	Our syndicated bank credit facility requires that we reduce the aggregate commitments to $200.0 million by April 2010 and to $185.0 million by January 31, 2011 and thereafter by $15.0 million each month and to zero by December 31, 2011 unless otherwise reduced by the receipt of collateral proceeds prior to those dates. Our 12.75% First Priority Senior Secured Notes due in July 2014 (the “2014 Senior Secured Notes”) share in the collateral securing this facility. The Aggregate Collateral Balance comprises loan assets and other assets that qualify as Available Assets as defined under the credit agreement.
(8)	LIBOR + 6.50% or at an alternative base rate, which is the greater of the prime rate for USD borrowings or the Federal Funds Rate + 0.50%, or for foreign currency borrowings, at the prevailing EURIBOR rate + 6.50% or GBP LIBOR + 6.50%.
(9)	As of December 31, 2009, commitments maturing in March 2012 were $258.9 million and commitments maturing in March 2010 were $66.1 million. In February 2010, we modified the extending lender maturity date from March 31, 2012 to December 31, 2011.

151

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FHLB SF Borrowings and FRB Credit Program

As a member of the FHLB SF, CapitalSource Bank has financing availability with the FHLB SF. Effective June 30, 2009, availability was increased to 20% of CapitalSource Bank’s total assets. As of December 31, 2009, the maximum financing under this formula was $1.1 billion. The financing is subject to various terms and conditions including pledging acceptable collateral, satisfaction of the FHLB SF stock ownership requirement and certain limits regarding the maximum term of debt. As of December 31, 2009, CapitalSource Bank had $965.2 million in borrowing capacity with the FHLB SF based on pledged collateral. As of December 31, 2009, unused borrowing capacity was $764.4 million, reflecting $200.0 million of principal outstanding and a letter of credit in the amount of $0.8 million. As of December 31, 2008, there were no outstanding FHLB SF borrowings, but a letter of credit in the amount of $0.8 million was outstanding.

In June 2009, CapitalSource Bank was approved for the primary credit program of the FRB of San Francisco’s discount window under which approved depository institutions are eligible to borrow from the FRB for periods of up to 90 days. As of December 31, 2009, collateral with an amortized cost of $191.8 million and a fair value of $209.9 million had been pledged under this program, but there were no borrowings outstanding.

Term Debt

In conjunction with each of our commercial term debt securitizations, we established and contributed commercial loans to separate single purpose entities (collectively, referred to as the “Issuers”). The Issuers are structured to be legally isolated, bankruptcy remote entities. The Issuers issued notes and certificates that are collateralized by the underlying assets of the Issuers, primarily comprising contributed commercial loans.

We continue to service the underlying commercial loans contributed to the Issuers and earn periodic servicing fees paid from the cash flows of the underlying commercial loans. We have no legal obligation to repay the outstanding notes or certificates or contribute additional assets to the entity. During the year ended December 31, 2008, we repurchased $162.4 million of loans that had experienced a credit event such as borrower delinquency or bankruptcy from certain Issuers as permitted by the transaction documents. The loans were repurchased at their outstanding loan balance plus accrued interest. These repurchases were executed in order to maintain strong performance of the transactions and to avoid the funding of delinquency reserves. We expect that these repurchases will occur less frequently in the future. For the year ended December 31, 2009, we did not repurchase any loans from the Issuers.

We have determined that the Issuers are VIEs, subject to applicable consolidation guidance. Through our assessment of the Issuers, we concluded that the entities were designed to pass along risks related to the credit performance of the underlying commercial loan portfolio. Upon our initial investment in the Issuers, we expected our interests to absorb a majority of the expected losses related to such risks and concluded that we were the primary beneficiary of the Issuers. In addition, there have been no events through December 31, 2009 that would require us to reconsider our status as the primary beneficiary. Consequently, we report the assets and liabilities of the Issuers in our audited consolidated financial statements including the underlying commercial loans and the issued notes and certificates held by third parties. The notes and certificates are designed to be paid off by the cash flows of the underlying commercial loans and related assets of the Issuers. The carrying amount of the underlying commercial loans held by the Issuers were approximately $3.0 billion and $4.4 billion as of December 31, 2009 and 2008, respectively. The carrying amount of outstanding notes and certificates was $2.7 billion and $3.6 billion as of December 31, 2009 and 2008, respectively.

As of December 31, 2009 and 2008, the outstanding balances of our commercial term debt securitizations were $3.7 billion and $4.6 billion, respectively. This amount includes approximately $1.0 billion of notes and certificates that we held as of December 31, 2009 and 2008.

152

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our outstanding term debt transactions in the form of asset securitizations held by third parties as of December 31, 2009 and 2008, were as follows:

	Amounts		Outstanding Third Party Held Debt Balance as of December 31,				Interest Rate			Original Expected
	Issued		2009		2008		Spread(1)			Maturity Date
	($ in thousands)
2006-1
Class A	$	567,134	$	46,701	$	118,453		0.12	%	April 20, 2010
Class B		27,379		12,637		12,637		0.25	%	June 21, 2010
Class C		68,447		31,592		31,592		0.55	%	September 20, 2010
Class D		52,803		24,372		24,371		1.30	%	December 20, 2010
Class E(2)		31,290		—		—		2.50	%	June 20, 2011
Class F(2)		35,202		—		—		N/A		N/A
		782,255		115,302		187,053
2006-2
Class A-1		300,000		175,556		300,000		0.24	%	May 20, 2013
Class A-2		550,000		260,667		550,000		0.21	%	September 20, 2012
Class A-3		147,500		147,500		147,500		0.33	%	May 20, 2013
Class B		71,250		71,250		71,250		0.38	%	June 20, 2013
Class C(3)		157,500		151,500		151,637		0.68	%	June 20, 2013
Class D(3)		101,250		98,000		101,250		1.52	%	June 20, 2013
Class E(4)		56,250		20,000		19,349		2.50	%	June 20, 2013
Class F(2)		116,250		—		—		N/A		N/A
		1,500,000		924,473		1,340,986
2006-A
Class A-1A		70,375		62,865		70,375		0.26	%	January 20, 2037
Class A-R(5)		200,000		130,160		106,108		0.27	%	January 20, 2037
Class A-2A		500,000		424,640		500,000		0.25	%	January 20, 2037
Class A-2B		125,000		125,000		125,000		0.31	%	January 20, 2037
Class B(3)		82,875		57,875		57,875		0.39	%	January 20, 2037
Class C(3)		62,400		32,400		32,400		0.65	%	January 20, 2037
Class D		30,225		30,225		30,225		0.75	%	January 20, 2037
Class E(3)		30,225		15,225		20,225		0.85	%	January 20, 2037
Class F(3)		26,650		5,078		5,000		1.05	%	January 20, 2037
Class G(3)		33,150		10,172		10,000		1.25	%	January 20, 2037
Class H		31,200		31,796		31,200		1.50	%	January 20, 2037
Class J(2)		47,450		—		—		2.50	%	January 20, 2037
Class K(2)		60,450		—		—		N/A		N/A
		1,300,000		925,436		988,408

153

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Amounts		Outstanding Third Party Held Debt Balance as of December 31,				Interest Rate			Original Expected
	Issued		2009		2008		Spread(1)			Maturity Date
	($ in thousands)
2007-1
Class A	$	586,000	$	224,434	$	337,847		0.13	%	May 21, 2012
Class B		20,000		11,531		11,531		0.31	%	July 20, 2012
Class C		84,000		48,429		48,429		0.65	%	February 20, 2013
Class D		48,000		27,673		27,673		1.50	%	September 20, 2013
Class E(2)		34,000		—		—		N/A		January 21, 2014
Class F(2)		28,000		—		—		N/A		N/A
		800,000		312,067		425,480
2007-A(6)
Class A		1,250,000		208,246		386,752		1.50	%	May 31, 2011(7)
Class B(2)		83,333		—		—		N/A		May 31, 2011
		1,333,333		208,246		386,752
2007-2
Class A		400,000		188,368		284,863		1.10	%	October 21, 2019
Class B(2)		10,000		—		—		N/A		October 21, 2019
Class C(2)		90,000		—		—		N/A		October 21, 2019
		500,000		188,368		284,863
Total	$	6,215,588	$	2,673,892	$	3,613,542

(1)	The interest rate of 2006-A is based on three-month LIBOR, which was 0.25% and 4.52% as of December 31, 2009 and 2008, respectively. The interest rates of 2007-A and 2007-2 are based on CP rates, which were 0.28% and 0.18%, respectively, as of December 31, 2009. All of our other term debt transactions are based on one-month LIBOR, which was 0.23% and 0.44% as of December 31, 2009 and 2008, respectively.
(2)	Securities retained by us.
(3)	We repurchased certain bonds from third party investors at fair market value. The total of $133.5 million of repurchased debt reflects various classes of the 2006-A securitization and two classes of the 2006-2 securitization. The tables reflect outstanding debt to third party investors, and therefore, eliminate the portions of debt owned by us.
(4)	$20.0 million of these securities were originally offered for sale. The remaining $36.3 million of the securities are retained by us.
(5)	Variable funding note.
(6)	Our 2007-A term debt securitization transaction requires conditional prepayments if we modify or renew other debt facilities to include periodic principal payment obligations or if we make optional prepayments to our other lenders, and is cross-collateralized to our CS Funding VII credit facility.
(7)	In February 2010, we amended our 2007-A term debt securitization transaction to require us to repurchase the collateral following the date on which the aggregate advances outstanding are less than 5% of the aggregate advances outstanding at the termination date.

Except for our series 2007-2 Term Debt (“2007-2”), series 2006-2 Term Debt (“2006-2”) and series 2006-A Term Debt (“2006-A”), the expected aforementioned maturity dates are based on the contractual maturities of the underlying loans held by the securitization trusts. The 2006-A Term Debt has the ability to use principal payments and/or a liquidity tranche to fund unfunded commitments on existing loans during a specified period of time. We

154

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assumed no prepayments would be made during this replenishment period. If the underlying loans experience delinquencies or have their maturity dates extended, the interest payments collected on them to repay the notes may be delayed. The note holders may get cash flows from the transactions faster if the notes remain outstanding beyond the stated maturity dates and upon other termination events, in which case our cash flow from these transactions would be delayed until the notes senior to our retained interests are retired.

In July 2009, we issued $300.0 million principal amount of the 2014 Senior Secured Notes at an issue price of 93.966%, which included an issuance discount of approximately $18.1 million, in a private offering to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and outside the United States in reliance on Regulation S under the Securities Act pursuant to an indenture (the “Indenture”) by and among CapitalSource Inc., the subsidiary guarantors and U.S. Bank National Association, as trustee. We received net proceeds of $273.8 million from the issuance of the 2014 Senior Secured Notes, which were used to reduce the commitments of the extending lenders under our syndicated bank credit facility. The 2014 Senior Secured Notes accrue interest at a rate of 12.75% per annum from July 27, 2009. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2010. The 2014 Senior Secured Notes will mature on July 15, 2014. Repayment of the 2014 Senior Secured Notes may be accelerated upon the occurrence of events of defaults specified in the indenture. As of December 31, 2009, the 2014 Senior Secured Notes had a balance of $282.9 million, which is net of a discount of $17.1 million.

The Indenture contains a covenant that generally limits cash dividends and dividends in other property paid on our common stock and other capital stock to amounts that do not exceed the cumulative amount of our consolidated net income (as defined for purposes of the Indenture) plus (i) the net cash proceeds of certain equity offerings, and (ii) the net reduction of specified investments. The Indenture does not restrict payment of a regular quarterly dividend not to exceed $0.01 per share, as adjusted for certain transactions.

The 2014 Senior Secured Notes contain certain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries, to incur or guarantee additional indebtedness, pay dividends or make other distributions on, or redeem or repurchase, our capital stock, make certain investments or other restricted payments, refinance our existing indebtness, repay subordinated indebtedness, enter into transactions with affiliates, sell assets, create liens, pay dividends and other payments to CapitalSource Inc., designate unrestricted subsidiaries, issue or sell stock of subsidiaries, and engage in a merger, sale or consolidation. All of the covenants are subject to a number of important qualifications and exceptions.

We may redeem some or all of the 2014 Senior Secured Notes at a redemption price equal to 100% of their principal amount plus a “make-whole” premium. In addition, before July 15, 2012, we may redeem up to 35% of the aggregate principal amount of the 2014 Senior Secured Notes at a redemption price of 112.75% of their principal amount with the net cash proceeds of certain equity offerings. If we undergo a change of control, sell certain of our assets, or, under certain circumstances, receive certain cash proceeds from loan collateral, we may be required to offer to purchase 2014 Senior Secured Notes from holders at 101% of their principal amount, in the case of a change of control, or 100% of their principal amount, in the case of asset sales or receipt of loan collateral proceeds. Accrued and unpaid interest on the 2014 Senior Secured Notes would also be payable in each of the foregoing events of redemption or purchase.

The 2014 Senior Secured Notes are secured on a senior basis, equally and ratably with our existing syndicated bank credit facility and any future senior obligations by all of the assets that are pledged by us to secure our syndicated bank credit facility and by secured intercompany notes issued to us by our subsidiaries which are guarantors of the obligations under our existing syndicated bank credit facility but not guarantors of the 2014 Senior Secured Notes. These intercompany notes are pledged as part of the security for the 2014 Senior Secured Notes.

Owner Trust Term Debt

In December 2009, we sold our beneficial interest in both of the Owner Trusts that had issued asset-backed notes through two on-balance sheet securitizations. As a result of the disposition, the mortgage loans previously recorded as assets and senior notes and subordinate notes previously recorded as liabilities are no longer recorded as

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such in our audited consolidated financial statements. As of December 31 2008, the outstanding balances of our Owner Trusts term debt was $1.7 billion.

Convertible Debt

We have issued five series of convertible debentures as part of our financing activities. Two of the series, our 1.25% Senior Convertible Debentures due 2034 (originally issued in March 2004) and our 1.625% Senior Subordinated Convertible Debentures due 2034 (originally issued in April 2007), were repurchased in full during 2009. As a result, our outstanding convertible debt as of December 31, 2009 comprises only our 3.5% Senior Convertible Debentures due 2034 (originally issued in July 2004; the “Senior Debentures”), our 4% Senior Subordinated Convertible Debentures due 2034 (originally issued in April 2007), and our 7.25% Senior Subordinated Convertible Debentures due 2037 (originally issued in July 2007; the 4% debentures and the 7.25% debentures, together, the “Subordinated Debentures” and, together with the Senior Debentures, the “Debentures”).

Our outstanding convertible debt transactions as of December 31, 2009 and 2008, and their applicable conversion rates, effective conversion prices per share, and number of shares used to determine aggregate consideration as of December 31, 2009 were as follows:

							December 31, 2009
									Effective
	Outstanding Balance								Conversion
	as of December 31,						Conversion		Price per		Number of
Debentures	2009			2008			Rate(1)		Share(1)		Shares
	($ in thousands)
1.25% Senior Convertible Debentures due 2034	$	—		$	26,620			—	$	—		—
1.625% Senior Subordinated Convertible Debentures due 2034		—			153,500			—		—		—
3.5% Senior Convertible Debentures due 2034		8,446			8,446			47.7134		20.96		402,958
4% Senior Subordinated Convertible Debentures due 2034		321,554			321,554			47.7134		20.96		15,341,317
7.25% Senior Subordinated Convertible Debentures due 2037		250,000			250,000			36.9079		27.09		9,228,498
Debt discount, net of amortization(2)		(18,653	)		(30,646	)		—		—		—
Total	$	561,347		$	729,474							24,972,773
Equity components recorded in additional paid-in capital	$	101,220		$	101,220

(1)

As of December 31, 2009, the debentures may convert into the stated number of shares of common stock per $1,000 principal amount of debentures, subject to certain conditions. The conversion rates and prices of our convertible debt are subject to adjustment based on the average price of our common stock ten business days prior to the ex-dividend date and on the dividends we pay on our common stock. See below for further information regarding the adjustments of the conversion rates and prices.

(2)

As of December 31, 2009, the unamortized discounts on our 3.5%, 4% and 7.25% Senior Convertible Debentures will be amortized through July 15, 2011, July 15, 2011 and July 15, 2012, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the periods ended December 31, 2009, 2008 and 2007, the interest expense recognized on our Convertible Debentures and the effective interest rates on the liability components were as follows:

	Year Ended December 31,
	2009			2008			2007
	($ in thousands)
Interest expense recognized on:
Contractual interest coupon	$	31,785		$	34,645		$	23,896
Amortization of deferred financing fees		1,414			2,235			2,191
Amortization of debt discount		12,085			18,461			18,098
Total interest expense recognized	$	45,284		$	55,341		$	44,185
Effective interest rate on the liability component:
1.25% Senior Convertible Debentures due 2034		8.30	%		8.29	%		5.88	%
1.625% Senior Subordinated Convertible Debentures due 2034		7.33	%		6.81	%		6.27	%
3.5% Senior Convertible Debentures due 2034		7.16	%		7.25	%		7.25	%
4% Senior Subordinated Convertible Debentures due 2034		7.70	%		7.68	%		7.68	%
7.25% Senior Subordinated Convertible Debentures due 2037		7.79	%		7.79	%		7.79	%

If not earlier redeemed or repurchased, the 3.5% Debentures will pay contingent interest, subject to certain limitations, beginning on July 15, 2011. This contingent interest feature is indexed to the value of our common stock, which is not clearly and closely related to the economic characteristics and risks of the 3.5% Debentures. The contingent interest feature represents an embedded derivative that must be bifurcated from its host instrument and accounted for separately as a derivative instrument. However, we determined that the fair value of the contingent interest feature at inception was zero based on our option to redeem the 3.5% Debentures prior to incurring any contingent interest payments. If we were to exercise this redemption option, we would not be required to make any contingent interest payments and, therefore, the holders of the 3.5% Debentures cannot assume they will receive those payments. We continue to conclude that the fair value of the contingent interest feature is zero. The 3.5% Debentures are unsecured and unsubordinated obligations, and are guaranteed by one of our wholly owned subsidiaries. For additional information, see Note 8, Guarantor Information.

In April 2007, we completed exchange offers relating to our 1.25% Debentures and 3.5% Debentures. At closing, we issued $177.4 million in aggregate principal amount of 1.625% Debentures, in exchange for a like principal amount of our 1.25% Debentures, and we issued $321.6 million in aggregate principal amount of 4% Debentures in exchange for a like principal amount of our 3.5% Debentures. The results of the exchange offers were as follows:

	Amount
	Outstanding		Amount
	Prior		Outstanding
	to Exchange		at Completion of
Securities	Offers		Exchange Offers
	($ in thousands)
3.5% Senior Convertible Debentures due 2034	$	330,000	$	8,446
1.25% Senior Convertible Debentures due 2034		225,000		47,620
4% Senior Subordinated Convertible Debentures due 2034		—		321,554
1.625% Senior Subordinated Convertible Debentures due 2034		—		177,380
Total	$	555,000	$	555,000

Subsequent to the exchange offers, the 1.25% Debentures and the 1.625% Debentures were exchanged for equity or repurchased in 2008 and in 2009. As of December 31, 2009, both our 3.5% Debentures and our 4% Debentures would be convertible, subject to certain conditions, into 0.4 million and 15.3 million shares of our common stock, respectively, at a conversion rate of 47.7134 shares of common stock per $1,000 principal amount of

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debentures, representing an effective conversion price of approximately $20.96 per share. The conversion rate and price will adjust each time we pay a dividend on our common stock, with the fair value of each adjustment taxable to the holders. The 3.5% Debentures and 4% Debentures are redeemable for cash at our option at any time on or after July 15, 2011 at a redemption price of 100% of their principal amount plus accrued interest. Holders of the 3.5% Debentures or 4% Debentures have the right to require us to repurchase some or all of their respective debentures for cash on July 15, 2011, and each five-year anniversary thereafter at a price of 100% of their principal amount plus accrued interest. Holders of the 3.5% or 4% Debentures also have the right to require us to repurchase some or all of their respective debentures upon certain events constituting a fundamental change.

Because the terms of the 1.625% Debentures and the 4% Debentures were not substantially different from the 1.25% or 3.5% Debentures, we did not consider the consummation of the exchange offers to prompt an extinguishment of issued debt and, therefore, continued to amortize the remaining unamortized deferred financing fees over the remaining estimated lives of the 1.625% Debentures and the 4% Debentures. Additionally, all costs associated with the exchange offers were expensed as incurred.

In July 2007, we issued $250.0 million principal amount of 7.25% senior subordinated convertible notes due 2037 bearing interest at a rate of 7.25% per year. The 7.25% Debentures were sold at a price of 98% of the aggregate principal amount of the notes. The 7.25% Debentures had an initial conversion rate of 36.9079 shares of our common stock per $1,000 principal amount of notes, representing an initial conversion price of approximately $27.09 per share. The conversion rate and price will adjust if we pay dividends on our common stock greater than $0.60 per share, per quarter, with the fair value of each adjustment taxable to the holders.

The 7.25% Debentures are redeemable for cash at our option at any time on or after July 20, 2012 at a redemption price of 100% of their principal amount plus accrued interest. Holders of the 7.25% Debentures have the right to require us to repurchase some or all of their debentures for cash on July 15, 2012 and each five-year anniversary thereafter at a price of 100% of their principal amount plus accrued interest. Holders of the 7.25% Debentures also have the right to require us to repurchase some or all of their 7.25% Debentures upon certain events constituting a fundamental change.

The Subordinated Debentures are guaranteed on a senior subordinated basis by CapitalSource Finance. For additional information, see Note 8, Guarantor Information. The Subordinated Debentures rank junior to all of our other existing and future secured and unsecured indebtedness, including the outstanding Senior Debentures, and senior to our existing and future subordinated indebtedness.

The Subordinated Debentures provide for a make-whole amount upon conversion in connection with certain transactions or events that may occur prior to July 15, 2011 and July 15, 2012 for the 4% Debentures and the 7.25% Debentures, respectively, which, under certain circumstances, will increase the conversion rate by a number of additional shares. The Subordinated Debentures do not provide for the payment of contingent interest.

Holders of each series of the Debentures may convert their debentures prior to maturity only if the following conditions occur:

1) The sale price of our common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous calendar quarter is greater than or equal to 120% of the applicable conversion price per share of our common stock on such last trading day;

2) During the five consecutive business day period after any five consecutive trading day period in which the trading price per debenture for each day of that period was less than 98% of the product of the conversion rate and the last reported sale price of our common stock for each day during such period (the “98% Trading Exception”); provided, however, that if, on the date of any conversion pursuant to the 98% Trading Exception that is on or after July 15, 2019 for the 3.5% Debenture or 4% Debentures and on or after July 15, 2022 for the 7.25% Debentures, the last reported sale price of our common stock on the trading day before the conversion date is greater than 100% of the applicable conversion price, then holders surrendering debentures for conversion will receive, in lieu of shares of our common stock based on the then applicable conversion rate, shares of common stock with a value equal to the principal amount of the debentures being converted;

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3) Specified corporate transactions occur such as if we elect to distribute to all holders of our common stock rights or warrants entitling them to subscribe for or purchase, for a period expiring within 45 days after the date of the distribution, shares of our common stock at less than the last reported sale price of a share of our common stock on the trading day immediately preceding the declaration date of the distribution; or distribute to all holders of our common stock, assets, debt securities or rights to purchase our securities, which distribution has a per share value as determined by our board of directors exceeding 5% of the last reported sale price of our common stock on the trading day immediately preceding the declaration date for such distribution;

4) We call any or all of the Debentures of such series for redemption; or

5) We are a party to a consolidation, merger or binding share exchange, in each case pursuant to which our common stock would be converted into cash or property other than securities.

We are unable to assess the likelihood of meeting conditions (1) or (2) above for the Debentures as both conditions depend on future market prices for our common stock and the Debentures. We believe that the likelihood of meeting conditions (3), (4) or (5) related to the specified corporate transactions occurring for the Debentures is remote since we have no current plans to distribute rights or warrants to all holders of our common stock, call any of our Debentures for redemption or enter a consolidation, merger or binding share exchange pursuant to which our common stock would be converted into cash or property other than securities.

Under the terms of the indenture governing 3.5% Debentures and 4% Debentures, we have the ability to make irrevocable elections to pay the principal balance in cash upon any conversion prior to or at maturity. The principal balance of our 7.25% Debentures is required to be settled in cash upon redemption or conversion. During the third quarter of 2008, we began applying the if-converted method to determine the effect on diluted net income per share of shares issuable pursuant to our Senior Debentures, 1.625% Debentures and 4% Debentures as we are no longer assuming cash settlement of the underlying principal. The only impact on diluted net income per share from our 7.25% Debentures results from the application of the treasury stock method to any conversion spread on this instrument. For additional information, see Note 17, Net (Loss) Income per Share.

In February 2009, we entered into an agreement with an existing security holder and issued 19,815,752 shares of our common stock in exchange for approximately $61.6 million in aggregate principal amount of our outstanding 1.625% Debentures held by the security holder, and our wholly owned subsidiary, CapitalSource Finance, paid approximately $0.6 million in cash to the security holder in exchange for the guaranty on such notes by such subsidiary. We retired all of the debentures acquired in the exchange. In connection with this exchange, we incurred a loss of approximately $57.5 million in the first quarter of 2009, which included a write-off of $0.4 million in deferred financing fees and debt discount.

In accordance with the terms of the 1.25% and 1.625% Debentures, we offered to repurchase $118.5 million of our outstanding convertible debentures, all of which were tendered, repurchased and retired in March 2009.

Subordinated Debt

We have issued subordinated debt to statutory trusts (“TP Trusts”) that are formed for the purpose of issuing preferred securities to outside investors, which we refer to as Trust Preferred Securities (“TPS”). We generally retained 100% of the common securities issued by the TP Trusts, representing 3% of their total capitalization. The terms of the subordinated debt issued to the TP Trusts and the TPS issued by the TP Trusts are substantially identical.

The TP Trusts are wholly owned indirect subsidiaries of CapitalSource. However, we have not consolidated the TP Trusts for financial statement purposes. We account for our investments in the TP Trusts under the equity method of accounting pursuant to relevant GAAP requirements.

We had subordinated debt outstanding totaling $439.7 million and $438.8 million as of December 31, 2009 and 2008, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2009, our outstanding subordinated debt transactions were as follows (amounts in thousands):

		Trust Formation					Interest Rate as of
TPS Series		Date	Debt Issued		Maturity Date	Date Callable(1)	December 31, 2009
	2005-1	November 2005	$	103,093	December 15, 2035	December 15, 2010		2.20	%(2)
	2005-2	December 2005	$	128,866	January 30, 2036	January 30, 2011		6.82	%(3)
	2006-1	February 2006	$	51,545	April 30, 2036	April 30, 2011		6.96	%(4)
	2006-2	September 2006	$	51,550	October 30, 2036	October 30, 2011		6.97	%(5)
	2006-3	September 2006	€	25,775	October 30, 2036	October 30, 2011		2.77	%(6)
	2006-4	December 2006	$	21,908	January 30, 2037	January 30, 2012		2.23	%(2)
	2006-5	December 2006	$	6,650	January 30, 2037	January 30, 2012		2.23	%(2)
	2007-2	June 2007	$	39,177	July 30, 2037	July 30, 2012		2.23	%(2)

(1)	The subordinated debt is callable by us in whole or in part at par at any time after the stated date.
(2)	Bears interest at a floating interest rate equal to three-month LIBOR plus 1.95%, resetting quarterly at various dates.
(3)	Bears a fixed rate of interest of 6.82% through January 20, 2011 and then bears interest at a floating interest rate equal to three-month LIBOR plus 1.95%, resetting quarterly.
(4)	Bears a fixed rate of interest of 6.96% through April 1, 2011 and then bears interest at a floating interest rate equal to three-month LIBOR plus 1.95%, resetting quarterly.
(5)	Bears a fixed rate of interest of 6.97% through October 30, 2011 and then bears interest at a floating interest rate equal to three-month LIBOR plus 1.95%, resetting quarterly.
(6)	Bears interest at a floating interest rate equal to three-month EURIBOR plus 2.05%, resetting quarterly.

The subordinated debt described above is unsecured and ranks subordinate and junior in right of payment to all of our indebtedness.

Mortgage Debt

We use mortgage loans to finance certain of our direct real estate investments. We had mortgage debt totaling $447.7 million and $330.3 million as of December 31, 2009 and 2008, respectively, of which $184.9 million and $60.6 million was secured by real estate assets included in discontinued operations as of December 31, 2009 and 2008, respectively. As of December 31, 2009, our mortgage debt comprised a senior loan of $228.9 million, a mezzanine loan of $33.9 million, eleven mortgage loans totaling $55.3 million assumed on the acquisition of certain of our healthcare investment properties, guaranteed by HUD and collateralized by eleven of our healthcare investment properties and a further 18 new mortgage loans totaling $129.6 million guaranteed by HUD, collateralized by 29 of our healthcare investment properties and which we entered into in December 2009. The interest rate under the senior loan is one-month LIBOR plus 1.54%, and the interest rate under the mezzanine loan is one-month LIBOR plus 4% and the weighted average interest rate on the assumed mortgage loans is 6.63% and on the new mortgage loans is 4.85%.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Debt Maturities

The on-balance sheet contractual obligations under our credit facilities, term debt, convertible debt, subordinated debt, mortgage debt and notes payable as of December 31, 2009, were as follows:

					Other Borrowings
	Credit				Convertible		Subordinated		Mortgage
	Facilities(1)		Term Debt(2)		Debt(3)		Debt(4)		Debt(5)		Notes Payable(6)		Total
	($ in thousands)
2010	$	179,220	$	115,302	$	—	$	—	$	7,566	$	40,000		342,088
2011		136,189		208,246		330,000		—		8,101		89,000		771,536
2012		227,372		496,632		250,000		—		254,696		48,000		1,276,700
2013		—		739,908		—		—		2,822		6,026		748,756
2014		—		300,000		—		—		2,977		20,000		322,977
Thereafter		—		1,183,645		—		439,701		171,521		20,000		1,814,867
Total	$	542,781	$	3,043,733	$	580,000	$	439,701	$	447,683	$	223,026	$	5,276,924

(1)	The contractual obligations for credit facilities are computed based on the stated final maturities of the facilities not considering amortization, optional annual renewals, and assumes utilization of available term-out features.
(2)	The amounts are presented gross of net unamortized discounts of $0.3 million on our term debt securitizations and $17.1 million on the 2014 Senior Secured Notes and include a liquidity tranche, of which $69.8 million is not drawn. Contractual obligations on our term debt securitizations are computed based on their estimated lives. The estimated lives are based upon the contractual amortization schedule of the underlying loans. These underlying loans are subject to prepayment, which could shorten the life of the term debt securitizations; conversely, the underlying loans may be amended to extend their term, which may lengthen the life of the term debt securitizations. At our option, we may substitute loans for prepaid loans up to specified limitations, which may also impact the life of the term debt securitizations.
(3)	The contractual obligations for our convertible debt are computed based on the initial put/call date. The legal maturity of our 7.25% Debentures is 2037, and the legal maturities of our other series of Debentures are 2034. The amounts are presented gross of $18.7 million discounts, net of amortization.
(4)	The contractual obligations for subordinated debt are computed based on the legal maturities, which are between 2035 and 2037.
(5)	The contractual obligations for mortgage debt include $184.9 million, which relates to discontinued operations. Contractual obligations assume exercise of all extension options provided for under the debt agreements.
(6)	The contractual obligations for notes payable include $20.0 million, which relates to discontinued operations.

Interest Expense

The weighted average interest rates on all of our borrowings, including amortization of deferred financing costs, for the years ended December 31, 2009, 2008 and 2007 were 3.6%, 4.9% and 6.2%, respectively.

Deferred Financing Fees

As of December 31, 2009 and 2008, deferred financing fees of $69.2 million and $73.5 million, respectively, net of accumulated amortization of $219.6 million and $171.8 million, respectively, were included in other assets in our audited consolidated balance sheets.

Debt Covenants

The Parent Company is subject to financial and non-financial covenants under our indebtedness, including, with respect to restricted payments, interest coverage, minimum tangible net worth, leverage, maximum delinquent

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and charged-off loans, servicing standards, and limitations on incurring or guaranteeing indebtedness, refinancing existing indebtedness, repaying subordinated indebtedness, making investments, dividends, distributions, redemptions or repurchases of our capital stock, selling assets, creating liens and engaging in a merger, sale or consolidation. If we were to default under our indebtedness by violating these covenants or otherwise, our lenders’ remedies would include the ability to, among other things, transfer servicing to another servicer, foreclose on collateral, accelerate payment of all amounts payable under such indebtedness and/or terminate their commitments under such indebtedness. In the future, we may have difficulty complying with some of these provisions if economic conditions affecting our industry fail to improve, and we may need to obtain additional waivers or amendments again in the future if we cannot satisfy all of the covenants and obligations under our debt.

During the year ended December 31, 2009, we obtained waivers, extended previously obtained waivers and/or executed amendments with respect to some of our indebtedness to avoid potential events of default. In the past, we have received waivers to potential breaches of some of these provisions.

In addition, upon the occurrence of specified servicer defaults, our lenders under our credit facilities and the holders of the asset-backed notes issued in our term debt may elect to terminate us as servicer of the loans under the applicable facility or term debt and appoint a successor servicer or replace us as cash manager for our secured facilities and term debt. If we were terminated as servicer, we would no longer receive our servicing fee. In addition, because there can be no assurance that any successor servicer would be able to service the loans according to our standards, the performance of our loans could be materially adversely affected and our income generated from those loans significantly reduced.

In February 2010, we amended the tangible net worth covenant for our syndicated bank credit facility and other indebtedness for the reporting period ended December 31, 2009 and future periods. The amendments were obtained to provide certainty that the net loss reported for the quarter and the year ended December 31, 2009, after making certain adjustments as provided for in the covenant definition, would not cause an event of default under these facilities. For additional information, see Note 28, Subsequent Events.

Note 13.   Shareholders’ Equity

Common Stock Shares Outstanding

Common stock share activity for the years ended December 31, 2009, 2008 and 2007 was as follows:

Outstanding as of December 31, 2006	181,452,290
Issuance of common stock	36,327,557
Sale of treasury stock	1,300,000
Exercise of options	339,201
Restricted stock and other stock grants, net	1,285,752
Outstanding as of December 31, 2007	220,704,800
Issuance of common stock	61,644,758
Exercise of options	57,327
Restricted stock and other stock grants, net	397,326
Outstanding as of December 31, 2008	282,804,211
Issuance of common stock	40,044,073
Repurchase of common stock	(639,400	)
Exercise of options	2,718
Restricted stock and other stock grants, net	831,011
Outstanding as of December 31, 2009	323,042,613

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Dividend Reinvestment and Stock Purchase Plan

During 2009 we had a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”) for current and prospective shareholders. Participation in the DRIP allowed common shareholders to reinvest cash dividends and to purchase additional shares of our common stock, in some cases at a discount from the market price. During the year ended December 31, 2009, there were no direct purchases made under the DRIP. During the year ended December 31, 2008, we received $198.1 million related to the direct purchase of 15.4 million shares of our common stock pursuant to the DRIP. In addition, we received proceeds of $0.1 million and $38.7 million, respectively, related to cash dividends reinvested in 36,000 and 3.6 million shares of our common stock during the years ended December 31, 2009 and 2008, respectively. We terminated the DRIP effective March 1, 2010.

Share Repurchase Plan

In March 2009, our Board of Directors authorized us to repurchase up to $25.0 million of our common stock through open market purchases or privately negotiated transactions from time to time for a period of up to two years. The amount and timing of any repurchases will depend on market conditions and other factors and repurchases may be suspended or discontinued at any time. During the year ended December 31, 2009, we purchased 639,400 shares of our common stock under the share repurchase plan, at a weighted average price of $1.22 per share for a total purchase price of $781,507. All shares purchased under the share purchase plan were retired upon settlement. Our ability to repurchase additional shares may be limited by the terms of our 2014 Senior Secured Notes, and there is no assurance that we will repurchase additional shares.

Equity Offerings

In February 2009, we entered into an agreement with an existing security holder and issued 19,815,752 shares of our common stock in exchange for approximately $61.6 million in aggregate principal amount of our outstanding 1.625% debentures held by the security holder, and our wholly owned subsidiary, CapitalSource Finance, paid approximately $0.6 million in cash to the security holder in exchange for the guaranty on such notes by such subsidiary. We retired all of the debentures acquired in the exchange. In connection with this exchange, we incurred a loss of approximately $57.5 million in the first quarter of 2009, which included a write-off of $0.4 million in deferred financing fees and debt discount.

In July 2009, we sold approximately 20.1 million shares of our common stock in an underwritten public offering at a price of $4.10 per share, including the approximately 2.6 million shares purchased by the underwriters pursuant to their over-allotment option. In connection with this offering, we received net proceeds of approximately $77.0 million.

Note 14.   Employee Benefit Plan

Our employees are eligible to participate in the CapitalSource Finance LLC 401(k) Savings Plan (“401(k) Plan”), a defined contribution plan in accordance with Section 401(k) of the Internal Revenue Code of 1986, as amended. For the years ended December 31, 2009, 2008 and 2007, we contributed $1.8 million, $2.0 million and $1.9 million, respectively, in matching contributions to the 401(k) Plan.

Note 15.   Income Taxes

We provide for income taxes as a “C” corporation on income earned from operations. Currently our subsidiaries cannot participate in the filing of a consolidated federal tax return. As a result, certain subsidiaries may have taxable income that cannot be offset by taxable losses or loss carryforwards of other entities. We are subject to federal, foreign, state and local taxation in various jurisdictions.

We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and

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liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the change.

From 2006 through 2008, we operated as a REIT. Effective January 1, 2009, we revoked our REIT election and recognized the deferred tax effects in our audited consolidated financial statements as of December 31, 2008. During the period we operated as a REIT, we were generally not subject to federal income tax at the REIT level on our net taxable income distributed to shareholders, but we were subject to federal corporate-level tax on the net taxable income of our taxable REIT subsidiaries, and we were subject to taxation in various foreign, state and local jurisdictions. In addition, we were required to distribute at least 90% of our REIT taxable income to our shareholders and meet various other requirements imposed by the Internal Revenue Code, through actual operating results, asset holdings, distribution levels, and diversity of stock ownership.

The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2009, 2008 and 2007 were as follows:

	Year Ended December 31,
	2009			2008			2007
	($ in thousands)
Current:
Federal	$	69,020		$	(70,274	)	$	37,135
State		17,220			7,858			6,229
Foreign		2,953			22,515			2,615
Total current		89,193			(39,901	)		45,979
Deferred:
Federal		17,175			(112,756	)		36,354
State		34,890			(37,828	)		5,230
Foreign		(4,944	)		(98	)		—
Total deferred		47,121			(150,682	)		41,584
Income tax expense (benefit)	$	136,314		$	(190,583	)	$	87,563

Income tax expense from discontinued operations was $4.5 million and $1.3 million for the years ended December 31, 2009 and 2008, respectively. There was no income tax expense from discontinued operations for the year ended December 31, 2007.

For the year ended December 31, 2009, we had $3.0 million of pre-tax income and $761.0 million of pre-tax loss that was attributable to foreign and domestic continuing operations, respectively. For the year ended December 31, 2008, we had $15.8 million of pre-tax income and $466.5 million of pre-tax loss that was attributable to foreign and domestic continuing operations, respectively. For the year ended December 31, 2007, we had approximately $7.8 million of pre-tax income and $208.8 million of pre-tax income that was attributable to foreign and domestic continuing operations, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The reconciliations of the effective income tax rate and the federal statutory corporate income tax rate for the years ended December 31, 2009, 2008 and 2007, were as follows:

	Year Ended December 31,
	2009			2008			2007
Federal statutory rate		35.0	%		35.0	%		35.0	%
Benefit of REIT election		—			(12.6	)		(1.4	)
State income taxes, net of federal tax benefit		4.4			1.9			3.5
Induced conversion of convertible debentures		(2.6	)		—			—
Valuation allowance		(50.9	)		—			—
Impact of making and revoking REIT election(1)		—			24.2			—
Other		(3.9	)		(5.0	)		2.5
Effective income tax rate		(18.0	)%		43.5	%		39.6	%

(1) In connection with revoking our REIT election, we recognized $97.7 million of net deferred tax assets relating to our REIT qualifying activities into income during the year ended December 31, 2008.

Deferred income taxes are recorded when revenues and expenses are recognized in different periods for financial statement and income tax purposes. Net deferred tax assets are included in other assets in our audited consolidated balance sheets. The components of deferred tax assets and liabilities as of December 31, 2009 and 2008 were as follows ($ in thousands):

	December 31,
	2009			2008
Deferred tax assets:
Allowance for loan losses	$	221,027		$	171,348
Net unrealized losses on investments		103,124			117,799
Net operating losses — federal		136,879			85,141
Net operating losses — state, net of federal tax benefit		27,835			20,102
Non-accrual interest		26,950			17,464
Share-based compensation awards		16,045			9,761
Other		94,623			93,251
Total deferred tax assets		626,483			514,866
Valuation allowance		(385,858	)		—
Total deferred tax assets, net of valuation allowance		240,625			514,866
Deferred tax liabilities:
Mark-to-market on loans		113,090			304,489
Other		20,478			52,638
Total deferred tax liabilities		133,568			357,127
Net deferred tax assets	$	107,057		$	157,739

Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. All evidence, both positive and negative, is evaluated when making this determination. Items considered in this analysis include the ability to carry back losses to recoup taxes previously paid, the reversal of temporary differences, tax planning strategies, historical financial performance, expectations of future earnings and the length of statutory carryforward periods. Significant judgment is required in assessing future earning trends and the timing of reversals of temporary differences.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In 2009, we established a valuation allowance against a substantial portion of our net deferred tax assets for subsidiaries where we determined that there was significant negative evidence with respect to our ability to realize such assets. Negative evidence we considered in making this determination included the incurrence of operating losses at several of our subsidiaries, and uncertainty regarding the realization of a portion of the deferred tax assets at future points in time. As of December 31, 2009, the total valuation allowance was $385.9 million. Although realization is not assured, we believe it is more likely than not that the remaining recognized net deferred tax assets of $107.1 million as of December 31, 2009 will be realized. We intend to maintain a valuation allowance with respect to our deferred tax assets until sufficient positive evidence exists to support its reduction or reversal. As of December 31, 2008, we recorded no valuation allowance against our deferred tax assets.

As of December 31, 2009, we have net operating loss carryforwards of $391.1 million for federal tax purposes, which will be available to offset future taxable income. If not used, these carryforwards will begin to expire in 2028 and would fully expire in 2029. To the extent net operating loss carryforwards, when realized, relate to non-qualified stock option and restricted stock deductions, the resulting benefits will be credited to stockholders’ equity. We also have state net operating loss carryforwards of $583.9 million. These state net operating loss carryforwards will expire in varying amounts beginning in 2013 through 2029.

As of December 31, 2009, we have foreign tax credit carryforwards of $2.7 million for federal tax purposes, which will be available to offset future federal income tax. If not used, these carryforwards will begin to expire in 2016 and would fully expire in 2017.

We adopted the provisions for accounting for uncertain tax positions in accordance with the current Income Taxes Topic of the Codification on January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2009 and 2008 are as follows ($ in thousands):

	Year Ended
	December 31,
	2009			2008
Balance as of the beginning of year	$	19,747		$	16,720
Additions for tax positions of prior years		48,375			26,246
Reductions for tax positions of prior years		(1,615	)		(6,510	)
Settlements		(4,297	)		(16,709	)
Balance as of the end of year	$	62,210		$	19,747

As of December 31, 2009 and 2008, approximately $3.5 million and $5.0 million, respectively, of our unrecognized tax benefits would affect the effective tax rate. We believe it is possible that a significant portion of the unrecognized tax benefit above could decrease within the next twelve months. However, we have sufficient net operating losses to offset these potential tax liabilities.

We recognize interest and penalties accrued related to unrecognized tax benefits as a component of income taxes. As of December 31, 2009, 2008 and 2007, accrued interest expense and penalties totaled $11.0 million, $4.9 million and $2.0 million, respectively. For the years ended December 31, 2009, 2008 and 2007, we recognized $6.2 million, $2.7 million and $1.0 million, respectively, in interest expense.

We file income tax returns with the United States and various state, local and foreign jurisdictions and generally remain subject to examinations by these tax jurisdictions for tax years 2004 through 2008. In 2008, we settled an Internal Revenue Service examination for the tax years 2005 and 2004 and concluded certain state examinations in 2009 and 2008 of tax years 2005, 2004 and 2003. We incurred penalty and interest expense of $1.0 million and $3.3 million in 2009 and 2008, respectively. In addition, we paid taxes in connection with the settlement and conclusion of these examinations of $4.3 million and $16.7 million in 2009 and 2008, respectively. We are currently under examination by the Internal Revenue Service for the tax years 2006 to 2008, and certain states for the tax years 2004 and 2005.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 16.   Comprehensive (Loss) Income

Comprehensive (loss) income for the years ended December 31, 2009, 2008 and 2007, was as follows:

	Year Ended December 31,
	2009			2008			2007
	($ in thousands)
Net (loss) income from continuing operations	$	(894,311	)	$	(260,091	)	$	129,044
Net (loss) income from discontinued operations, net of taxes		33,335			41,310			35,027
Gain (loss) from sale of discontinued operations, net of taxes		(8,071	)		104			156
Net (loss) income		(869,047	)		(218,677	)		164,227
Unrealized (loss) gain on available-for-sale securities, net of taxes		(608	)		7,857			(3,103	)
Unrealized gain (loss) on foreign currency translation, net of taxes		11,357			(2,892	)		5,175
Unrealized (loss) gain on cash flow hedges, net of taxes		(86	)		(820	)		413
Comprehensive (loss) income		(858,384	)		(214,532	)		166,712
Comprehensive (loss) income attributable to noncontrolling interests		( 28	)		1,426			4,938
Comprehensive (loss) income attributable to CapitalSource Inc.	$	( 858,356	)	$	(215,958	)	$	161,774

Accumulated other comprehensive income, net as of December 31, 2009 and 2008, was as follows:

	December 31,
	2009			2008
	($ in thousands)
Unrealized gain on available-for-sale securities, net of taxes	$	5,027		$	7,468
Unrealized gain on foreign currency translation, net of taxes		14,647			1,457
Unrealized gain on cash flow hedge, net of taxes		84			170
Effect of adoption of amended investment guidance		(397	)		—
Accumulated other comprehensive income, net	$	19,361		$	9,095

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 17.   Net (Loss) Income Per Share

The computations of basic and diluted net (loss) income per share attributable to CapitalSource Inc. for the years ended December 31, 2009, 2008 and 2007, were as follows:

	Year Ended December 31,
	2009			2008			2007
	($ in thousands, except per share data)
Net (loss) income:
From continuing operations	$	(894,311	)	$	(260,091	)	$	129,044
From discontinued operations, net of taxes		33,335			41,310			35,027
From sale of discontinued operations, net of taxes		(8,071	)		104			156
Total from discontinued operations		25,264			41,414			35,183
Attributable to CapitalSource Inc.		(869,019	)		(220,103	)		159,289
Average shares — basic		306,417,394			251,213,699			191,697,254
Effect of dilutive securities:
Option shares		—			—			340,328
Unvested restricted stock		—			—			1,120,000
Stock units		—			—			30,380
Conversion premium on the Debentures(1)		—			—			94,694
Average shares — diluted		306,417,394			251,213,699			193,282,656
Basic net (loss) income per share
From continuing operations	$	(2.92	)	$	(1.04	)	$	0.67
From discontinued operations, net of taxes		0.08			0.16			0.18
Attributable to CapitalSource Inc.		(2.84	)		(0.88	)		0.83
Diluted net (loss) income per share
From continuing operations	$	(2.92	)	$	(1.04	)	$	0.67
From discontinued operations, net of taxes		0.08			0.16			0.18
Attributable to CapitalSource Inc.		(2.84	)		(0.88	)		0.82

(1) For the year ended December 31, 2007, the conversion premiums on the 1.25% and 1.625% Debentures represent the dilutive shares based on a conversion price of $22.41.

The weighted average shares that have an antidilutive effect in the calculation of diluted net (loss) income per share attributable to CapitalSource Inc. and have been excluded from the computations above were as follows:

	Year Ended December 31,
	2009		2008		2007
Stock units		2,509,297		144,952		—
Stock options		5,689,616		8,812,062		8,102,769
Non-managing member units		—		826,476		2,110,113
Shares subject to a written call option		2,346,825		7,401,420		7,401,420
Shares issuable upon conversion of convertible debt		15,633,859		12,710,307		—
Unvested restricted stock		1,971,253		2,488,571		—

From the third quarter of 2008, we are no longer assuming cash settlement of the underlying principal on our 3.5% Debentures and 4% Debentures; therefore, we began applying the if-converted method to determine the effect

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

on diluted net income per share of shares issuable pursuant to convertible debt. For prior periods, we used the treasury stock method to determine the effect on diluted income per share attributable to CapitalSource Inc. of shares issuable pursuant to the conversion premium of convertible debt and the shares underlying the principal balances were excluded. For additional information, see Note 12, Borrowings.

As dividends are paid, the conversion prices related to our Senior Debentures and 4% Debentures are adjusted. The conversion price related to the 7.25% Debentures will be adjusted only if we pay dividends on our common stock greater than $0.60 per share, per quarter. Also, we have excluded the shares underlying the principal balance of the 7.25% Debentures for all periods presented as the principal balance of our 7.25% Debentures is required to be settled in cash upon redemption or conversion.

Note 18.   Stock-Based Compensation

Equity Incentive Plan

In April 2006, our shareholders adopted the CapitalSource Inc. Third Amended and Restated Equity Incentive Plan (the “Plan”), which amended the CapitalSource Inc. Second Amended and Restated Equity Incentive Plan adopted on August 6, 2003 in connection with our initial public offering. A total of 33.0 million shares of common stock are reserved for issuance under the Plan. Any shares that may be issued under the Plan to any person pursuant to an option or stock appreciation right (a “SAR”) are counted against this limit as one share for every one share granted. Any shares that may be issued under the Plan to any person, other than pursuant to an option or SAR, are counted against this limit as one and one-half shares for every one share granted. As of December 31, 2009, there were 14.2 million shares subject to outstanding grants and 3.2 million shares remaining available for future grants under the Plan. The Plan will expire on the earliest of (1) the date as of which the Board of Directors, in its sole discretion, determines that the Plan shall terminate, (2) following certain corporate transactions such as a merger or sale of our assets if the Plan is not assumed by the surviving entity, (3) at such time as all shares of common stock that may be available for purchase under the Plan have been issued or (4) August 6, 2016. The Plan is intended to give eligible employees, members of the Board of Directors, and our consultants and advisors awards that are linked to the performance of our common stock.

Total compensation cost recognized in income pursuant to the Plan was $30.9 million, $43.6 million and $44.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Stock Options

Stock option activity for the year ended December 31, 2009 was as follows:

				Weighted		Weighted Average
				Average		Remaining
				Exercise		Contractual Life		Aggregate
	Options			Price		(in years)		Intrinsic Value
								($ in thousands)
Outstanding as of December 31, 2008		8,893,940		$	22.98
Granted		7,009,274			3.53
Exercised		(2,718	)		0.01
Forfeited		(3,961,694	)		21.37
Canceled		(4,267,010	)		23.67
Outstanding as of December 31, 2009		7,671,792			5.66		8.65	$	2,922
Vested as of December 31, 2009		2,198,078			10.54		6.61		467
Exercisable as of December 31, 2009		2,198,078			10.54		6.61		467

For the years ended December 31, 2009, 2008 and 2007, the weighted average grant date fair values of options granted were $1.91, $2.65 and $1.60, respectively. The total intrinsic values of options exercised during the years ended December 31, 2009, 2008 and 2007, were $10,845, $0.5 million and $3.8 million, respectively. As of

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2009, the total unrecognized compensation cost related to nonvested options granted pursuant to the Plan was $7.1 million. This cost is expected to be recognized over a weighted average period of 2.39 years.

For awards containing only service and/or performance based vesting conditions, we use the Black-Scholes option-pricing model to estimate the fair value of each option grant on its grant date. The assumptions used in this model for the years ended December 31, 2009, 2008 and 2007, were as follows:

	Year Ended December 31,
	2009			2008			2007
Dividend yield		1.2	%		12.0	%		10.4	%
Expected volatility		84.2	%		49.6	%		23.3	%
Risk-free interest rate		1.7	%		2.8	%		4.6	%
Expected life		4.0 years			4.0 years			4.0 years

The dividend yield is computed based on annualized dividends and the average share price for the period. The expected volatility is based on the historical volatility of CapitalSource Inc.’s stock price in the most recent period that is equal to the expected term of the options being valued. The risk-free interest rate is the U.S. Treasury yield curve in effect at the time of grant based on the expected life of options. The expected life of our options granted represents the period of time that options are expected to be outstanding.

Restricted Stock and Restricted Stock Units

Restricted stock activities, including restricted stock awards and restricted stock units, for the year ended December 31, 2009, were as follows:

				Weighted
				Average
				Grant-Date
	Shares			Fair Value
Outstanding as of December 31, 2008		5,464,101		$	19.40
Granted		3,153,930			3.45
Vested		(1,812,558	)		18.94
Forfeited		(283,597	)		11.86
Outstanding as of December 31, 2009(1)		6,521,876			7.52

(1) Includes 2.5 million and 1.1 million vested and unvested restricted stock units, respectively.

The fair value of nonvested restricted stock and restricted stock units is determined based on the closing trading price of our common stock on the grant date, in accordance with the Plan. The weighted average grant date fair value of restricted stock awards and restricted stock units granted during the years ended December 31, 2009, 2008 and 2007 was $3.45, $8.78 and $23.53, respectively.

The total fair value of restricted stock awards that vested during the years ended December 31, 2009, 2008 and 2007 was $5.9 million, $31.7 million and $39.8 million, respectively. As of December 31, 2009, the total unrecognized compensation cost related to nonvested restricted stock awards granted pursuant to the Plan was $15.0 million, which is expected to be recognized over a weighed average period of 1.86 years.

Note 19.   Bank Regulatory Capital

CapitalSource Bank is subject to various regulatory capital requirements established by federal and state regulatory agencies. Failure to meet minimum capital requirements can result in regulatory agencies initiating certain mandatory and possibly additional discretionary actions that, if undertaken, could have a direct material effect on our audited consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, CapitalSource Bank must meet specific capital guidelines that involve

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

quantitative measures of its assets and liabilities as calculated under regulatory accounting practices. CapitalSource Bank’s capital amounts and other requirements are also subject to qualitative judgments by its regulators about, risk weightings and other factors. See Item 1, Business — Supervision and Regulation, for a further description of CapitalSource Bank’s regulatory requirements.

The calculations of the respective capital amounts at CapitalSource Bank as of December 31, 2009, were as follows ($ in thousands):

Common stockholder’s equity at CapitalSource Bank	$	868,325
Less:
Disallowed goodwill and other disallowed intangible assets		(166,365	)
Unrealized gain on available-for-sale securities		(2,637	)
Total Tier-1 Capital		699,323
Add: Allowable portion of the allowance for loan losses and other		55,257
Total Risk-Based Capital	$	754,580

Under prompt corrective action regulations, a “well-capitalized” bank must have a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a Tier 1 leverage ratio of 5%. Under its approval order from the FDIC, CapitalSource Bank must be both “well capitalized” and at all times have a total risk-based capital ratio of 15%, a Tier-1 risk-based capital ratio of 6% and a Tier 1 leverage ratio of 5%. CapitalSource Bank’s capital ratios and the minimum requirement as of December 31, 2009 and 2008 were as follows:

	December 31,
	2009										2008
	Actual					Minimum Required					Actual					Minimum Required
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
								($ in thousands)
Tier-1 Leverage	$	699,323		12.80	%	$	273,153		5.00	%	$	794,622		13.38	%	$	296,876		5.00	%
Tier-1 Risk-Based Capital		699,323		16.19			259,175		6.00			794,622		16.30			292,489		6.00
Total Risk-Based Capital		754,580		17.47			647,938		15.00			850,318		17.44			731,222		15.00

The California Department of Financial Institutions (the “DFI”) approval order requires that CapitalSource Bank, during the first three years of operations, maintain a minimum ratio of tangible shareholder’s equity to total tangible assets of at least 10.00%. As of December 31, 2009 and 2008, CapitalSource Bank satisfied the DFI capital ratio requirement with ratios of 12.32% and 12.04%, respectively.

Note 20.   Commitments and Contingencies

We have non-cancelable operating leases for office space and office equipment. The leases expire over the next fifteen years and contain provisions for certain annual rental escalations.

As of December 31, 2009, future minimum lease payments under non-cancelable operating leases, including leases held at CapitalSource Bank, were as follows ($ in thousands):

2010	$	16,063
2011		15,060
2012		14,067
2013		11,327
2014		8,876
Thereafter		58,500
Total	$	123,893

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Rent expense was $18.6 million, $11.4 million and $9.7 million for the years ended December 31, 2009, 2008 and 2007, respectively.

We are obligated to provide standby letters of credit in conjunction with several of our lending arrangements and property lease obligations. As of both December 31, 2009 and 2008, we had issued $182.5 million and $183.5 million, respectively, in letters of credit which expire at various dates over the next six years. If a borrower defaults on its commitment(s) subject to any letter of credit issued under these arrangements, we would be responsible to meet the borrower’s financial obligation and would seek repayment of that financial obligation from the borrower. These arrangements had carrying amounts totaling $6.1 million and $5.9 million, as reported in other liabilities in our audited consolidated balance sheets as of December 31, 2009 and 2008, respectively.

As of December 31, 2009 and 2008, we had unfunded commitments to extend credit to our clients of $2.8 billion and $3.6 billion, respectively, including unfunded commitments to extend credit by CapitalSource Bank of $914.9 million and $777.7 million, respectively. Due to their nature, we cannot know with certainty the aggregate amounts we will be required to fund under these unfunded commitments. We expect that these unfunded commitments will continue to indefinitely exceed our Parent Company’s available funds. Our failure to satisfy our full contractual funding commitment to one or more of our clients could create breach of contract and lender liability for us and irreparably damage our reputation in the marketplace. In many cases, our obligation to fund unfunded commitments is subject to our clients’ ability to provide collateral to secure the requested additional fundings, the collateral’s satisfaction of eligibility requirements, our clients’ ability to meet specified preconditions to borrowing, including compliance with all provisions of the loan agreements, and/or our discretion pursuant to the terms of the loan agreements. In other cases, however, there are no such prerequisites to future fundings by us and our clients may draw on these unfunded commitments at any time. To the extent there are unfunded commitments with respect to a loan that is owned partially by CapitalSource Bank and the Parent Company, unless our client is in default, CapitalSource Bank is obligated in some cases pursuant to intercompany agreements to fund its portion of the unfunded commitment before the Parent Company is required to fund its portion. In addition, in some cases we may be able to borrow additional amounts under our secured credit facilities as we fund these unfunded commitments.

As of December 31, 2009 and 2008, we had identified conditional asset retirement obligations primarily related to the future removal and disposal of asbestos that is contained within certain of our direct real estate investment properties. The asbestos is appropriately contained and we believe we are compliant with current environmental regulations. If these properties undergo major renovations or are demolished, certain environmental regulations specify the manner in which asbestos must be handled and disposed. We are required to record the fair value of these conditional liabilities if they can be reasonably estimated. As of December 31, 2009 and 2008, sufficient information was not available to estimate our liability for conditional asset retirement obligations as the obligations to remove the asbestos from these properties have indeterminable settlement dates. As such, no liability for conditional asset retirement obligations was recorded on our audited consolidated balance sheets as of December 31, 2009 and 2008.

In July 2009, we entered into a limited guarantee for the principal balance and any accrued interest and unpaid fees with respect to indebtedness owing by a company in which we hold an investment. The guarantee can be called by the lender on the earlier of an acceleration of our syndicated bank credit facility and July 9, 2011. As of December 31, 2009, the principal amount guaranteed was $22.1 million. In accordance with the Consolidation Topic of the Codification, we have determined that we are not required to recognize the assets and liabilities of this special purpose entity for financial statement purposes as of December 31, 2009.

From time to time we are party to legal proceedings. We do not believe that any currently pending or threatened proceeding, if determined adversely to us, would have a material adverse effect on our business, financial condition or results of operations, including our cash flows.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 21.   Related Party Transactions

We have from time to time in the past, and expect that we may from time to time in the future, enter into transactions with companies in which our directors, executive officers, nominees for directors, 5% or more beneficial owners or certain of their affiliates have material interests. Our Board of Directors, or a committee of disinterested directors, is charged with considering and approving these types of transactions. Management believes that each of our related party loans has been, and will continue to be, subject to the same due diligence, underwriting and rating standards as the loans that we make to unrelated third parties.

As of December 31, 2009 and 2008, we had committed to lend $86.5 million and $135.3 million, respectively, to such entities of which $64.0 million and $111.7 million, respectively, was outstanding. These loans bear interest ranging from 3.26% to 8.75% as of December 31, 2009 and 3.66% to 8.75% as of December 31, 2008. For the years ended December 31, 2009, 2008 and 2007, we recognized $4.7 million, $9.2 million and $13.0 million, respectively, in interest and fees from these loans.

Activity in related party loans for the year ended December 31, 2009, was as follows ($ in thousands):

Balance as of January 1, 2009	$	111,649
Advances		10,682
Repayments		(26,972	)
Loan sales		(19,469	)
Reclassified to non-related party		(11,900	)
Balance as of December 31, 2009	$	63,990

Note 22.   Derivative Instruments

We enter into various derivative instruments to manage interest rate and foreign exchange risks in our ongoing business operations. We account for these derivative instruments pursuant to the provisions of applicable accounting standards under the Derivatives and Hedging Topic of the Codification and, as such, adjust these instruments to fair value through income as a component of (loss) gain on derivatives in our audited consolidated statements of operations. During the years ended December 31, 2009, 2008 and 2007, we recognized net realized and unrealized losses of $13.1 million, $41.1 million and $46.2 million, respectively, related to these derivative instruments. As of December 31, 2009 and 2008, our commercial derivative activities resulted in an asset position of $14.3 million and $66.4 million, respectively, which is recorded in our audited consolidated balance sheets in other assets; and a liability position of $82.7 million and $131.3 million, respectively, which is recorded in our audited consolidated balance sheets in other liabilities. We do not enter into derivative instruments for speculative purposes. As of December 31, 2009, none of our derivatives were designated as hedging instruments pursuant to applicable accounting standards.

Interest Rate Risk

We enter into various derivative instruments to manage interest rate risk. The objective is to manage interest rate sensitivity by modifying the characteristics of certain assets and liabilities to reduce the adverse effect of changes in interest rates. We primarily use interest rate swaps and basis swaps to manage our interest rate risks. Interest rate swaps are contracts in which a series of interest rate cash flows, based on a specific notional amount and a fixed and variable interest rate, are exchanged over a prescribed period. Options are contracts that provide the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time or on a specific date in exchange for the payment of a premium when the contract is issued. Swaptions are contracts that provide the right, but not the obligation, to enter into an interest rate swap agreement on a specified future date in exchange for the payment of a premium when the contract is issued. Caps and floors are contracts that transfer, modify, or reduce interest rate risk in exchange for the payment of a premium when the contract is issued. Eurodollar and Treasury futures are contracts that cash settle on a future date based on a specific notional amount and a variable interest rate.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Interest Rate Swaps

We enter into interest rate swap agreements to minimize the economic effect of interest rate fluctuations specific to our fixed rate debt, certain fixed rate loans and certain sale-leaseback transactions. Interest rate fluctuations result in hedged assets and liabilities appreciating or depreciating in market value. Gain or loss on the derivative instruments will generally offset the effect of unrealized appreciation or depreciation of hedged assets and liabilities for the period the item is being hedged. As of December 31, 2009 and 2008, the fair value of the interest rate swap derivative asset was $14.0 million and $53.0 million, respectively. As of December 31, 2009 and 2008, the fair value of the interest rate swap derivative liability was $76.2 million and $127.6 million, respectively. The notional amount of the derivative instruments related to these exposures was approximately $710.2 million and $308.0 million as of December 31, 2009 and 2008, respectively.

Interest Rate Caps

The Issuers of our term debt securitization transactions entered into interest rate cap agreements to hedge loans with embedded interest rate caps that are pledged as collateral for our term debt. Simultaneously, we entered into offsetting interest rate cap agreements. The interest rate caps are not designated as hedges for accounting purposes. Since the interest rate cap agreements are offsetting, changes in the fair value of the interest rate cap agreements have no impact on current period earnings.

Basis Swaps

We enter into basis swap agreements to eliminate basis risk between our LIBOR-based term debt securitizations and the prime-based loans pledged as collateral for that debt. These basis swaps modify our exposure to interest risk typically by converting our prime rate loans to a one-month LIBOR rate. The objective of this swap activity is to protect us from risk that interest collected under the prime rate loans will not be sufficient to service the interest due under the one-month LIBOR-based term debt. These basis swaps are not designated as hedges for accounting purposes. The notional amounts of basis swaps related to these exposures were approximately $556.8 million and $916.7 million as of December 31, 2009 and 2008, respectively. During the years ended December 31, 2009, 2008 and 2007, we recognized a net loss of $7.8 million, net gain of $2.1 million and a net loss of $1.8 million, respectively, related to the fair value of these basis swaps and cash payments made or received, which was recorded in (loss) gain on derivatives in our audited consolidated statements of operations. As of December 31, 2009 and 2008, the fair value of the basis swap derivative asset was $0.1 million and $6.5 million, respectively. As of December 31, 2009 and 2008, the fair value of the basis swap derivative liability was $2.6 million for both periods.

Foreign Exchange Risk

Forward Exchange Contracts

We enter into forward exchange contracts to hedge anticipated loan syndications and foreign currency denominated loans we originate against foreign currency fluctuations. The objective is to manage the uncertainty of future foreign exchange rate fluctuations by contractually locking in current foreign exchange rates for the settlement of anticipated future cash flows. These forward exchange contracts provide for a fixed exchange rate which has the effect of locking in the anticipated cash flows to be received from the loan syndication and the foreign currency-denominated loans.

As of December 31, 2009 and 2008, the fair value of the forward exchange contracts derivative asset was $0.3 million and $6.9 million, respectively. As of December 31, 2009 and 2008, the fair value of the forward exchange contracts derivative liability was $3.9 million and $1.1 million, respectively. The notional amount of our foreign exchange contracts was approximately $54.6 million and $71.4 million as of December 31, 2009 and 2008, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2009, the fair values of our various derivative instruments as well as their locations in our audited consolidated balance sheets were as follows:

	Asset Derivatives				Liability Derivatives
	Location		Fair Value		Location		Fair Value
			($ in thousands)
Interest rate contracts		Other assets	$	14,073		Other liabilities	$	78,736
Foreign exchange contracts		Other assets		256		Other liabilities		3,926
Total			$	14,329			$	82,662

As of December 31, 2008, the fair values of our various derivative instruments as well as their locations in our audited consolidated balance sheets were as follows:

	Asset Derivatives				Liability Derivatives
	Location		Fair Value		Location		Fair Value
			($ in thousands)
Interest rate contracts		Other assets	$	59,506		Other liabilities	$	130,279
Foreign exchange contracts		Other assets		6,855		Other liabilities		1,021
Total			$	66,361			$	131,300

The gains and losses on our derivative instruments recognized during the years ended December 31, 2009, 2008 and 2007 as well as the locations of such gains and losses in our audited consolidated statements of operations were as follows:

		Gain (Loss) Recognized in Income in
		Year Ended December 31,
	Location	2009			2008			2007
		($ in thousands)
Interest rate contracts	(Loss) gain on derivatives	$	(4,748	)	$	(47,455	)	$	(40,499	)
Interest rate contracts	(Loss) gain on residential mortgage investment portfolio		896			(101,468	)		(79,581	)
Foreign exchange contracts	(Loss) gain on derivatives		(8,307	)		14,582			(577	)
Total		$	(12,159	)	$	(134,341	)	$	(120,657	)

Note 23.   Credit Risk

In the normal course of business, we utilize various financial instruments to manage our exposure to interest rate and other market risks. These financial instruments, which consist of derivatives and credit-related arrangements, involve, to varying degrees, elements of credit and market risk in excess of the amounts recorded on our audited consolidated balance sheets in accordance with applicable accounting standards.

Credit risk is the risk of loss arising from adverse changes in a client’s or counterparty’s ability to meet its financial obligations under agreed-upon terms. Market risk is the possibility that a change in market prices may cause the value of a financial instrument to decrease or become more costly to settle. The contract or notional amounts of financial instruments, which are not included in our audited consolidated balance sheets, do not necessarily represent credit or market risk. However, they can be used to measure the extent of involvement in various types of financial instruments.

We manage credit risk of our derivatives and credit-related arrangements by limiting the total amount of arrangements outstanding by an individual counterparty, by obtaining collateral based on management’s assessment of the client and by applying uniform credit standards maintained for all activities with credit risk. As of December 31, 2009, we had received cash collateral of $0.5 million and have posted cash collateral of $59.8 million related to our derivatives in asset and liability positions, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Contract or notional amounts and the credit risk amounts for derivatives and credit-related arrangements as of December 31, 2009 and 2008, were as follows:

	December 31,
	2009				2008
	Contract or				Contract or
	Notional		Credit Risk		Notional		Credit Risk
	Amount		Amount		Amount		Amount
			($ in thousands)
Derivatives:
Interest rate swaps	$	1,267,049	$	14,073	$	8,173,804	$	192,747
Interest rate caps		269,478		—		1,115,575		616
Futures		—		—		2,656,000		2,848
Interest rate swaptions		—		—		152,000		523
Forward exchange contracts		53,683		256		71,443		6,855
Total derivatives	$	1,590,210	$	14,329	$	12,168,822	$	203,589
Credit-related arrangements:
Commitments to extend credit	$	2,838,915	$	25,838	$	3,576,193	$	38,910
Commitments to extend letters of credit		371,528		24,430		169,144		6,578
Balloon and bullet loans		7,935,903		7,935,903		8,874,758		8,874,758
Paid-in-kind interest on loans		101,771		101,771		74,516		74,516
Total credit-related arrangements	$	11,248,117	$	8,087,942	$	12,694,611	$	8,994,762

Derivatives

Derivative instruments expose us to credit risk in the event of nonperformance by counterparties to such agreements. This risk exposure consists primarily of the termination value of agreements where we are in a favorable position. Credit risk related to derivative instruments is considered and provided for separately from the allowance for loan losses. We manage the credit risk associated with various derivative agreements through counterparty credit review and monitoring procedures. We obtain collateral from certain counterparties and monitor all exposure and collateral requirements daily. We continually monitor the fair value of collateral received from counterparties and may request additional collateral from counterparties or return collateral pledged as deemed appropriate. Our agreements generally include master netting agreements whereby we are entitled to settle our individual derivative positions with the same counterparty on a net basis upon the occurrence of certain events. As of December 31, 2009, our gross derivative counterparty exposures, based on the positive fair value of our derivative instruments, were $14.3 million. Our master netting agreements with our counterparties reduced this gross exposure by $13.7 million, resulting in a net exposure of $0.6 million as of December 31, 2009. We report our derivatives in our audited consolidated balance sheets at fair value on a gross basis irrespective of our master netting arrangements. We held $0.5 million of collateral against our derivative instruments that were in an asset position as of December 31, 2009. For derivatives that were in a liability position, we had posted collateral of $59.8 million as of December 31, 2009. For additional information, see Note 22, Derivative Instruments.

Credit-Related Arrangements

As of December 31, 2009 and 2008, we had committed credit facilities to our borrowers of approximately $11.6 billion and $13.3 billion, respectively, of which approximately $2.8 billion and $3.6 billion, respectively, was unfunded. Our failure to satisfy our full contractual funding commitment to one or more of our borrower’s could create a breach of contract and lender liability for us and damage our reputation in the marketplace, which could have a material adverse effect on our business.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We are obligated to provide standby letters of credit in conjunction with several of our lending arrangements. As of December 31, 2009 and 2008, we had issued $182.5 million and $183.5 million, respectively, in letters of credit which expire at various dates over the next six years. If a borrower defaults on its commitment(s) subject to any letter of credit issued under these arrangements, we would be responsible to meet the borrower’s financial obligation and would seek repayment of that financial obligation from the borrower.

Balloon and bullet loans collectively represent approximately 95% and 93% of our loan portfolio as of December 31, 2009 and 2008, respectively. A balloon loan is a term loan with a series of scheduled payment installments calculated to amortize the principal balance of the loan so that upon maturity of the loan more than 25%, but less than 100%, of the loan balance remains unpaid and must be satisfied. A bullet loan is a loan with no scheduled payments of principal before the maturity date of the loan. On the maturity date, the entire unpaid balance of the loan is due. Balloon loans and bullet loans involve a greater degree of credit risk than other types of loans because they require the client to make a large final payment upon the maturity of the loan.

Our PIK interest rate loans represent the deferral of either a portion or all of the contractual interest payments on the loan. At each payment date, any accrued and unpaid interest is capitalized and included in the loan’s principal balance. As of December 31, 2009 and 2008, the outstanding balance of our PIK loans was $1.0 billion and $1.1 billion, respectively. On the maturity date, the principal balance and the capitalized PIK interest are due. Loans with PIK interest have a greater degree of credit risk than other types of loans because they require the client to make a large final payment upon the maturity of the loan.

Concentrations of Credit Risk

In our normal course of business, we engage in transactions with clients throughout the United States. As of December 31, 2009, the single largest industry concentration was healthcare and social assistance, which made up approximately 20% of our commercial loan portfolio. As of December 31, 2009, the largest geographical concentration was Florida, which made up approximately 12% of our commercial loan portfolio. As of December 31, 2009, the single largest industry concentration in our direct real estate investment portfolio was skilled nursing, which made up approximately 99% of the investments. As of December 31, 2009, the largest geographical concentration in our direct real estate investment portfolio was Florida, which made up approximately 45% of the investments.

Note 24.   Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain of our assets and liabilities and to determine fair value disclosures. Investment securities, available-for-sale, mortgage-backed securities, warrants and derivatives are recorded at fair value on a recurring basis. In addition, we may be required, in specific circumstances, to measure certain of our assets at fair value on a nonrecurring basis, including investment securities, held-to-maturity, loans held for sale, loans held for investment, direct real estate investments, REO, and certain other investments.

Fair Value Determination

Fair value is based on quoted market prices or by using market based inputs where available. Given the nature of some of our assets and liabilities, clearly determinable market based valuation inputs are often not available; therefore, these assets and liabilities are valued using internal estimates. As subjectivity exists with respect to many of our valuation inputs used, the fair value estimates we have disclosed may not equal prices that we may ultimately realize if the assets are sold or the liabilities are settled with third parties.

Below is a description of the valuation methods for our assets and liabilities recorded at fair value on either a recurring or nonrecurring basis. While we believe the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain assets and liabilities could result in a different estimate of fair value at the measurement date.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Financial Assets and Liabilities

Cash

Cash and cash equivalents and restricted cash are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market.

Investment Securities, Available-for-Sale

Investment securities, available-for-sale, consist of Agency discount notes, Agency callable notes, Agency debt, Agency MBS, and Non-agency MBS that are carried at fair value on a recurring basis and classified as available-for-sale securities. Fair value adjustments on these investments are generally recorded through other comprehensive income. However, if impairment on an investment, available-for-sale is deemed to be other-than-temporary, all or a portion of the fair value adjustment may be reported in earnings. The securities are valued using quoted prices from external market participants, including pricing services. If quoted prices are not available, the fair value is determined using quoted prices of securities with similar characteristics or independent pricing models, which utilize observable market data such as benchmark yields, reported trades and issuer spreads. These securities are classified within Level 2 of the fair value hierarchy.

Investment securities, available-for-sale, also include a collateralized loan obligation and corporate debt securities which consist primarily of corporate bonds whose values are determined using internally developed valuation models. These models may utilize discounted cash flow techniques for which key inputs include the timing and amount of future cash flows and market yields. Market yields are based on comparisons to other instruments for which market data is available. These models may also utilize industry valuation benchmarks, such as multiples of EBITDA, depending on the industry, to determine a value for the underlying enterprise. Given the lack of active and observable trading in the market, our corporate debt securities and collateralized loan obligation are classified in Level 3.

Investment securities, available-for-sale, also consist of equity securities which are valued using the stock price of the underlying company in which we hold our investment. Our equity securities are classified in Level 1 or 2 depending on the level of activity within the market.

Investment Securities, Held-to-Maturity

Investment securities, held-to-maturity consist of commercial mortgage-backed-securities. These securities are recorded at amortized cost and recorded at fair value on a non-recurring basis to the extent we record an other-than-temporary impairment on the securities. Fair value measurements as of December 31, 2009 are determined using quoted prices from external market participants, including pricing services. If quoted prices are not available, the fair value is determined using quoted prices of securities with similar characteristics or independent pricing models, which utilize observable market data such as benchmark yields, reported trades and issuer spreads.

Mortgage-Related Receivables

Mortgage-related receivables are recorded at outstanding principal, net of unamortized purchase discounts. For disclosure purposes, the fair value is determined by an external pricing service based on the underlying collateral of the receivables. The value of the loans collateralizing the mortgage-related receivables is based on internal valuation techniques that consider interest rates, home values and borrower attributes, as well as anticipated default rates and prepayment rates.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Commercial Real Estate “A” Participation Interest

The “A” Participation Interest is recorded at outstanding principal, net of the unamortized purchase discount. For disclosure purposes, the fair value is estimated based on a discounted cash flow analysis, using rates currently being offered for securities with similar characteristics as the underlying collateral.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value, with fair value adjustments recorded on a nonrecurring basis. The fair value is determined using actual market transactions when available. In situations when market transactions are not available, we use the income approach through internally developed valuation models to estimate the fair value. This requires the use of significant judgment surrounding discount rates and the timing and amounts of future cash flows. Key inputs to these valuations also include costs of completion and unit settlement prices for the underlying collateral of the loans. Fair values determined through actual market transactions are classified within Level 2 of the fair value hierarchy, while fair values determined through internally developed valuation models are classified within Level 3 of the fair value hierarchy.

Loans Held for Investment

Loans held for investment are recorded at outstanding principal, net of any deferred fees and unamortized purchase discounts or premiums. We may record fair value adjustments on a nonrecurring basis when we have determined that it is necessary to record a specific reserve against the loans and we measure such specific reserves using the fair value of the loan’s collateral. To determine the fair value of the collateral, we may employ different approaches depending on the type of collateral. Typically, we determine the fair value of the collateral using internally developed models. Our models utilize industry valuation benchmarks, such as multiples of EBITDA, depending on the industry, to determine a value for the underlying enterprise. In certain cases where our collateral is a fixed or other tangible asset, we will periodically obtain a third party appraisal. When fair value adjustments are recorded on these loans, we typically classify them in Level 3 of the fair value hierarchy.

We determine the fair value estimates of loans held for investment primarily using external valuation specialists. These valuation specialists group loans based on credit rating and collateral type, and the fair value is estimated utilizing discounted cash flow techniques. The valuations take into account current market rates of return, contractual interest rates, maturities and assumptions regarding expected future cash flows. Within each respective loan grouping, current market rates of return are determined based on quoted prices for similar instruments that are actively traded, adjusted as necessary to reflect the illiquidity of the instrument. This approach requires the use of significant judgment surrounding current market rates of return, liquidity adjustments and the timing and amounts of future cash flows.

Direct Real Estate Investments, net and Direct Real Estate Investments Held for Sale

Direct real estate investments, net are generally recorded at cost, net of accumulated depreciation. However, fair value adjustments are recorded on a nonrecurring basis if the carrying amount of an investment is not recoverable and exceeds its fair value. Direct real estate investments held for sale are recorded at the lower of cost or fair value with fair value adjustments occurring on a nonrecurring basis. We determine the fair value of these investments using actual market transactions where available. If market transactions are not available, we use the income approach through internally developed valuation models to estimate the fair value. This requires the use of significant judgment surrounding discount rates and the timing and amounts of future cash flows. Fair values determined through actual market transactions are classified within Level 2 of the valuation hierarchy while fair values determined through internally developed valuation models are classified within Level 3.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other Investments

Other investments accounted for under the cost or equity methods of accounting are carried at fair value on a nonrecurring basis to the extent that they are determined to be other-than-temporarily impaired during the period. As there is rarely an observable price or market for such investments, we determine fair value using internally developed models. Our models utilize industry valuation benchmarks, such as multiples of EBITDA, depending on the industry, to determine a value for the underlying enterprise. We reduce this value by the value of debt outstanding to arrive at an estimated equity value of the enterprise. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the pricing indicated by the external event will be used to corroborate our private equity valuation. Fair value measurements related to these investments are typically classified within Level 3 of the fair value hierarchy.

Warrants

Warrants are carried at fair value on a recurring basis and generally relate to private companies. Warrants for private companies are valued based on the estimated value of the underlying enterprise. This fair value is derived principally using a multiple determined either from comparable public company data or from the transaction where we acquired the warrant and a financial performance indicator based on EBITDA or another revenue measure. Given the nature of the inputs used to value private company warrants, they are classified in Level 3 of the fair value hierarchy.

Derivative Assets and Liabilities

Derivatives are carried at fair value on a recurring basis and primarily relate to interest rate swaps, caps, floors, basis swaps and forward exchange contracts which we enter into to manage interest rate risk and foreign exchange risk. Our derivatives are principally traded in over-the-counter markets where quoted market prices are not readily available. Instead, derivatives are measured using market observable inputs such as interest rate yield curves, volatilities and basis spreads. We also consider counterparty credit risk in valuing our derivatives. We typically classify our derivatives in Level 2 of the fair value hierarchy.

FHLB SF Stock

Our investment in FHLB stock is recorded at historical cost. FHLB stock does not have a readily determinable fair value, but may be sold back to the FHLB at its par value with stated notice; however, the FHLB SF has currently ceased repurchases of excess stock. The investment in FHLB SF stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through December 31, 2009.

Real Estate Owned

REO is initially recorded at its estimated fair value at the time of foreclosure and carried at the lower of its carrying amount or fair value subsequent to the date of foreclosure, with fair value adjustments recorded on a nonrecurring basis. When available, the fair value of REO is determined using actual market transactions. When market transactions are not available, the fair value of REO is typically determined based upon recent appraisals by third parties. We may or may not adjust these third party appraisal values based on our own internally developed judgments and estimates. To the extent that market transactions or third party appraisals are not available, we use the income approach through internally developed valuation models to estimate the fair value. This requires the use of significant judgment surrounding discount rates and the timing and amounts of future cash flows. Fair values determined through actual market transactions are classified within Level 2 of the fair value hierarchy while fair values determined through third party appraisals and through internally developed valuation models are classified within Level 3 of the fair value hierarchy.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Loan Receivables

When we foreclose on a borrower whose underlying collateral consists of consumer loans, we record the acquired loans at the estimated fair value at the time of foreclosure. Fair value is determined using internally developed models that segregate the portfolio into performing and non-performing segments. Key inputs into these models include default and recovery rates, market discount rates and the underlying value of collateral.

Deposits

Deposits are carried at historical cost. The carrying amounts of deposits for savings and money market accounts and brokered certificates of deposit are deemed to approximate fair value as they either have no stated maturities or short-term maturities. Certificates of deposit are grouped by maturity date, and the fair value is estimated utilizing discounted cash flow techniques. The interest rates applied to the analyses are rates currently being offered for similar certificates of deposit within the respective maturity groupings.

Repurchase Agreements

The carrying amount of repurchase agreements is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market.

Credit Facilities

The fair value of our credit facilities is estimated based on current market interest rates for similar debt instruments adjusted for the remaining time to maturity.

Term Debt

Term debt is comprised of term debt transactions in the form of asset securitizations and 2014 Senior Secured Notes. For disclosure purposes, the fair values of our term debt securitizations and 2014 Senior Secured Notes are determined based on actual prices from recent third party purchases of our debt when available and based on indicative price quotes received from various market participants when recent transactions have not occurred.

Other Borrowings

Our other borrowings are comprised of convertible debt, subordinated debt and mortgage debt. For disclosure purposes, the fair value of our convertible debt is determined from quoted market prices in active markets or, when the market is not active, from quoted market prices for debt with similar maturities. The fair value of our subordinated debt is determined based on recent third party purchases of our debt when available and based on indicative price quotes received from market participants when recent transactions have not occurred. The fair value of our mortgage debt is estimated using discounted cash flow techniques, which take into account current market interest rates and the fixed spread included in the debt.

Off-Balance Sheet Financial Instruments

Loan Commitments and Letters of Credit

Loan commitments and letters of credit generate ongoing fees at our current pricing levels, which are recognized over the term of the commitment period. For disclosure purposes, the fair value is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current creditworthiness of the counterparties and current market conditions. In addition, for loan commitments, the market rates of return utilized in the valuation of the loans held for investment as described above are applied to this analysis to reflect current market conditions.

181

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Assets and Liabilities Carried at Fair Value on a Recurring Basis

Assets and liabilities have been grouped in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value on a recurring basis on the balance sheet as of December 31, 2009 were as follows:

	Fair Value
	Measurement as of		Quoted Prices in		Significant Other		Significant
	December 31,		Active Markets for		Observable		Unobservable
	2009		Identical Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
	($ in thousands)
Assets
Investment securities, available-for-sale	$	960,591	$	52,984	$	901,763	$	5,844
Investments carried at fair value:
Warrants		1,392		—		—		1,392
Other assets held at fair value:
Derivative assets		14,329		—		14,329		—
Total assets	$	976,312	$	52,984	$	916,092	$	7,236
Liabilities
Other liabilities held at fair value:
Derivative liabilities	$	82,662	$	—	$	82,662	$	—

Assets and liabilities carried at fair value on a recurring basis on balance sheet as of December 31, 2008 were as follows:

	Fair Value
	Measurement as of		Quoted Prices in		Significant Other		Significant
	December 31,		Active Markets for		Observable		Unobservable
	2008		Identical Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
	($ in thousands)
Assets
Investment securities, available-for-sale	$	679,551	$	—	$	642,927	$	36,624
Mortgage-backed securities pledged, trading		1,489,291		—		1,489,291		—
Investments carried at fair value:
Warrants		4,661		—		—		4,661
Other assets held at fair value:
Derivative assets		206,979		—		206,979		—
Total assets	$	2,380,482	$	—	$	2,339,197	$	41,285
Liabilities
Other liabilities held at fair value:
Derivative liabilities	$	342,784	$	—	$	342,784	$	—

182

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the changes in the fair values of assets and liabilities carried at fair value on a recurring basis for the year ended December 31, 2009, that have been classified in Level 3 of the fair value hierarchy was as follows:

			Realized and Unrealized						Total			Purchases,
			(Losses) Gains						Realized			Sales,							Unrealized
						Included in			and			Issuances,							Losses
	Balance as of					Other			Unrealized			and			Transfers		Balance as of		As of
	January 1,		Included in			Comprehensive			(Losses)			Settlements,			in (out)		December 31,		December 31,
	2009		Income			Income, net			Gains			Net			of Level 3		2009		2009
	($ in thousands)
Assets
Investments carried at fair value:
Investment securities, available-for-sale	$	36,624	$	(12,142	)	$	(2,420	)	$	(14,562	)	$	(16,218	)	$	—	$	5,844	$	(1,098	)
Warrants		4,661		(21	)		—			(21	)		(3,248	)		—		1,392		(185	)
Total assets	$	41,285	$	(12,163	)	$	(2,420	)	$	(14,583	)	$	(19,466	)	$	—	$	7,236	$	(1,283	)

A summary of the changes in the fair values of assets and liabilities carried at fair value on a recurring basis for the year ended December 31, 2008 that have been classified in Level 3 was as follows:

			Realized and Unrealized									Purchases,
			Losses, net						Total			Sales,
						Included in			Realized			Issuances,
	Balance as of					Other			and			and			Transfers		Balance as of
	January 1,		Included in			Comprehensive			Unrealized			Settlements,			in (out)		December 31,		Unrealized
	2008		Income			Income, net			Losses			Net			of Level 3		2008		Losses, net(1)
	($ in thousands)
Assets
Investments carried at fair value:
Investment securities, available-for-sale	$	12,837	$	(25,008	)	$	(10	)	$	(25,018	)	$	48,805		$	—	$	36,624	$	(25,008	)
Warrants		8,994		(2,681	)		—			(2,681	)		(1,652	)		—		4,661		(2,281	)
Total assets	$	21,831	$	(27,689	)	$	(10	)	$	(27,699	)	$	47,153		$	—	$	41,285	$	(27,289	)

(1) Represents net unrealized losses included in income relating to assets held as of December 31, 2008.

Realized and unrealized gains and losses on assets and liabilities classified in Level 3 of the fair value hierarchy included in income for the year ended December 31, 2009, reported in interest income, loss on investments, net, and loss on residential mortgage investment portfolio were as follows:

						Loss on
	Interest		Loss on			Residential Mortgage
	Income		Investments, net			Investment Portfolio
	($ in thousands)
Total gains (losses) included in earnings for the year	$	895	$	(13,588	)	$	(4	)
Unrealized gains (losses) relating to assets still held at reporting date		739		(2,018	)		(4	)

183

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Realized and unrealized gains and losses on assets and liabilities classified in Level 3 included in income for the year ended December 31, 2008, reported in interest income, (loss) gain on investments, net, and loss on residential mortgage investment portfolio, were as follows:

							Loss on
	Interest			Loss on			Residential Mortgage
	Income			Investments, net			Investment Portfolio
	($ in thousands)
Total losses included in earnings for the year	$	(83	)	$	(23,536	)	$	(4,070	)
Unrealized losses relating to assets still held at reporting date		(83	)		(23,136	)		(4,070	)

Assets Carried at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. As described above, these adjustments to fair value usually result from the application of lower of cost or fair value accounting or write downs of individual assets. The table below provides the fair values of those assets for which nonrecurring fair value adjustments were recorded during the years ended December 31, 2009 and 2008, classified by their position in the fair value hierarchy. The table also provides the gains (losses) related to those assets recorded during the years ended December 31, 2009 and 2008.

	Fair Value		Quoted Prices in						Total Net Losses for
	Measurement as of		Active Markets		Significant Other		Significant		the Year Ended
	December 31,		for Identical		Observable Inputs		Unobservable		December 31,
	2009		Assets (Level 1)		(Level 2)		Inputs (Level 3)		2009
	($ in thousands)
Assets
Loans held for sale	$	670	$	—	$	670	$	—	$	(3,438	)
Loans held for investment(1)		388,982		—		—		388,982		(276,650	)
Investments carried at cost		12,914		—		—		12,914		(12,542	)
Investments accounted for under the equity method		610		—		—		610		(2,802	)
REO(2)		80,674		—		—		80,674		(17,156	)
Loan receivables		127,173		—		—		127,173		(3,594	)
Total assets	$	611,023	$	—	$	670	$	610,353	$	(316,182	)

(1)	Represents impaired loans held for investment measured at fair value of the collateral less transaction costs. Transaction costs were not significant during the year.
(2)	Represents REO measured at fair value of the collateral less transaction costs. Transaction costs were not significant during the year.

	Fair Value
	Measurements For		Quoted Prices in						Total Net Losses for
	the Year Ended		Active Markets		Significant Other		Significant		the Year Ended
	December 31,		for Identical		Observable Inputs		Unobservable		December 31,
	2008		Assets (Level 1)		(Level 2)		Inputs (Level 3)		2008
Assets
Loans held for sale	$	8,543	$	—	$	8,543	$	—	$	(5,498	)
Loans held for investment(1)		289,363		—		—		289,363		(353,202	)
Investments carried at cost		3,993		—		—		3,993		(52,278	)
Investments accounted for under the equity method		6,207		—		—		6,207		(7,564	)
Total assets	$	308,106	$	—	$	8,543	$	299,563	$	(418,542	)

(1) Represents impaired loans held for investment measured at fair value of the loan’s collateral less transaction costs. Transaction costs were not significant during the year.

184

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Value of Financial Instruments

GAAP requires the disclosure of the estimated fair value of financial instruments. The Master Glossary of the Codification defines a financial instrument as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable terms. The methods and assumptions used in estimating the fair values of our financial instruments are described above.

The table below provides fair value estimates for our financial assets and liabilities as of December 31, 2009 and 2008, excluding financial assets and liabilities for which carrying value is a reasonable estimate of fair value and financial instruments that are recorded at fair value on a recurring basis.

	December 31,
	2009				2008
	Carrying Value		Fair Value		Carrying Value		Fair Value
	($ in thousands)
Assets:
Mortgage-related receivables, net	$	—	$	—	$	1,801,535	$	1,005,639
Commercial real estate “A” Participation Interest, net		530,560		530,390		1,396,611		1,266,921
Loans held for investment, net		7,588,135		7,287,196		8,849,088		7,944,681
Investments carried at cost		53,205		87,940		61,279		81,237
Investment securities, held-to-maturity		242,078		262,181		14,389		14,389
Liabilities:
Deposits		4,483,879		4,486,285		5,043,695		5,066,874
Credit facilities		542,781		497,036		1,445,062		1,343,512
Owner Trust term debt		—		—		1,724,914		997,611
Other term debt		2,956,536		2,162,533		3,613,542		2,135,646
Convertible debt		561,347		525,860		729,474		455,368
Subordinated debt		439,701		255,027		438,799		219,400
Mortgage debt		447,683		426,865		330,311		275,995
Loan commitments and letters of credit		—		45,455		—		45,488

Note 25.   Segment Data

We currently operate as three reportable segments: 1) CapitalSource Bank, 2) Other Commercial Finance, and 3) Healthcare Net Lease. Our CapitalSource Bank segment comprises our commercial lending and banking business activities; our Other Commercial Finance segment comprises our loan portfolio and residential mortgage and other business activities in the Parent Company; and our Healthcare Net Lease segment comprises our direct real estate investment business activities.

For the year ended December 31, 2008, we presented financial results through three reportable segments: 1) Commercial Banking, 2) Healthcare Net Lease, and 3) Residential Mortgage Investment. Beginning in the first quarter of 2009, changes were made in the way management organizes financial information to make operating decisions, resulting in the activities previously reported in the Commercial Banking segment being disaggregated into the CapitalSource Bank and Other Commercial Finance segments and the results of our Residential Mortgage Investment segment being combined into the Other Commercial Finance segment. We have reclassified all comparative prior period segment information to reflect our current segments.

185

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On November 17, 2009, we announced the intent to sell certain direct real estate investments, currently included in our Healthcare Net Lease segment. As of December 31, 2009, we have closed on the sale of the first group of properties and anticipate closing on another group in the second quarter of 2010. As a result, we have recast prior periods’ segment financial data to reflect the retrospective accounting application of the discontinued operation within our Healthcare Net Lease segment. For additional information, see 3, Discontinued Operations.

The financial results of our operating segments as of and for the years ended December 31, 2009, 2008 and 2007, were as follows:

	Year Ended December 31, 2009
				Other
	CapitalSource			Commercial			Healthcare			Intercompany			Consolidated
	Bank(1)			Finance			Net Lease			Eliminations			Total
							($ in thousands)
Total interest and fee income	$	314,115		$	589,965		$	450		$	(19,060	)	$	885,470
Operating lease income		—			—			33,985			—			33,985
Interest expense(2)		111,993			318,662			20,109			(13,051	)		437,713
Provision for loan losses		213,381			632,605			—			—			845,986
Operating expenses(3)		100,474			213,042			19,014			(44,662	)		287,868
Other income (expense), net		34,806			(91,080	)		(2,136	)		(47,475	)		(105,885	)
Net (loss) income from continuing operations before income taxes		(76,927	)		(665,424	)		(6,824	)		(8,822	)		(757,997	)
Income tax (benefit) expense		(6,228	)		143,800			(1,258	)		—			136,314
Net loss from continuing operations		(70,699	)		(809,224	)		(5,566	)		(8,822	)		(894,311	)
Net income from discontinued operations, net of taxes		—			—			33,335			—			33,335
Loss from sale of discontinued operations, net of taxes		—			—			(8,071	)		—			(8,071	)
Net (loss) income		(70,699	)		(809,224	)		19,698			(8,822	)		(869,047	)
Net loss attributable to noncontrolling interests		—			(28	)		—			—			(28	)
Net (loss) income attributable to CapitalSource Inc.	$	(70,699	)	$	(809,196	)	$	19,698		$	(8,822	)	$	(869,019	)
Total assets as of December 31, 2009	$	5,677,354		$	6,069,857		$	678,030		$	(178,299	)	$	12,246,942
Assets of discontinued operations, held for sale, as of December 31, 2009		—			—			260,541			—			260,541

186

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Year Ended December 31, 2008
				Other
	CapitalSource			Commercial			Healthcare			Intercompany			Consolidated
	Bank(1)			Finance			Net Lease			Eliminations			Total
	($ in thousands)
Total interest and fee income	$	148,104		$	1,090,704		$	1,402		$	(7,582	)	$	1,232,628
Operating lease income		—			—			31,896			—			31,896
Interest expense(2)		76,246			591,645			37,546			(12,080	)		693,357
Provision for loan losses		55,600			537,446			—			—			593,046
Operating expenses(3)		43,287			223,697			21,310			(23,258	)		265,036
Other income (expense), net		12,451			(138,174	)		41			(38,077	)		(163,759	)
Net loss from continuing operations before income taxes		(14,578	)		(400,258	)		(25,517	)		(10,321	)		(450,674	)
Income tax benefit		(6,089	)		(183,146	)		(1,348	)		—			(190,583	)
Net loss from continuing operations		(8,489	)		(217,112	)		(24,169	)		(10,321	)		(260,091	)
Net income from discontinued operations, net of taxes		—			—			41,310			—			41,310
Gain from sale of discontinued operations, net of taxes		—			—			104			—			104
Net (loss) income		(8,489	)		(217,112	)		17,245			(10,321	)		(218,677	)
Net (loss) income attributable to noncontrolling interests		—			(706	)		2,132			—			1,426
Net (loss) income attributable to CapitalSource Inc.	$	(8,489	)	$	(216,406	)	$	15,113		$	(10,321	)	$	(220,103	)
Total assets as of December 31, 2008	$	6,112,572		$	11,550,880		$	1,059,031		$	(302,851	)	$	18,419,632
Assets of discontinued operations, held for sale, as of December 31, 2008		—			—			686,466			—			686,466

187

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Year Ended December 31, 2007
			Other
	CapitalSource		Commercial			Healthcare			Intercompany			Consolidated
	Bank(1)		Finance			Net Lease			Eliminations			Total
	($ in thousands)
Total interest and fee income	$	—	$	1,429,811		$	1,362		$	(1,366	)	$	1,429,807
Operating lease income		—		—			33,444			—			33,444
Interest expense(2)		—		824,558			35,988			(1,366	)		859,180
Provision for loan losses		—		78,641			—			—			78,641
Operating expenses(3)		—		226,550			18,452			—			245,002
Other income (expense), net		—		(63,790	)		(31	)		—			(63,821	)
Net (loss) income from continuing operations before income taxes		—		236,272			(19,665	)		—			216,607
Income tax expense		—		87,563			—			—			87,563
Net (loss) income from continuing operations		—		148,709			(19,665	)		—			129,044
Net income from discontinued operations, net of taxes		—		—			35,027			—			35,027
Gain (loss) from sale of discontinued operations, net of taxes		—		—			156			—			156
Net income		—		148,709			15,518			—			164,227
Net income attributable to noncontrolling interests		—		(1,037	)		5,975			—			4,938
Net income attributable to CapitalSource Inc.	$	—	$	149,746		$	9,543		$	—		$	159,289
Total assets as of December 31, 2007	$	—	$	17,188,820		$	1,098,287		$	(247,743	)	$	18,039,364
Assets of discontinued operations, held for sale, as of December 31, 2007		—		—			706,547			—			706,547

(1)	CapitalSource Bank segment commenced operations on July 25, 2008.
(2)	Interest expense in our Healthcare Net Lease segment includes interest on a secured credit facility, term debt and mortgage debt.
(3)	Operating expenses of our Healthcare Net Lease segment include depreciation of direct real estate investments, professional fees, an allocation of overhead expenses (including compensation and benefits) and other direct expenses.

The accounting policies of each of the individual operating segments are the same as those described in Note 2, Summary of Significant Accounting Policies. Currently, substantially all of our business activities occur within the United States of America; therefore, no additional geographic disclosures are necessary.

Intercompany Eliminations

The intercompany eliminations consist of eliminations for intercompany activity among the segments. Such activities primarily include services provided by the Parent Company to CapitalSource Bank and by CapitalSource Bank to the Parent Company; loan sales between the Parent Company and CapitalSource Bank; daily loan collections received at CapitalSource Bank for Parent Company loans and daily loan disbursements paid at the Parent Company for CapitalSource Bank loans; and intercompany notes and related interest between the segments.

188

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 26.   Parent Company Information

As of December 31, 2009 and 2008, the Parent Company condensed financial information was as follows:

Condensed Balance Sheets

	December 31,
	2009			2008
	($ in thousands)
Assets
Cash and cash equivalents	$	99,103		$	11
Investment in subsidiaries:
Bank subsidiary		868,324			915,690
Non-Bank subsidiaries		1,847,775			3,482,082
Total investment in subsidiaries		2,716,099			4,397,772
Other assets		438,214			114,169
Assets of discontinued operations, held for sale		—			—
Total assets	$	3,253,416		$	4,511,952
Liabilities and Shareholders’ Equity Liabilities:
Credit facilities	$	193,637		$	890,000
Other borrowings		844,285			729,474
Other liabilities		32,328			62,181
Liabilities of discontinued operations		—			—
Total liabilities		1,070,250			1,681,655
Shareholders’ equity:
Common stock		3,230			2,828
Additional paid-in capital		3,909,366			3,686,965
Accumulated deficit		(1,748,791	)		(868,394	)
Accumulated other comprehensive income, net		19,361			8,898
Total shareholders’ equity		2,183,166			2,830,297
Total liabilities and shareholders’ equity	$	3,253,416		$	4,511,952

189

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Statements of Operations

	Year Ended December 31,
	2009			2008			2007
	($ in thousands)
Net investment income:
Interest income	$	19,326		$	4,335		$	12,205
Interest expense		121,537			95,253			72,050
Net investment (loss) income		(102,211	)		(90,918	)		(59,845	)
Operating expenses:
Compensation and benefits		1,321			1,061			1,194
Professional fees		7,762			3,577			2,905
Other administrative expenses		4,163			38,175			48,074
Total operating expenses		13,246			42,813			52,173
Other (expense) income:
Other expense income		(57,095	)		(28,242	)		—
Earnings in Bank subsidiary		(70,699	)		(8,491	)		—
Earnings in non-Bank subsidiaries		(636,209	)		(39,448	)		271,307
Total other (expense) income		(764,003	)		(76,181	)		271,307
Net (loss) income from continuing operations before income taxes		(879,460	)		(209,912	)		159,289
Income tax (benefit) expense		(10,441	)		9,977			—
Net (loss) income from continuing operations		(869,019	)		(219,889	)		159,289
Net income from discontinued operations, net of taxes		—			—			—
Gain from sale of discontinued operations, net of taxes		—			—			—
Net (loss) income		(869,019	)		(219,889	)		159,289
Net income attributable to noncontrolling interests		—			—			—
Net (loss) income attributable to CapitalSource Inc.	$	(869,019	)	$	(219,889	)	$	159,289

190

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Statements of Cash Flows

	Year Ended December 31,
	2009			2008			2007
	($ in thousands)
Cash provided by (used in) operating activities:	$	600,766		$	(682,193	)	$	(618,913	)
Cash provided by investing activities:		—			—			—
Financing activities:
Proceeds from issuance of common stock, net of offering costs		77,105			601,755			714,490
Payment of dividend		(12,455	)		(287,566	)		(467,173	)
(Repayments of) borrowings on credit facilities, net		(696,363	)		409,763			124,551
Borrowings of term debt, net		281,898			—			—
(Repayments of) borrowings of convertible debt		(118,503	)		—			245,000
Others		(33,356	)		(41,748	)		1,888
Cash provided by financing activities:		(501,674	)		682,204			618,756
Increase (decrease) in cash and cash equivalents		99,092			11			(157	)
Cash and cash equivalents as of beginning of year		11			—			157
Cash and cash equivalents as of end of year	$	99,103		$	11		$	—

191

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 27.   Unaudited Quarterly Information

Unaudited quarterly information for each of the three months in the years ended December 31, 2009 and 2008, was as follows:

	Three Months Ended
	December 31,			September 30,			June 30,			March 31,
	2009			2009			2009			2009
	($ in thousands except per share data)
Interest income	$	196,079		$	206,475		$	214,539		$	245,493
Fee income		6,041			5,176			5,808			5,859
Total interest and fee income		202,120			211,651			220,347			251,352
Operating lease income		8,526			8,425			8,508			8,526
Total investment income		210,646			220,076			228,855			259,878
Interest expense		94,524			104,002			109,516			129,671
Net investment income		116,122			116,074			119,339			130,207
Provision for loan losses		265,487			221,385			203,847			155,267
Net investment loss after provision for loan losses		(149,365	)		(105,311	)		(84,508	)		(25,060	)
Depreciation of direct real estate investments		2,540			2,540			2,540			2,540
Other operating expenses		75,901			64,413			68,243			69,151
Other (expense) income		(9,294	)		(11,140	)		(11,681	)		(73,770	)
Net loss from continuing operations before income taxes		(237,100	)		(183,404	)		(166,972	)		(170,521	)
Income tax expense (benefit)		5,125			97,089			89,441			(55,341	)
Net loss from continuing operations		(242,225	)		(280,493	)		(256,413	)		(115,180	)
Net income from discontinued operations, net of taxes		8,518			6,257			8,907			9,653
(Loss) gain from sale of discontinued operations, net of taxes		(10,215	)		—			937			1,207
Net (loss) income		(243,922	)		(274,236	)		(246,569	)		(104,320	)
Net income (loss) attributable to noncontrolling interests		—			10			(22	)		(16	)
Net loss income attributable to CapitalSource Inc.	$	(243,922	)	$	(274,246	)	$	(246,547	)	$	(104,304	)
Basic (loss) income per share:
From continuing operations	$	(0.76	)	$	(0.89	)	$	(0.86	)	$	(0.40	)
From discontinued operations	$	(0.01	)	$	0.02		$	0.03		$	0.04
Attributable to CapitalSource Inc.	$	(0.76	)	$	(0.87	)	$	(0.82	)	$	(0.36	)
Diluted (loss) income per share:
From continuing operations	$	(0.76	)	$	(0.89	)	$	(0.86	)	$	(0.40	)
From discontinued operations	$	(0.01	)	$	0.02		$	0.03		$	0.04
Attributable to CapitalSource Inc.	$	(0.76	)	$	(0.87	)	$	(0.82	)	$	(0.36	)

192

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Three Months Ended
	December 31,			September 30,			June 30,		March 31,
	2008			2008			2008		2008
	($ in thousands except per share data)
Interest income	$	291,394		$	295,093		$	280,764	$	332,278
Fee income		7,114			6,600			12,140		7,245
Total interest and fee income		298,508			301,693			292,904		339,523
Operating lease income		8,474			8,850			5,669		8,903
Total investment income		306,982			310,543			298,573		348,426
Interest expense		174,220			173,463			156,692		188,982
Net investment income		132,762			137,080			141,881		159,444
Provision for loan losses		445,452			110,261			31,674		5,659
Net investment (loss) income after provision for loan losses		(312,690	)		26,819			110,207		153,785
Depreciation of direct real estate investments		2,540			2,540			2,540		2,490
Other operating expenses		82,316			52,528			61,575		58,507
Other (expense) income		(144,380	)		30,336			44,276		(93,991	)
Net (loss) income from continuing operations before income taxes		(541,926	)		2,087			90,368		(1,203	)
Income tax (benefit) expense		(229,965	)		(307	)		36,954		2,735
Net (loss) income from continuing operations		(311,961	)		2,394			53,414		(3,938	)
Net income from discontinued operations, net of taxes		10,831			11,207			8,793		10,479
Gain from sale of discontinued operations, net of taxes		—			—			104		—
Net (loss) income		(301,130	)		13,601			62,311		6,541
Net (loss) income attributable to noncontrolling interests		(54	)		(100	)		283		1,297
Net (loss) income attributable to CapitalSource Inc.	$	(301,076	)	$	13,701		$	62,028	$	5,244
Basic (loss) income per share:
From continuing operations	$	(1.13	)	$	0.01		$	0.23	$	(0.02	)
From discontinued operations	$	0.04		$	0.04		$	0.04	$	0.05
Attributable to CapitalSource Inc.	$	(1.08	)	$	0.05		$	0.26	$	0.02
Diluted (loss) income per share:
From continuing operations	$	(1.13	)	$	0.01		$	0.23	$	(0.02	)
From discontinued operations	$	0.04		$	0.04		$	0.04	$	0.05
Attributable to CapitalSource Inc.	$	(1.08	)	$	0.05		$	0.26	$	0.02

Note 28.   Subsequent Events

In February 2010, to avoid potential events of default, we amended the covenant for the minimum tangible net worth in our syndicated bank credit facility and our CS Funding III, CS Funding VII and CS Europe credit facilities to require that our tangible net worth be no less than $1.7 billion, plus 70% of net proceeds from the issuance of capital stock and/or conversion of debt after the amendment date. In addition, we modified the extending lender maturity date on the syndicated bank credit facility from March 31, 2012 to December 31, 2011 and agreed to reduce the aggregate commitment amount on the facility to $200.0 million by April 30, 2010, to $185.0 million by January 31, 2011 and thereafter by an additional $15.0 million per month, unless otherwise reduced by the receipt of collateral proceeds. The non-extending lender maturity date remains unchanged at March 13, 2010. As of the amendment date the extending lenders aggregate commitments were $207.1 million and the non-extending lenders aggregate commitments were $52.9 million.

193

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In February 2010, to avoid a potential event of default, we amended our 2007-A term debt securitization to require that our tangible net worth be no less than $1.7 billion, plus 70% of net proceeds from the issuance of capital stock and/or conversion of debt after the amendment. In addition, the amendment required us to reduce the aggregate advances outstanding to $123.5 million and modified the maximum advance rate to 27.2% commencing May 2010, to 23.6% commencing August 2010, 19.8% commencing November 2010 and 18.4% commencing February 2011.

194

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.   CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of our management, including our Co-Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our co-Chief Executive Officers and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2009. There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Reference is made to the Management Report on Internal Controls over Financial Reporting on page 106.

ITEM 9B.   OTHER INFORMATION

On February 24, 2010, we entered into Amendment No. 10 to the Credit Agreement, dated as of March 14, 2006, as amended as of June 30, 2006, December 20, 2006, June 29, 2007, December 19, 2007, June 26, 2008, December 23, 2008, February 25, 2009, July 10, 2009 and November 5, 2009, by and among CapitalSource Inc., as initial borrower, CapitalSource TRS LLC (“TRS”), CapitalSource Finance LLC (“CSF”), CSE Mortgage LLC (“CSEM”), CapitalSource SF TRS LLC (“SF TRS”), CapitalSource Finance II LLC (“CSF II”), CapitalSource CF LLC (“CS CF”), CSE CHR Holdco LLC (“CHR Holdco”), CSE CHR Holdings LLC (“CHR Holdings”) and CS Funding IX Depositor LLC (“Funding IX” and together with TRS, CSF, CSEM, SF TRS, CSF II, CHR Holdco and CHR Holdings, the “Guarantors”), the banks and other financial institutions parties thereto, Wachovia Bank, National Association, as administrative agent (“Wachovia”), swingline lender, and issuing lender, and Bank of America, N.A., as issuing lender (the “Amendment”). The Amendment modified our tangible net worth covenant effective December 31, 2009 to be no less than $1.7 billion, plus 70% of net proceeds from the issuance of capital stock and/or conversion of debt, shortened the extending lender maturity date from March 31, 2012 to December 31, 2011 and requires us to reduce the aggregate commitment amount on the facility to $200.0 million by April 30, 2010, to $185.0 million by January 31, 2011 and thereafter by an additional $15.0 million per month, unless otherwise reduced by the receipt of collateral proceeds.

On February 24, 2010, we entered into Amendment No. 2 to the Sale and Servicing Agreement, dated as of May 29, 2009, by and among CSE QRS Funding I LLC, as a seller, CapitalSource Funding III LLC, as a seller, CSE Mortgage LLC, as an originator, CapitalSource Finance LLC, as an originator and as the servicer, CS Europe Finance Limited, as a guarantor, CS UK Finance Limited, as a guarantor, each of the conduit purchasers from time to time party thereto, each of the institutional purchasers from time to time party thereto, each of the purchaser agents from time to time party thereto, and Wachovia Capital Markets, LLC, as the administrative agent for the purchaser agents, and as the purchaser agent for Wachovia Bank, National Association, as an institutional purchaser and Wells Fargo Bank, National Association, as the backup servicer and collateral custodian (the “CS III Amendment”). The CS III Amendment modified our tangible net worth covenant effective December 31, 2009 to be no less than $1.7 billion, plus 70% of net proceeds from the issuance of capital stock and/or conversion of debt after the amendment date.

On February 24, 2010, we entered into the Deed of Amendment Relating to the Service Agreement among CS Europe Finance Limited and CS UK Finance Limited, as borrowers and guarantors, CapitalSource Finance LLC, as servicer, Wachovia Bank, N.A., as administrative agent and security trustee and Wachovia Securities International Ltd., as lead arranger and sole bookrunner, which amends the Servicing Agreement dated May 29, 2009, between CS UK Finance Limited and CS Europe Finance Limited, as borrowers, CapitalSource Finance LLC, as servicer, CapitalSource Europe Limited, as subservicer and parent, CapitalSource UK Limited, as parent, Wachovia Bank, N.A., as administrative agent and security trustee and Wachovia Securities International Ltd., as lead arranger and sole bookrunner (collectively, the “Europe Amendment”). The Europe Amendment modified our tangible net worth covenant effective December 31, 2009 be no less than $1.7 billion, plus 70% of net proceeds from the issuance of capital stock and/or conversion of debt after the amendment date.

195

From time to time we have entered into other transactions and agreements with Wachovia, certain of the other parties to the Amendment, the CS III Amendment and the Europe Amendment and their respective affiliates.

On February 26, 2010, we entered into the Third Amendment to the Second Amended and Restated Sale and Servicing Agreement, dated as of June 16, 2009 as amended, by and among CS Funding VII Depositor LLC, as the seller, CapitalSource Finance LLC, as the originator, and as the servicer, each of the issuers from time to time party thereto, each of the liquidity banks from time to time party thereto, Citicorp North America, Inc., as the administrative agent for the issuers and liquidity banks thereunder, and Wells Fargo Bank, National Association, not in its individual capacity but as the backup servicer and collateral custodian (the “CS VII Amendment”). The CS VII Amendment modified our tangible net worth covenant effective December 31, 2009 to be no less than $1.7 billion, plus 70% of net proceeds from the issuance of capital stock and/or conversion of debt after the amendment.

On February 26, 2010, we entered into the Third Amendment to the Fourth Amended and Restated Sale and Servicing Agreement dated as of June 16, 2009 as amended by and among CapitalSource Real Estate Loan LLC, 2007-A, as the seller, CSE Mortgage LLC, as the originator and servicer, the issuers from time to time party thereto, the liquidity banks from time to time party thereto, Citicorp North America, Inc., as the administrative agent and Wells Fargo Bank, National Association, as the backup servicer and as the collateral custodian (the “2007-A Amendment”). The 2007-A Amendment modified our tangible net worth covenant effective December 31, 2009 to be no less than $1.7 billion, plus 70% of net proceeds from the issuance of capital stock and/or conversion of debt after the amendment, required us to reduce the aggregate advances outstanding to $123.5 million and modified the maximum advance rate to 27.2% commencing May 2010, to 23.6% commencing August 2010, 19.8% commencing November 200 and 18.4% commencing February 2011.

196

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

A listing of our executive officers and their biographies are included under Item 1, Business, in the section entitled “Executive Officers” on page 26 of this Form 10-K.

The members of our Board of Directors, their principal occupations and the Board committees on which they serve are as follows:

William G. Byrnes⁽¹⁾
Private Investor

John K. Delaney⁽⁴⁾
Executive Chairman

Frederick W. Eubank, II⁽²⁾⁽⁴⁾
Managing Partner, Wachovia Capital Partners 2000, LLC

Andrew B. Fremder⁽³⁾⁽⁴⁾
President, East Bay College Fund

Sara Grootwassink Lewis⁽¹⁾⁽³⁾
Private Investor

C. William Hosler⁽²⁾
Private Investor and Consultant to Rockwood Capital, LLC

Timothy M. Hurd⁽²⁾
Managing Director, Madison Dearborn Partners, LLC

Steven A. Museles
Co-Chief Executive Officer

Lawrence C. Nussdorf⁽¹⁾⁽⁵⁾
President and Chief Operating Officer, Clark Enterprises, Inc.

James J. Pieczynski
Co-Chief Executive Officer

Biographies for our non-management directors and additional information pertaining to directors and executive officers and our corporate governance as well as the remaining information called for by this item are incorporated herein by reference to Election of Directors, Corporate Governance, Board of Directors and Other Matters — Section 16(a) Beneficial Ownership Reporting Compliance and other sections in our definitive proxy statement for our 2010 Annual Meeting of Stockholders to be held April 29, 2010, which will be filed within 120 days of the end of our fiscal year ended December 31, 2009 (the “2010 Proxy Statement”).

Our Co-Chief Executive Officers and Chief Financial Officer have delivered, and we have filed with this Form 10-K, all certifications required by rules of the SEC and relating to, among other things, the Company’s financial statements, internal controls and the public disclosures contained in this Form 10-K. In addition, on May 19, 2009, our then Chairman and Chief Executive Officer certified to the New York Stock Exchange (the “NYSE”) that he was not aware of any violations by the Company of the NYSE’s corporate governance listing standards and, as required by the rules of the NYSE. We expect our Co-Chief Executive Officers to provide a similar certification following the 2010 Annual Meeting of Stockholders.

(1)	Audit Committee
(2)	Compensation Committee
(3)	Nominating and Corporate Governance Committee
(4)	Asset, Liability and Credit Policy Committee
(5)	Mr. Nussdorf will not be standing for re-election upon the expiration of his term at the 2010 Annual Meeting of Stockholders to be held on April 29, 2010.

197

ITEM 11.   EXECUTIVE COMPENSATION

Information pertaining to executive compensation is incorporated herein by reference to Executive Compensation in the 2010 Proxy Statement with respect to our 2010 Annual Meeting of Stockholders to be held on April 29, 2010.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information pertaining to security ownership of management and certain beneficial owners of the registrant’s Common Stock is incorporated herein by reference to Voting Securities and Principal Holders Thereof and other sections of the 2010 Proxy Statement with respect to our 2010 Annual Meeting of Stockholders to be held on April 29, 2010.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information pertaining to certain relationships and related transactions and director independence is incorporated herein by reference to Corporate Governance and Compensation Committee Interlocks and Insider Participation and other sections of the 2010 Proxy Statement with respect to our 2010 Annual Meeting of Stockholders to be held on April 29, 2010.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information pertaining to principal accounting fees and services is incorporated herein by reference to Report of the Audit Committee of the 2010 Proxy Statement with respect to our 2010 Annual Meeting of Stockholders to be held on April 29, 2010.

198

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

15(a)(1) Financial Statements

The audited consolidated financial statements of the registrant as listed in the “Index to Consolidated Financial Statements” included in Item 8, Financial Statements and Supplementary Data, on page 108 of this report, are filed as part of this report.

15(a)(2) Financial Statement Schedules

Consolidated financial statement schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedules, or because the required information is provided in our audited consolidated financial statements or notes thereto.

15(a)(3) Exhibits

The exhibits listed in the accompanying Index to Exhibits are filed as part of this report.

199

Signatures

Pursuant to the requirements of Section 13 or 15(d) 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.

CAPITALSOURCE INC.

Date March 1, 2010	/s/  STEVEN A. MUSELESSteven A. Museles Director and Co-Chief Executive Officer (Principal Executive Officer)
Date March 1, 2010	/s/  JAMES J. PIECZYNSKIJames J. Pieczynski Director and Co-Chief Executive Officer (Principal Executive Officer)
Date March 1, 2010	/s/  DONALD F. COLEDonald F. Cole Chief Financial Officer (Principal Financial Officer)
Date: March 1, 2010	/s/  BRYAN D. SMITHBryan D. Smith Chief Accounting Officer (Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 1, 2010.

/s/  JOHN K. DELANEY	/s/  WILLIAM G. BYRNES
John K. Delaney, Chairman of the Board of Directors	William G. Byrnes, Director
/s/  FREDERICK W. EUBANK, II	/s/  C. WILLIAM HOSLER
Frederick W. Eubank, II, Director	C. William Hosler, Director
/s/  ANDREW B. FREMDER	/s/  TIMOTHY M. HURD
Andrew B. Fremder, Director	Timothy M. Hurd, Director
/s/  SARA GROOTWASSINK LEWIS	/s/   LAWRENCE C. NUSSDORF
Sara Grootwassink Lewis, Director	Lawrence C. Nussdorf, Director

200

INDEX TO EXHIBITS

Exhibit
No		Description
	3.1	Second Amended and Restated Certificate of Incorporation (composite version; reflects all amendments through May 1, 2008)(incorporated by reference to exhibit 3.1 to the Form 10-Q filed by CapitalSource on May 12, 2008).
	3.2	Amended and Restated Bylaws (composite version; reflects all amendments through November 15, 2009) (incorporated by reference to exhibit 3.1 to the Form 10-Q filed by CapitalSource on November 17, 2009).
	4.1	Indenture dated as of July 7, 2004, by and among CapitalSource Inc., as issuer, U.S. Bank National Association, as trustee, and CapitalSource Holdings LLC and CapitalSource Finance LLC, as guarantors, including form of 3.5% Senior Convertible Debenture due 2034 (incorporated by reference to exhibit 4.1 to the Registration Statement on Form S-3 (Reg. No. 333-118738) filed by CapitalSource on September 1, 2004).
	4.1.1	First Supplemental Indenture dated as of October 18, 2004, by and among the CapitalSource Inc., as issuer, CapitalSource Holdings Inc. and CapitalSource Finance LLC, as guarantors, and U.S. Bank National Association, as trustee (incorporated by reference to exhibit 4.1.1 to the Registration Statement on Form S-3 (Reg. No. 333-118738) filed by CapitalSource on October 19, 2004).
	4.2	Indenture dated as of April 4, 2007, by and among CapitalSource Inc., as issuer, CapitalSource Finance LLC, as guarantor, and Wells Fargo Bank, N.A., as trustee. (incorporated by reference to exhibit 4.4 to the Form 10-K filed by CapitalSource on March 2, 2009).
	4.3	Indenture dated as of July 30, 2007, by and between CapitalSource Inc., as issuer, and Wells Fargo Bank, N.A., as trustee (incorporated by reference to exhibit 4.20 to the Form 10-Q filed by CapitalSource on November 9, 2007).
	4.3.1	First Supplemental Indenture dated as of July 30, 2007, by and between CapitalSource Inc., as issuer, CapitalSource Finance LLC, as guarantor, and Wells Fargo Bank, N.A., as trustee (incorporated by reference to exhibit 4.20.1 to the Form 10-Q filed by CapitalSource on November 9, 2007).
	4.4	Indenture dated as of July 27, 2009 between CapitalSource Inc., the guarantors of the notes from time to time parties to this Indenture and U.S. Bank National Association, as trustee (incorporated by reference to exhibit 4.1 to the Form 8-K filed by CapitalSource on July 30, 2009).
	10.1	Capital Maintenance and Liquidity Agreement dated as of July 25, 2008, among CapitalSource Inc., CapitalSource TRS LLC (formerly CapitalSource TRS Inc.), CapitalSource Finance LLC, CapitalSource Bank and the FDIC (incorporated by reference to exhibit 10.1 to the Form 8-K filed by CapitalSource on July 28, 2008).
	10.2	Parent Company Agreement dated as of July 25, 2008, among CapitalSource Inc., CapitalSource TRS LLC (formerly CapitalSource TRS Inc.), CapitalSource Finance LLC, CapitalSource Bank and the FDIC (incorporated by reference to exhibit 10.2 to the Form 8-K filed by CapitalSource on July 28, 2008).
	10.3	Office Lease Agreement dated as of December 8, 2000, by and between Chase Tower Associates, L.L.C. and CapitalSource Finance LLC (incorporated by reference to exhibit 10.1 to the Registration Statement on Form S-1/A (Reg. No. 333-106076) filed by CapitalSource on June 12, 2003).
	10.3.1	First Amendment to Office Lease Agreement dated May 10, 2002, by and between Chase Tower Associates, L.L.C. and CapitalSource Finance LLC (incorporated by reference to exhibit 10.3.1 to the Form 10-K filed by CapitalSource on March 2, 2009).
	10.3.2	Second Amendment to Office Lease Agreement dated February 4, 2003, by and between Chase Tower Associates, L.L.C. and CapitalSource Finance LLC (incorporated by reference to exhibit 10.3.2 to the Form 10-K filed by CapitalSource on March 2, 2009).
	10.3.3	Third Amendment to Office Lease Agreement dated as of August 1, 2003, by and between Chase Tower Associates, L.L.C. and CapitalSource Finance LLC (incorporated by reference to exhibit 10.1.1 to the Registration Statement on Form S-1 (Reg. No. 333-112002) filed by CapitalSource on February 2, 2004).
	10.3.4	Fourth Amendment to Office Lease Agreement dated July 2, 2007, by and between Chase Tower Associates, L.L.C. and CapitalSource Finance LLC (incorporated by reference to exhibit 10.3.4 to the Form 10-K filed by CapitalSource on March 2, 2009).

201

Exhibit
No		Description
	10.3.5	Fifth Amendment to Office Lease Agreement dated March 6, 2008, by and between Chase Tower Associates, L.L.C. and CapitalSource Finance LLC (incorporated by reference to exhibit 10.3.5 to the Form 10-K filed by CapitalSource on March 2, 2009).
	10.3.5.1	Assignment and Assumption Agreement dated December 8, 2004 to the Office Lease Agreement dated December 7, 2001, by and between Medical Office Properties, Inc. f/k/a Healthcare Financial Partners REIT, Inc. and CapitalSource Finance LLC (incorporated by reference to exhibit 10.3.5.1 to the Form 10-K filed by CapitalSource on March 2, 2009).
	10.3.5.2	Office Lease Agreement dated December 7, 2001, by and between Chase Tower Associates, L.L.C. and Healthcare Financial Partners REIT, Inc. (incorporated by reference to exhibit 10.3.5.2 to the Form 10-K filed by CapitalSource on March 2, 2009).
	10.3.5.3	First Amendment to Office Lease Agreement dated June 30, 2003, by and between Chase Tower Associates, L.L.C. and Healthcare Financial Partners REIT, Inc. (incorporated by reference to exhibit 10.3.5.3 to the Form 10-K filed by CapitalSource on March 2, 2009).
	10.4	Office Lease Agreement dated April 27, 2007 by and between Wisconsin Place Office LLC and CapitalSource Finance LLC (incorporated by reference to exhibit 10.4 to the Form 10-K filed by CapitalSource on March 2, 2009).
	10.4.1	Amendment No. 1 to Lease dated August 25, 2008 by and between Wisconsin Place Office LLC and CapitalSource Finance LLC (incorporated by reference to exhibit 10.6 to the Form 10-Q filed by CapitalSource on August 10, 2009).
	10.4.2	Amendment No. 2 to Lease dated February 17, 2009 by and between Wisconsin Place Office LC and CapitalSource Finance LLC (incorporated by reference to exhibit 10.7 to the Form 10-Q filed by CapitalSource on August 10, 2009).
	10.5	Office Lease dated November 5, 2008, by and between Maguire Properties — 130 S. State College, LLC and CapitalSource Bank (incorporated by reference to exhibit 10.1 to the Form 10-Q filed by CapitalSource on May 11, 2009).
	10.6	Amended and Restated Registration Rights Agreement dated August 30, 2002, among CapitalSource Holdings LLC and the holders party thereto (incorporated by reference to exhibit 10.11 to the Registration Statement on Form S-1 (Reg. No. 333-106076) filed by CapitalSource on June 12, 2003).
	10.7	Fourth Amended and Restated Intercreditor and Lockbox Administration Agreement dated as of June 30, 2005, among Bank of America, N.A., as lockbox bank, CapitalSource Finance LLC, as originator, original servicer and lockbox servicer, CapitalSource Funding Inc., as owner, and the financing agents (incorporated by reference to exhibit 10.39 to the Form 10-Q filed by CapitalSource on August 5, 2005).
	10.8	Fifth Amended and Restated Three Party Agreement Relating to Lockbox Services and Control dated as of June 30, 2005, among Bank of America, N.A., as the bank, CapitalSource Finance LLC, as originator, original servicer and lockbox servicer, CapitalSource Funding Inc., as the owner, and the financing agents (incorporated by reference to exhibit 10.40 to the Form 10-Q filed by CapitalSource on August 5, 2005).
	10.9	Credit Agreement dated as of March 14, 2006, among CapitalSource Inc., as borrower, the guarantors and lenders as listed in the Credit Agreement, Wells Fargo Bank, N.A. f/k/a Wachovia Bank, National Association, as administrative agent, swingline lender and issuing lender, Bank of America, N.A., as issuing lender, Wells Fargo Securities, LLC (f/k/a Wachovia Capital Markets, LLC), as sole bookrunner and lead arranger, and Bank of Montreal, Barclays Bank PLC and SunTrust Bank, as co-documentation agents (composite version; reflects all amendments through February 24, 2010).†
	10.11	Amended Security Agreement dated as of July 27, 2009 by and among CapitalSource Inc. and certain direct and indirect subsidiaries of CapitalSource Inc. that are or become guarantors collectively, the guarantors and the obligors, and Wachovia Bank, National Association, as collateral agent (composite version; reflects all amendments through November 5, 2009).†
	10.12	Amended Pledge Agreement dated as of July 27, 2009 by and among CapitalSource Inc. and certain direct and indirect subsidiaries of CapitalSource Inc. that are or become guarantors collectively, the guarantors and pledgors, Wachovia Bank, National Association, as collateral agent, Wells Fargo Bank, National Association as collateral custodian and CapitalSource Finance LLC, as servicer (composite version; reflects all amendments through November 5, 2009).†

202

Exhibit
No		Description
	10.13	Intercreditor Agreement dated as of July 27, 2009, among Wachovia Bank, National Association, , as collateral agent for the First Lien Secured Parties, Wachovia Bank, National Association, as authorized representative for the Credit Agreement Secured Parties and administrative agent, and U.S. Bank National Association, as authorized representative for the Notes Secured Parties and trustee (incorporated by reference to exhibit 4.2 to the Form 8-K filed by CapitalSource on July 30, 2009).
	10.14	Sale and Servicing Agreement dated as of May 29, 2009, by and among CSE QRS Funding I LLC, as a seller, CapitalSource Funding III LLC, as a seller, CSE Mortgage LLC, as QRS originator, CapitalSource Finance LLC, as CS III originator and servicer, CS Europe Finance Limited, as a guarantor, and CS UK Finance Limited, as a guarantor, Wachovia Capital Markets, LLC, as administrative agent and WBNA agent, and Wells Fargo Bank, National Association, as backup servicer and collateral custodian (composite version; reflects all amendments through June 30, 2009) (incorporated by reference to exhibit 10.1 to the Form 10-Q filed by CapitalSource on August 10, 2009).
	10.14.1	Amendment No. 2 to Sale and Servicing Agreement dated as of February 24, 2010, by and among CSE QRS Funding I LLC, as a seller, CapitalSource Funding III LLC, as a seller, CSE Mortgage LLC, as QRS originator, CapitalSource Finance LLC, as CS III originator and servicer, CS Europe Finance Limited, as a guarantor, and CS UK Finance Limited, as a guarantor, Wells Fargo Securities, LLC (f/k/a Wachovia Capital Markets, LLC), as administrative agent and WBNA agent, and Wells Fargo Bank, National Association, as backup servicer and collateral custodian.†
	10.15	Second Amended and Restated Sale and Servicing Agreement by and among CS Funding VII Depositor LLC, as the seller, CapitalSource Finance LLC, as the servicer and originator, the issuers from time to time party thereto, the liquidity banks from time to time party thereto, Citicorp North America, Inc., as the administrative agent and Wells Fargo Bank, National Association, as the backup servicer and as the collateral custodian (composite version; reflects all amendments through August 28, 2009) (incorporated by reference to exhibit 10.2 to the Form 10-Q filed by CapitalSource on November 4, 2009).
	10.15.1	Third Amendment to the Second Amended and Restated Sale and Servicing Agreement, dated as of February 26, 2010, by and among CS Funding VII Depositor LLC, as the seller, CapitalSource Finance LLC, as the servicer and originator, the issuers from time to time party thereto, the liquidity banks from time to time party thereto, Citicorp North America, Inc., as the administrative agent and Wells Fargo Bank, National Association, as the backup servicer and as the collateral custodian.†
	10.16	Facility Agreement dated as of October 3, 2007, among CS Europe Finance Limited and CS UK Finance Limited, as borrowers and guarantors, CapitalSource Finance LLC, as servicer, Wachovia Bank, N.A., as administrative agent and security trustee and Wachovia Securities International Ltd., as lead arranger and sole bookrunner (composite version; reflects all amendments through May 29, 2009) (incorporated by reference to exhibit 10.2 to the Form 8-K dated June 4, 2009).
	10.17	Servicing Agreement dated October 3, 2007, between CS UK Finance Limited and CS Europe Finance Limited, as borrowers, CapitalSource Finance LLC, as servicer, CapitalSource Europe Limited, as subservicer and parent, CapitalSource UK Limited, as parent, Wachovia Bank, N.A., as administrative agent and security trustee, and Wachovia Securities International Ltd., as lead arranger and sole bookrunner (composite version; reflects all amendments through May 29, 2009) (incorporated by reference to exhibit 10.3 to the Form 8-K dated June 4, 2009).
	10.17.1	Deed of Amendment Relating to the Servicing Agreement dated February 24, 2010, between CS UK Finance Limited and CS Europe Finance Limited, as borrowers, CapitalSource Finance LLC, as servicer, CapitalSource Europe Limited, as subservicer and parent, CapitalSource UK Limited, as parent, Wachovia Bank, N.A., as administrative agent and security trustee, and Wachovia Securities International Ltd., as lead arranger and sole bookrunner.†
	10.18	Amended and Restated Loan Agreement dated March 29, 2007, between Column Financial, Inc., as lender, and those subsidiaries of CapitalSource Inc. listed as borrowers from time to time, borrowers (incorporated by reference to exhibit 10.18 to the Form 10-K dated March 2, 2009).
	10.18.1	Modification Agreement dated July 31, 2007 to that certain Amended and Restated Loan Agreement dated as of March 29, 2007, between Column Financial, Inc., as lender, and, those subsidiaries of CapitalSource Inc. listed as borrowers from time to time, borrowers (incorporated by reference to exhibit 10.18.1 to the Form 10-K dated March 2, 2009).

203

Exhibit
No		Description
	10.19	Guaranty Agreement dated March 29, 2007 to the Amended and Restated Loan Agreement dated March 29, 2007, made by CapitalSource Inc. for the benefit of Column Financial, Inc (incorporated by reference to exhibit 10.19 to the Form 10-K dated March 2, 2009).
	10.20	Mezzanine Loan Agreement dated as of July 31, 2007, between Column Financial, Inc., as lender, and CSE Casablanca Holdings II LLC, as borrower (incorporated by reference to exhibit 10.20 to the Form 10-K dated March 2, 2009).
	10.20.1	Modification dated July 31, 2007 to that certain Mezzanine Loan Agreement dated as of July 31, 2007, between Column Financial, Inc., lender and CSE Casablanca Holdings II LLC, borrower (incorporated by reference to exhibit 10.20.1 to the Form 10-K dated March 2, 2009).
	10.21	Guaranty Agreement dated July 31, 2007 to the Mezzanine Loan Agreement dated July 31, 2007 made by CapitalSource Inc. for the benefit of Column Financial, Inc. (incorporated by reference to exhibit 10.21 to the Form 10-K dated March 2, 2009).
	10.21.1	Amendment dated July 31, 2007 to that certain Guaranty Agreement to the Mezzanine Loan Agreement dated July 31, 2007 made by CapitalSource Inc. for the benefit of Column Financial, Inc. (incorporated by reference to exhibit 10.21.1 to the Form 10-K dated March 2, 2009).
	10.22	Fourth Amended and Restated Sale and Servicing Agreement by and among CapitalSource Real Estate Loan LLC, 2007-A, as the seller, CSE Mortgage LLC, as the originator and servicer, the issuers from time to time party thereto, the liquidity banks from time to time party thereto, Citicorp North America, Inc., as the administrative agent and Wells Fargo Bank, National Association, as the backup servicer and as the collateral custodian (composite version; reflects all amendments through August 28, 2009) (incorporated by reference to exhibit 10.4 to the Form 10-Q dated November 4, 2009).
	10.22.1	Third Amendment to the Fourth Amended and Restated Sale and Servicing Agreement, dated as of February 26, 2010, by and among CapitalSource Real Estate Loan LLC, 2007-A, as the seller, CSE Mortgage LLC, as the originator and servicer, the issuers from time to time party thereto, the liquidity banks from time to time party thereto, Citicorp North America, Inc., as the administrative agent and Wells Fargo Bank, National Association, as the backup servicer and as the collateral custodian.†
	10.23	Indenture dated as of September 28, 2006, by and among CapitalSource Commercial Loan Trust 2006-2, as the issuer, and Wells Fargo Bank, National Association, as the indenture trustee (incorporated by reference to exhibit 4.16 to the Form 8-K filed by CapitalSource on October 4, 2006).
	10.24	Sale and Servicing Agreement dated as of September 28, 2006, by and among CapitalSource Commercial Loan Trust 2006-2, as the issuer, CapitalSource Commercial Loan LLC, 2006-2, as the trust depositor, CapitalSource Finance LLC, as the originator and as the servicer, and Wells Fargo Bank, National Association, as the indenture trustee and as the backup servicer (incorporated by reference to exhibit 10.66 to the Form 8-K filed by CapitalSource on October 4, 2006).
	10.25	Indenture dated as of December 20, 2006, by and among CapitalSource Real Estate Loan Trust 2006-A, as the issuer, CapitalSource Finance LLC, as advancing agent and Wells Fargo Bank, N.A., as trustee, paying agent, calculation agent, transfer agent, custodial securities intermediary, backup advancing agent and notes registrar (incorporated by reference to exhibit 4.17 to the Form 8-K filed by CapitalSource on December 27, 2006).
	10.26	Servicing Agreement dated as of December 20, 2006, by and among CapitalSource Real Estate Loan Trust 2006-A, as the issuer, Wells Fargo Bank, N.A., as trustee and as the backup servicer and CapitalSource Finance LLC, as collateral manager, servicer and special servicer (incorporated by reference to exhibit 10.67 to the Form 8-K filed by CapitalSource on December 27, 2006).
	10.27	Collateral Management Agreement dated as of December 20, 2006, by and among CapitalSource Real Estate Loan Trust 2006-A, as the issuer, and CapitalSource Finance LLC, as collateral manager (incorporated by reference exhibit 10.68 to the Form 8-K filed by CapitalSource on December 27, 2006).
	10.28	Securities Purchase Agreement dated November 17, 2009 between CapitalSource Inc., CHR HUD Borrower, LLC, CSE Mortgage LLC, CSE SLB LLC, CSE SNF Holding LLC and Omega Healthcare Investors, Inc. (incorporated by reference to exhibit 2.1 to the Form 8-K filed by CapitalSource on November 23, 2009).

204

Exhibit
No			Description
	10.29		Form of Option Agreement between CapitalSource Inc., CSE SLB LLC and Omega Healthcare Investors, Inc. (incorporated by reference to exhibit 2.2 to the Form 8-K filed by CapitalSource on November 23, 2009).
	10.30		Form of Registration Rights Agreement between Omega Healthcare Investors, Inc. CapitalSource Inc., CHR HUD Borrower, LLC, CSE Mortgage LLC, CSE SLB LLC and CSE SNF Holding LLC (incorporated by reference to exhibit 2.3 to the Form 8-K filed by CapitalSource on November 23, 2009).
	10.31	*	Third Amended and Restated Equity Incentive Plan (composite version; reflects all amendments through August 10, 2009) (incorporated by reference to exhibit 10.8 to the Form 10-Q filed by CapitalSource on August 10, 2009).
	10.32.1	*	Form of Non-Qualified Option Agreement (2005) (incorporated by reference to exhibit 10.1 to the Form 8-K filed by CapitalSource on January 31, 2005).
	10.32.2	*	Form of Non-Qualified Option Agreement (2007) (incorporated by reference to exhibit 10.81 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.32.3	*	Form of Non-Qualified Option Agreement (2008) (incorporated by reference to exhibit 10.8 to the Form 10-Q filed by CapitalSource on August 11, 2008).
	10.32.4	*	Form of Non-Qualified Option Agreement (2010).†
	10.33.1	*	Form of Non-Qualified Option Agreement for Directors (2005) (incorporated by reference to exhibit 10.2 to the Form 8-K filed by CapitalSource on January 31, 2005).
	10.33.2	*	Form of Non-Qualified Option Agreement for Directors (2007) (incorporated by reference to exhibit 10.78 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.33.3	*	Form of Non-Qualified Option Agreement for Directors (2008) (incorporated by reference to exhibit 10.18.3 to the Form 10-K filed by CapitalSource on February 29, 2008).
	10.33.4	*	Form of Non-Qualified Option Agreement for Directors (2010).†
	10.34.1	*	Form of Restricted Stock Agreement (2005) (incorporated by reference to exhibit 10.3 to the Form 8-K filed by CapitalSource on January 31, 2005).
	10.34.2	*	Form of Restricted Stock Agreement (2007) (incorporated by reference to exhibit 10.79 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.34.3	*	Form of Restricted Stock Agreement (2008) (incorporated by reference to exhibit 10.6 to the Form 10-Q filed by CapitalSource on August 11, 2008).
	10.34.4	*	Form of Restricted Stock Agreement (2009) (incorporated by reference to exhibit 10.7 to the Form 10-Q filed by CapitalSource on May 11, 2009).
	10.34.5	*	Form of Restricted Stock Agreement (2010).†
	10.35.1	*	Form of Restricted Stock Agreement for Directors (2007) (incorporated by reference to exhibit 10.76 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.35.2	*	Form of Restricted Stock Agreement for Directors (2008) (incorporated by reference to exhibit 10.20.2 to the Form 10-K filed by CapitalSource on February 29, 2008).
	10.35.3	*	Form of Restricted Stock Agreement for Directors (2009) (incorporated by reference to exhibit 10.8 to the Form 10-Q filed by CapitalSource on May 11, 2009).
	10.35.4	*	Form of Restricted Stock Agreement for Directors (2010).†
	10.36.1	*	Form of Restricted Unit Agreement (2007) (incorporated by reference to exhibit 10.70 to the Form 8-K filed by CapitalSource on March 13, 2007).
	10.36.2	*	Form of Restricted Stock Unit Agreement (2007) (incorporated by reference to exhibit 10.80 to the Form 10-Q filed by CapitalSource on August 8, 2007).
	10.36.3	*	Form of Restricted Stock Unit Agreement (2008) (incorporated by reference to exhibit 10.7 to the Form 10-Q filed by CapitalSource on August 11, 2008).
	10.36.4	*	Form of Restricted Stock Unit Agreement (2010).†
	10.37.1	*	Form of Restricted Stock Unit Agreement for Directors (2007) (incorporated by reference to exhibit 10.77 to the Form 10-Q filed by CapitalSource on August 8, 2007).

205

Exhibit
No			Description
	10.37.2	*	Form of Restricted Stock Unit Agreement for Directors (2008) (incorporated by reference to exhibit 10.22.2 to the Form 10-K filed by CapitalSource on February 29, 2008).
	10.37.3	*	Form of Restricted Stock Unit Agreement for Directors 2010.†
	10.38	*	CapitalSource Inc. Amended and Restated Deferred Compensation Plan effective August 8, 2008 (incorporated by reference to exhibit 10.7 to the Form 10-Q filed by CapitalSource on November 10, 2008).
	10.39	*	Summary of Non-employee Director Compensation (incorporated by reference to exhibit 10.8 to the Form 10-Q filed by CapitalSource on November 10, 2008).
	10.40	*	CapitalSource Bank Compensation for Non-Employee Directors.†
	10.41	*	Form of Indemnification Agreement between CapitalSource Inc. and each of its non-employee directors (incorporated by reference to exhibit 10.4 to the Form 10-Q filed by CapitalSource on November 7, 2003).
	10.42	*	Form of Indemnification Agreement between CapitalSource Inc. and each of its employee directors (incorporated by reference to exhibit 10.5 to the Form 10-Q filed by CapitalSource on November 7, 2003).
	10.43	*	Form of Indemnification Agreement between CapitalSource Inc. and each of its executive officers (incorporated by reference to exhibit 10.6 to the Form 10-Q filed by CapitalSource on November 7, 2003).
	10.44	*	Amended and Restated Employment Agreement dated December 16, 2009 between CapitalSource Inc. and John K. Delaney (incorporated by reference to exhibit 10.1 to the Form 8-K filed by CapitalSource on December 18, 2009).
	10.45	*	Amended and Restated Employment Agreement dated December 16, 2009 between CapitalSource Inc. and Steven A. Museles (incorporated by reference to exhibit 10.2 to the Form 8-K filed by CapitalSource on December 18, 2009).
	10.46	*	Relocation Agreement dated August 22, 2008 between CapitalSource Inc. and Steven A. Museles (incorporated by reference to exhibit 10.6 to the Form 10-Q filed by CapitalSource on November 10, 2008).
	10.47	*	Amended and Restated Employment Agreement dated December 16, 2009 between CapitalSource Inc. and James J. Pieczynski (incorporated by reference to exhibit 10.3 to the Form 8-K filed by CapitalSource on December 18, 2009).
	10.48	*	Employment Agreement dated as of July 25, 2008 between CapitalSource Bank and Douglas Hayes Lowrey.†
	10.49	*	Separation and Consulting Agreement, dated March 25, 2009 between CapitalSource Inc. and Thomas A. Fink (incorporated by reference to exhibit 99.1 to the Form 8-K filed by CapitalSource on March 26, 2009).
	10.50	*	Separation and General Release Agreement dated November 16, 2009 between CapitalSource Inc. and Dean C. Graham (incorporated by reference to exhibit 10.1 to the Form 8-K filed by CapitalSource on November 17, 2009).
	10.51	*	Consulting Agreement dated November 16, 2009 between CapitalSource Inc. and Dean C. Graham (incorporated by reference to exhibit 10.2 to the Form 8-K filed by CapitalSource on November 17, 2009).
	12.1		Ratio of Earnings to Fixed Charges.†
	21.1		List of Subsidiaries.†
	23.1		Consent of Ernst & Young LLP.†
	31.1.1		Rule 13a — 14(a) Certification of Co-Chief Executive Officer.†
	31.1.2		Rule 13a — 14(a) Certification of Co-Chief Executive Officer.†
	31.2		Rule 13a — 14(a) Certification of Chief Financial Officer.†

206

Exhibit
No		Description
	32	Section 1350 Certifications.†
	99.1	Federal Deposit Insurance Corporation in Re: CapitalSource Bank (In Organization) Pasadena, California, Applications for Federal Deposit Insurance and Consent to Purchase Certain Assets and Assume Certain Liabilities and Establish 22 Branches — Order Granting Deposit Insurance, Approving a Merger, and Consenting to the Establishment of Branches dated June 17, 2008 (incorporated by reference to exhibit 99.1 to the Form 8-K filed by CapitalSource on June 18, 2008).

†	Filed herewith.
*	Management contract or compensatory plan or arrangement.

The registrant agrees to furnish to the Commission, upon request, a copy of each agreement with respect to long-term debt not filed herewith in reliance upon the exemption from filing applicable to any series of debt that does not exceed 10% of the total consolidated assets of the registrant.

207

EX-10.9

Exhibit 10.9

COMPOSITE VERSION:
reflects all amendments through February 24, 2010

CREDIT AGREEMENT

among

CAPITALSOURCE INC.

as the Initial Borrower

THE GUARANTORS LISTED HEREIN,

THE LENDERS LISTED HEREIN,

WACHOVIA BANK, NATIONAL ASSOCIATION,
as the Administrative Agent, Swingline Lender, and Issuing Lender

BANK OF AMERICA, N.A.,
as Issuing Lender

WELLS FARGO SECURITIES, LLC
(f/k/a WACHOVIA CAPITAL MARKETS, LLC)
as Sole Bookrunner and as Lead Arranger

BANK OF MONTREAL,

BARCLAYS BANK PLC,

and

SUNTRUST BANK,
as Co-Documentation Agents

March 14, 2006
(Composite Version; Reflects All Amendments through Amendment No. 10, dated as of February 24, 2010)

TABLE OF CONTENTS

	Page
ARTICLE I DEFINITIONS		1
Section 1.1. Defined Terms		1
Section 1.2. Other Definitional Provisions		42
Section 1.3. Accounting Terms		42
Section 1.4. Computation of Time Periods		43
Section 1.5. Currencies Generally		43
ARTICLE II THE LOANS; AMOUNT AND TERMS		44
Section 2.1. Revolving Loans		44
Section 2.2. Intentionally Omitted		46
Section 2.3. Letter of Credit Subfacility		46
Section 2.4. Swingline Loan Subfacility		52
Section 2.5. Fees		54
Section 2.6. Commitment Reductions		55
Section 2.7. Prepayments		61
Section 2.8. Minimum Principal Amounts		63
Section 2.9. Default Rate and Payment Dates		63
Section 2.10. Conversion Options		64
Section 2.11. Computation of Interest and Fees		65
Section 2.12. Pro Rata Treatment and Payments		66
Section 2.13. Non-Receipt of Funds by the Administrative Agent		68
Section 2.14. Inability to Determine Interest Rate		69
Section 2.15. Illegality		69
Section 2.16. Requirements of Law		70
Section 2.17. Indemnity		72
Section 2.18. Taxes		72
Section 2.19. Indemnification; Nature of Issuing Lender’s Duties		74
Section 2.20. Extension of Commitment Termination Date		76
Section 2.21. Replacement of Lenders		76
Section 2.22. Additional Limitations on CSF as Borrower		77

-i-

TABLE OF CONTENTS
(continued)

	Page
Section 2.23. Several Liability of the Borrower		77
Section 2.24. Currency Conversion of Loans		77
ARTICLE III CONDITIONS PRECEDENT		78
Section 3.1. Conditions to Closing		78
Section 3.2. Conditions to All Extensions of Credit		80
ARTICLE IV REPRESENTATIONS AND WARRANTIES		81
Section 4.1. Existence and Power		81
Section 4.2. Organizational and Governmental Authorization; No Contravention		82
Section 4.3. Binding Effect		82
Section 4.4. Financial Information		82
Section 4.5. Litigation		82
Section 4.6. Compliance with ERISA		83
Section 4.7. Taxes		83
Section 4.8. Subsidiaries		83
Section 4.9. Investment Company Act		83
Section 4.10. [Reserved]		83
Section 4.11. Ownership of Property		84
Section 4.12. No Default		84
Section 4.13. Full Disclosure		84
Section 4.14. Environmental Matters		84
Section 4.15. Compliance with Laws		85
Section 4.16. Capital Stock		85
Section 4.17. Margin Stock		85
Section 4.18. Insolvency		85
Section 4.19. Available Assets		86
Section 4.20. Labor Matters		86
Section 4.21. Patents, Trademarks, Etc		86
Section 4.22. Tax Shelter Regulations		86

-ii-

TABLE OF CONTENTS
(continued)

	Page
Section 4.23. All Consents Required		87
Section 4.24. Selection Procedures		87
Section 4.25. Location of Collateral		87
Section 4.26. Credit and Collection Policy; Residential Mortgage Policies and Procedures		87
Section 4.27. Compliance with OFAC Rules and Regulations. N		87
Section 4.28. REIT Status		88
Section 4.29. Security Documents		88
Section 4.30. Deposit Accounts		88
Section 4.31. Holding Company		88
ARTICLE V COVENANTS		88
Section 5.1. Financial Statements		89
Section 5.2. Certificates; Other Information		90
Section 5.3. Payment of Taxes and Other Obligations		90
Section 5.4. Notices		91
Section 5.5. Inspection of Property, Books and Records		92
Section 5.6. Acquisitions		92
Section 5.7. Restricted Payments		93
Section 5.8. Capital Expenditures		93
Section 5.9. Additional Guarantors		93
Section 5.10. Payments on 2009 Debt Issuance or the HY Intercompany Notes		94
Section 5.11. Ownership of Credit Parties; Restrictions		94
Section 5.12. Maintenance of Existence		95
Section 5.13. Dissolution		95
Section 5.14. Consolidations, Mergers and Sales of Assets		95
Section 5.15. Use of Proceeds		96
Section 5.16. Compliance with Laws		96
Section 5.17. Insurance		97
Section 5.18. Change in Fiscal Year		98

-iii-

TABLE OF CONTENTS
(continued)

	Page
Section 5.19. Maintenance of Property		98
Section 5.20. Environmental Laws		98
Section 5.21. Conditional Obligations to Repurchase Loans		99
Section 5.22. Pledged Assets		99
Section 5.23. Compliance with Material Contracts		99
Section 5.24. Transactions with Affiliates		99
Section 5.25. [Intentionally Omitted]		100
Section 5.26. No Restrictive Agreement		100
Section 5.27. Costs and Expenses		100
Section 5.28. Additional Debt		100
Section 5.29. Lien Waivers		101
Section 5.30. Credit and Collection Policy		101
Section 5.31. REIT Status and Notice of REIT Termination		102
Section 5.32. Financial Covenants		102
Section 5.33. Other		103
Section 5.34. Liens		103
Section 5.35. Adverse Amendments to Debt		103
Section 5.36. No Further Negative Pledges		104
Section 5.37. Bank Accounts		104
Section 5.38. Form U-1		105
Section 5.39. Prohibited Stock		105
Section 5.40. Amendments to Security Documents		105
ARTICLE VI [RESERVED]		105
ARTICLE VII EVENTS OF DEFAULT		105
Section 7.1. Events of Default		105
Section 7.2. Acceleration; Remedies		109
ARTICLE VIII THE ADMINISTRATIVE AGENT		110
Section 8.1. Appointment		110
Section 8.2. Delegation of Duties		110

-iv-

TABLE OF CONTENTS
(continued)

	Page
Section 8.3. Exculpatory Provisions		110
Section 8.4. Reliance by Administrative Agent		111
Section 8.5. Notice of Default		111
Section 8.6. Non-Reliance on Administrative Agent and Other Lenders		112
Section 8.7. Indemnification		112
Section 8.8. The Administrative Agent in Its Individual Capacity		113
Section 8.9. Successor Administrative Agent		113
Section 8.10. Other Agents		114
Section 8.11. Collateral Matters		114
Section 8.12. Agency for Perfection		115
Section 8.13. Concerning the Collateral and Related Credit Documents		115
ARTICLE IX MISCELLANEOUS		116
Section 9.1. Amendments, Waivers and Release of Collateral		116
Section 9.2. Notices		118
Section 9.3. No Waiver; Cumulative Remedies		120
Section 9.4. [Reserved]		120
Section 9.5. Payment of Expenses and Taxes; Indemnification		120
Section 9.6. Successors and Assigns; Participations; Purchasing Lenders		122
Section 9.7. Set-off		125
Section 9.8. Table of Contents and Section Headings		126
Section 9.9. Counterparts		126
Section 9.10. Effectiveness		126
Section 9.11. Severability		126
Section 9.12. Integration		126
Section 9.13. Governing Law		127
Section 9.14. Consent to Jurisdiction and Service of Process		127
Section 9.15. Confidentiality		127
Section 9.16. Acknowledgments		128
Section 9.17. Waivers of Jury Trial; Waiver of Consequential Damages		129

-v-

TABLE OF CONTENTS
(continued)

	Page
Section 9.18. PATRIOT Act Notice		129
Section 9.19. Judgment Shortfall		129
Section 9.20. Return of Notes		130
Section 9.21. Most Favored Provisions		130
Section 9.22. HY Intercreditor Agreement		131
ARTICLE X GUARANTY		131
Section 10.1. The Guaranty		131
Section 10.2. Bankruptcy		132
Section 10.3. Nature of Liability		132
Section 10.4. Independent Obligation		133
Section 10.5. Authorization		133
Section 10.6. Reliance		133
Section 10.7. Waiver		134
Section 10.8. Limitation on Enforcement		135
Section 10.9. Confirmation of Payment		135
Section 10.10. Limitation of Guaranty of CSF		135

-vi-

     CREDIT AGREEMENT, dated as of March 14, 2006 and as amended through February 24, 2010 (this “Credit Agreement”), among CAPITALSOURCE INC., a Delaware corporation, CAPITALSOURCE TRS LLC, a Delaware limited liability company (“TRS”), CAPITALSOURCE FINANCE LLC, a Delaware limited liability company (“CSF”), CSE MORTGAGE LLC, a Delaware limited liability company (“CSM”), CAPITALSOURCE CF LLC, a Delaware limited liability company (“CSCF”), CAPITALSOURCE SF TRS LLC, a Delaware limited liability company (“SFTRS”), CAPITALSOURCE FINANCE II LLC, a Delaware limited liability company ( “CS FII”), CSE CHR HOLDCO LLC, a Delaware limited liability company (“CC Holdco”), CSE CHR HOLDINGS LLC, a Delaware limited liability company (“CC Holdings”) and CS FUNDING IX DEPOSITOR LLC, a Delaware limited liability company (“CSFD” and, together with TRS, CSF, CSM, CSCF, SFTRS, CS FII, CC Holdco, CC Holdings and any other Subsidiary of the Borrower that becomes a party to this Credit Agreement, collectively the “Guarantors” and individually a “Guarantor”), the several banks and other financial institutions from time to time parties to this Credit Agreement (collectively the “Lenders” and individually a “Lender”), WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association, as administrative agent for the Lenders hereunder (in such capacity, the “Administrative Agent” or the “Agent”), Swingline Lender, and Issuing Lender, and BANK OF AMERICA, N.A., as Issuing Lender.

W I T N E S S E T H:

     WHEREAS, the Borrower has requested, and the Lenders have agreed, to extend certain credit facilities to the Borrower on the terms and conditions set forth herein;

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, such parties hereby agree as follows:

ARTICLE I

DEFINITIONS

     Section 1.1. Defined Terms.

     As used in this Credit Agreement, terms defined in the preamble to this Credit Agreement have the meanings therein indicated, and the following terms have the following meanings:

     “2009-2012 Debt Documentation” shall mean the definitive documentation, executed and delivered in connection with any 2009-2012 Debt Issuance, including, without limitation, the HY Debt Documents, which documentation shall be on terms substantially identical to those set forth in the Indenture, dated as of July 27, 2009, relating to the Borrower’s 12.75% First Priority Senior Secured Notes due 2014 (and as in effect on such date) or otherwise in form and substance reasonably satisfactory to the Agent.

     “2009-2012 Debt Issuance” shall mean the issuance (in one or more transactions), at any time after July 10, 2009 by any Credit Party of any secured Debt governed by the 2009-2012

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Debt Documentation that is entitled to the rights and benefits of the Collateral pursuant to the HY Intercreditor Agreement, including, without limitation, Debt issued under the HY Debt Documents.

     “2009 Equity Issuance” shall mean the issuance (in one or more transactions), at any time during the period commencing on July 10, 2009 and ending on September 30, 2009, by the Initial Borrower to any Person of any shares of its Capital Stock (other than any such equity issuance to the Initial Borrower or its Subsidiaries) that is not Prohibited Stock; provided, however, that the term “2009 Equity Issuance” shall not include any issuance by the Borrower or any of its Subsidiaries solely to the extent that such Capital Stock is issued to directors, officers and employees of the Borrower or any Subsidiary pursuant to any employee stock option plan or other equity incentive plan approved by the board of directors (or similar governing body) of the Borrower or the applicable Subsidiary.

     “ABR Default Rate” shall have the meaning set forth in Section 2.9.

     “Acquisition” means the acquisition of (i) a controlling equity interest in another Person (including the purchase of an option, warrant or convertible or similar type security to acquire such a controlling interest at the time it becomes exercisable by the holder thereof), whether by purchase of such equity interest or upon exercise of an option or warrant for, or conversion of securities into, such equity interest, or (ii) assets of another Person which constitute all or any material part of the assets of such Person or of a line or lines of business conducted by such Person; provided, however, the term “Acquisition” shall exclude a Portfolio Investment.

     “Additional Credit Party” shall mean each Person that becomes a Guarantor by execution of a Joinder Agreement in accordance with Section 5.9.

     “Advances Outstanding” means on any day, the aggregate outstanding principal amount of all Revolving Loans, Swingline Loans and LOC Obligations.

     “Affiliate” of any Person means (i) any other Person which directly, or indirectly through one or more intermediaries, controls such Person, (ii) any other Person which directly, or indirectly through one or more intermediaries, is controlled by or is under common control with such Person, or (iii) any other Person of which such Person owns, directly or indirectly, 20% or more of the common stock or equivalent equity interests. As used herein, the term “control” means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise; provided, however, the term “Affiliate” shall not include any Person that constitutes Investments in Equity Instruments or an Investment Loan Subsidiary.

     “Agreement” or “Credit Agreement” shall mean this Credit Agreement, as amended, modified or supplemented from time to time in accordance with its terms.

     “Agreement Currency” shall have the meaning set forth in Section 9.19(b).

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     “Alternate Base Rate” shall mean, for any day, a rate per annum equal to:

     (a) in the case of amounts denominated in Dollars, the greater of (i) the Prime Rate in effect on such day plus the Applicable Percentage, and (ii) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%; provided, however, that notwithstanding the foregoing, to the extent that at any time (1) the sum of the LIBOR Rate at such time for a one month Interest Period plus the Applicable Percentage with respect thereto plus one percent is greater than (2) the greater of the rates specified in subsection (i) and (ii) of this clause (a), then the Alternate Base Rate for purposes of this clause (a) shall be increased by the difference between (1) and (2);

     (b) in the case of amounts denominated in Euro, the “main refinancing rate” as set by the European Central Bank in effect on such day plus 1/2 of 1% plus the Applicable Percentage; provided, however, that notwithstanding the foregoing, to the extent that at any time (1) the sum of EURIBOR at such time for a one month Interest Period plus the Applicable Percentage plus one percent is greater than (2) the “main refinancing rate” as set by the European Central Bank in effect on such day plus 1/2 of 1% plus the Applicable Percentage, then the Alternate Base Rate for purposes of this clause (b) shall be increased by the difference between (1) and (2);

     (c) in the case of amounts denominated in Pounds Sterling, the base rate as set by the Monetary Policy Committee of the Bank of England in effect on such day plus 1/2 of 1% plus the Applicable Percentage; provided, however, that notwithstanding the foregoing, to the extent that at any time (1) the sum of LIBOR at such time for a one month Interest Period plus the Applicable Percentage plus one percent is greater than (2) the base rate as set by the Monetary Policy Committee of the Bank of England in effect on such day plus 1/2 of 1% plus the Applicable Percentage, then the Alternate Base Rate for purposes of this clause (c) shall be increased by the difference between (1) and (2); and

     (d) in the case of amounts denominated in any other Alternative Currency, the rate determined by the Administrative Agent, according to comparable financial benchmarks, in its reasonable discretion on such day.

     For purposes hereof: “Prime Rate” shall mean, at any time, the rate of interest per annum publicly announced or otherwise identified from time to time by Wachovia at its principal office in Charlotte, North Carolina as its prime rate. The parties hereto acknowledge that the rate announced publicly by Wachovia as its Prime Rate is an index or base rate and shall not necessarily be its lowest or best rate charged to its customers or other banks; and “Federal Funds Effective Rate” shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published on the next succeeding Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three (3) federal funds brokers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive in the absence of manifest error) that it is unable to ascertain the Federal Funds Effective Rate, for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with

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the terms thereof, the Alternate Base Rate shall be determined without regard to clause (a)(ii) of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate, the “main refinancing rate” as set by the European Central Bank or the base rate as set by the Monetary Policy Committee of the Bank of England shall be effective on the opening of business on the date of such change.

     “Alternate Base Rate Loans” shall mean Loans that bear interest at an interest rate based on the Alternate Base Rate.

     “Alternative Currency” shall mean, at any time, any of Pounds Sterling or Euro.

     “Alternative Currency Sub-Limit” shall mean $65,000,000; provided however that, notwithstanding the foregoing, when the aggregate Committed Amount is less than or equal to (a) $300,000,000, the term “Alternative Currency Sub-Limit” shall mean $60,000,000 and (b) $100,000,000, the term “Alternative Currency Sub-Limit” shall mean $0.

     “Applicable Creditor” shall have the meaning set forth in Section 9.19(b).

     “Applicable Law” shall mean for any Person or property of such Person, the organization and governing documents of such Person, all existing and future applicable laws, rules, regulations (including temporary and final income tax regulations), statutes, treaties, codes, ordinances, permits, certificates, executive orders, orders and licenses of and interpretations by any Governmental Authority (including, without limitation, usury laws, predatory lending laws, the Federal Truth in Lending Act, and Regulation Z and Regulation B of the Federal Reserve Board), and applicable judgments, decrees, injunctions, writs, orders, or line action of any court, arbitrator or other administrative, judicial, or quasi-judicial tribunal or agency of competent jurisdiction.

     “Applicable Percentage” shall mean, for Alternate Base Rate Loans, EURIBOR/LIBOR Rate Loans and LMIR Loans, the percentage set forth below opposite the Initial Borrower’s applicable senior unsecured debt rating in the column labeled “Alternate Base Rate Loans, EURIBOR/LIBOR Rate Loans and LMIR Loans” and for the Commitment Fee, the percentage set forth below opposite the Initial Borrower’s applicable senior unsecured debt rating in the column labeled “Commitment Fee,” as applicable; provided that if the senior unsecured debt ratings from S&P, Moody’s and Fitch are different, and (a) two ratings are equal and higher than the third, the higher rating will apply, (b) two ratings are equal and lower than the third, the lower rating will apply, or (c) no ratings are equal, the intermediate rating will apply. In the event that the Initial Borrower shall maintain ratings from only two of Moody’s, Fitch and S&P and the Initial Borrower is split-rated and (i) the ratings differential is one level, the higher rating will apply, or (ii) the ratings differential is two levels or more, the rating immediately below the highest rating will apply. In the event that the Initial Borrower shall maintain ratings from only one of Moody’s, Fitch and S&P, the one rating shall apply.

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	Alternate Base Rate Loans,
	EURIBOR/LIBOR Rate
Rating (S&P/Moody’s/Fitch)	Loans and LMIR Loans			Commitment Fee
BBB/Baa2/BBB		4.25	%		0.50	%
BBB–/Baa3/BBB–		4.50	%		0.75	%
BB+/Ba1/BB+		5.00	%		1.00	%
BB/Ba2/BB		5.50	%		1.25	%
< BB/Ba2/BB		6.50	%		1.50	%

In the event that no senior unsecured rating is available from any of (a) Fitch, (b) S&P, or (c) Moody’s, then the term “Applicable Percentage” shall mean 6.50% for Alternate Base Rate Loans, EURIBOR/LIBOR Rate Loans and LMIR Loans and 1.50% for the Commitment Fee. The Applicable Percentage for Alternate Base Rate Loans, EURIBOR/LIBOR Rate Loans, LMIR Loans and the Commitment Fee shall be adjusted within three (3) Business Days of (A) Initial Borrower’s receipt of senior unsecured debt ratings from S&P and Moody’s (in addition to Initial Borrower’s current senior unsecured debt rating from Fitch), and (B) a change in such senior unsecured debt ratings.

     “Asset Based Loans” shall mean any revolving loan that is secured by a first priority security interest in the related Obligor’s accounts receivable, inventory or equipment, and provides the related Obligor with the option to receive additional borrowings thereunder based on the value of its eligible accounts receivable, inventory or equipment.

     “Available Asset Coverage Ratio” shall mean the ratio of (a) the sum of the Initial Borrower’s and its Consolidated Subsidiaries (i) unencumbered and unrestricted cash and Cash Equivalents of the Credit Parties (other than as a result of any Lien granted by any Credit Party to Administrative Agent under the Credit Documents) that is, to the extent required by Section 5.37, subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of a control agreement in form and substance satisfactory to the Administrative Agent; and (ii) Qualified Available Assets to (b) the sum of, without duplication, (i) the Committed Amount plus (ii) Senior Unsecured Debt of the Initial Borrower and its Consolidated Subsidiaries plus (iii) all Debt outstanding pursuant to each 2009-2012 Debt Issuance.

     “Available Assets” means (i) with respect to the calculation of Qualified Available Assets for the purposes of the Available Asset Coverage Ratio, an amount equal to (without duplication) the sum of each of the following unencumbered assets and (ii), in all other contexts, the following unencumbered assets (without duplication) without giving effect to the discount factors specified below:

     (a) (a) (1) 85% of the Book Value of each Investment Loan that is a Risk Rated 1 Investment Loan to a Risk Rated 3 Investment Loan to the extent that such Investment Loan is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge

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Agreement plus (2) 80% of the Book Value of each Investment Loan that is a Risk Rated 4 Investment Loan to the extent that such Investment Loan is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; provided that in the event that the Average Portfolio Charged-Off Ratio as determined as of the last day of each calendar month equals or exceeds (i) 12%, the discount factor for such Risk Rated 4 Investment Loans for such calendar month shall be 50% of the Book Value of such Risk Rated 4 Investment Loans or (ii) 14%, the discount factor for such Risk Rated 4 Investment Loans for such calendar month shall be 25% of the Book Value of such Risk Rated 4 Investment Loans, plus

     (b) (1) 25% of the Book Value of each Investment Loan that is a Risk Rated 5 Investment Loan to the extent that such Investment Loan is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; plus (2) 45.5% of the Book Value of each Investment Loan that is an Asset Based Loan that is a Risk Rated 6 Investment Loan to the extent that such Investment Loan is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; provided that in the event that the Average Portfolio Charged-Off Ratio as determined as of the last day of each calendar month equals or exceeds 12%, the discount factor for such Risk Rated 5 Investment Loans and such Risk Rated 6 Investment Loans for such calendar month shall be 0% of the Book Value of such Investment Loans; plus

     (c) (1) with respect to any CapitalSource Securitization Note, 23% of the par value of such CapitalSource Securitization Note to the extent that (i) such CapitalSource Securitization Note is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement or (ii) a Domestic Securitization Note Subsidiary directly owns such CapitalSource Securitization Note free and clear of all Liens (other than Permitted Liens) and all of the Capital Stock of such Domestic Securitization Note Subsidiary is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; plus (2) with respect to any CapitalSource Repurchased Securitization Note, the lesser of (A) 25% of the par value of such CapitalSource Repurchased Securitization Note and (B) 68% of the cash purchase price paid by Initial Borrower or any Subsidiary for such CapitalSource Repurchased Securitization Note to the extent, in each case, that such CapitalSource Repurchased Securitization Note is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; plus

     (d) 63.5% of the lower of the fair market value or the Book Value of Investment Grade rated debt securities excluding securities issued by the

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Borrower, any Subsidiary or any Unrestricted Subsidiary and excluding any securities backed by pools of residential mortgages to the extent that such Investment Grade rated debt securities are subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; plus

     (e) 72.5% of the Fair Market Value of Real Property Owned to the extent that a Domestic Real Property Owned Subsidiary directly owns such Real Property Owned free and clear of all Liens (other than Permitted Liens) and all of the Capital Stock of such Domestic Real Property Owned Subsidiary is held directly by one or more Credit Parties free and clear of all Liens (other than Permitted Liens) and all such Capital Stock is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; plus

     (f) 45.5% of the Fair Market Value of Real Property Owned to the extent that a Domestic Real Property Owned Subsidiary directly owns such Real Property Owned free and clear of all Liens (other than Permitted Liens) and all of the Capital Stock of such Domestic Real Property Owned Subsidiary is held and owned directly by a Tier 1 Real Property Intermediate Holdco free and clear of all Liens (other than Permitted Liens) and all Capital Stock of the Tier 1 Real Property Intermediate Holdco is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; plus

     (g) 27% of the Fair Market Value of Real Property Owned to the extent that a Domestic Real Property Owned Subsidiary directly owns such Real Property Owned free and clear of all Liens (other than Permitted Liens) and all of the Capital Stock of such Domestic Real Property Owned Subsidiary is held and owned directly by an Intermediate Holdco free and clear of all Liens (other than Permitted Liens) and all of the Capital Stock of such Intermediate Holdco is held and owned directly by one or more Tier 2 Real Property Intermediate Holdcos free and clear of all Liens (other than Permitted Liens) and all Capital Stock of each such Tier 2 Real Property Intermediate Holdco is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement (except in the case that such Tier 2 Real Property Intermediate Holdco is CHR, then, at any time on or prior to January 15, 2009, only 97% of all of the Capital Stock of CHR shall be required for purposes of this clause (g) to be subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement); plus

     (h) if, as of any date of determination, the Healthcare REIT is a Healthcare REIT Consolidated Subsidiary and at least 20% of the outstanding

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Common Equity (determined on a fully-diluted basis) is listed on a U.S. national securities exchange or the NASDAQ Stock Market, then 32% of the Average Stock Price of the Common Equity that, unless a Form U-1 is provided by the Initial Borrower to the Administrative Agent pursuant to Section 5.38, is not Margin Stock of the Healthcare REIT held by the Credit Parties or their Subsidiaries to the extent that such Common Equity is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; plus

     (i) if, as of any date of determination, the Healthcare REIT is not a Healthcare REIT Consolidated Subsidiary and more than 50% of the outstanding Common Equity (determined on a fully-diluted basis) is listed on a U.S. national securities exchange or the NASDAQ Stock Market, then 45.5% of the Average Stock Price of the Common Equity that, unless a Form U-1 is provided by the Initial Borrower to the Administrative Agent pursuant to Section 5.38, is not Margin Stock of the Healthcare REIT held by the Credit Parties or their Subsidiaries to the extent that such Common Equity is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; plus

     (j) if, as of any date of determination, CapitalSource Bank is a Wholly Owned Subsidiary, 37% of the Tangible Book Value of the common equity of CapitalSource Bank held by the Initial Borrower to the extent that such common equity is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement.

     “Average Portfolio Charged-Off Ratio” means the percentage equivalent of a fraction (a) the numerator of which is equal to the sum of the portion of the outstanding balance of all Investment Loans of the Initial Borrower and its Consolidated Subsidiaries that became Charged-Off Investment Loans (net of recoveries) during the preceding 12 months, and (b) the denominator of which is equal to a fraction the numerator of which is the sum of the outstanding balance of all Investment Loans of the Initial Borrower and its Consolidated Subsidiaries at the beginning of each of the preceding 12 months, and the denominator of which is twelve; provided, that, Liquid Real Estate Assets shall not be included in the calculation of the Average Portfolio Charged-Off Ratio.

     “Average Stock Price” means the volume weighted average of the closing price per share of the common equity on a U.S. national securities exchange or the NASDAQ Stock Market for the thirty (30) trading days prior to the date of calculation (or, if such shares have been trading for less than thirty (30) days prior to the date of calculation, such shorter period that such shares have been trading), as published on each such day in The Wall Street Journal (National Edition) or, if no such closing price is published in the Wall Street Journal (National Edition), the average

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of the closing bid and asked prices on each such date, as officially reported on the principal national securities exchange on which the common equity is then listed or admitted to trading.

     “Bank Acquisition” means an acquisition permitted hereunder by any Credit Party or a Bank Subsidiary (all of the Capital Stock of which is owned directly by the Initial Borrower) of (a) all of the Capital Stock of a Person that is a regulated depository institution and which becomes a Bank Subsidiary and (b) all or substantially all of the assets of a regulated depository institution.

     “Bank Holding Company” has the meaning set forth in Section 2(a) of the Bank Holding Company Act of 1956, as amended (or an successor provision thereof).

     “Bankruptcy Code” means the United States Bankruptcy Reform Act of 1978 (11 U.S.C. §§ 101, et. seq.), as amended from time to time.

     “Bank Subsidiary” means a Subsidiary that is a regulated depository institution and is so designated by the Initial Borrower in writing to the Administrative Agent. Upon the consummation of the CapitalSource Bank Transaction, each of the CapitalSource Bank Entities that is a regulated depository institution shall automatically become a Bank Subsidiary.

     “Big 4 Accounting Firm” shall mean any of the following: PriceWaterhouseCoopers LLP; Deloitte & Touche LLP; Ernst & Young LLP; or KPMG LLP.

     “Book Value” means with respect to any asset, the value thereof as the same would be reflected on a consolidated balance sheet of the Initial Borrower and its Consolidated Subsidiaries as at such time in accordance with GAAP.

     “Borrower” means each of the Initial Borrower and CSF. If at any time there are Advances Outstanding from both the Initial Borrower and CSF, then the term “Borrower” shall mean the singular and the collective reference to each or all entities constituting or comprising Borrower, as the context may require.

     “Borrowing Date” shall mean, in respect of any Loan, the date such Loan is made.

     “Business Day” shall mean a day other than a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina or New York, New York are authorized or required by law to close; provided, however, that (a) when used in connection with a rate determination, borrowing or payment in respect of any EURIBOR/LIBOR Rate Loan, LMIR Loan or Alternate Base Rate Loan denominated in an Alternative Currency, the term “Business Day” shall also exclude any day on which banks in London, England are not open for dealings in deposits of Dollars or Alternative Currencies, as applicable, in the London interbank market; and (b) when used in connection with a rate determination, borrowing or payment in any Alternative Currency, the term “Business Day” shall also exclude any day on which banks are not open for foreign exchange dealings between banks in the exchange of the home country of such Alternative Currency.

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     “Capital Expenditures” means for any period the sum of all capital expenditures incurred during such period by the Initial Borrower, its Consolidated Subsidiaries and the CapitalSource Bank Entities, as determined in accordance with GAAP.

     “Capital Lease” shall mean any lease of property, real or personal, the obligations with respect to which are required to be capitalized on a balance sheet of the lessee in accordance with GAAP.

     “Capitalized Lease Obligation” means that portion of the obligations under a Capital Lease that is required to be capitalized in accordance with GAAP.

     “CapitalSource Bank Acquisition Agreement” shall mean that certain Purchase and Assumption Agreement dated as of April 13, 2008, by and among the Initial Borrower, CapitalSource TRS Inc., Fremont General Corporation, Fremont General Credit Corporation and Fremont Investment & Loan.

     “CapitalSource Bank Entities” shall mean, collectively, (i) the Wholly Owned Subsidiary formed by the Initial Borrower or one of its Wholly Owned Subsidiaries for the purpose of holding the assets acquired in the CapitalSource Bank Transaction and (ii) any Subsidiaries thereof. For purposes of this definition, the terms Wholly Owned Subsidiary and Subsidiary shall include any Bank Subsidiary (even if such Bank Subsidiary is an Unrestricted Subsidiary).

     “CapitalSource Bank Transaction” shall mean the acquisition by the Initial Borrower of the assets of Fremont Investment & Loan pursuant to the terms of the CapitalSource Bank Acquisition Agreement.

     “CapitalSource Repurchased Securitization Note” shall mean any security or note rated at least “BB” by S&P, “Ba2” by Moody’s and “BB” by Fitch issued by CSF, CSM or any subsidiary thereof, pursuant to a Securitization Transaction and which has been repurchased by such issuer or affiliate thereof after its primary issuance.

     “CapitalSource Securitization Note” shall mean any security or note rated at least “BB” by S&P, “Ba2” by Moody’s and “BB” by Fitch issued by CSF, CSM or any subsidiary thereof, pursuant to a Securitization Transaction and which has been retained by such issuer or affiliate thereof.

     “Capital Stock” means, with respect to any Person, shares of capital stock of (or other ownership or profit interests in) such Person, warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or other acquisition from such Person of such shares (or such other interests), and other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants,

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options, rights or other interests are authorized or otherwise existing on any date of determination.

     “Cash Collateralized Letters of Credit” has the meaning set forth in the definition of Permitted Liens.

     “Cash Equivalents” means: (i) marketable securities (A) issued or directly and unconditionally guaranteed as to interest and principal by the United States government or (B) issued by any agency of the United States government the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one (1) year after acquisition thereof; (ii) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after acquisition thereof and having, at the time of acquisition, a rating of at least A-1 from S&P or at least P-1 from Moody’s; (iii) commercial paper maturing no more than one year from the date of acquisition and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody’s; (iv) certificates of deposit or bankers’ acceptances issued or accepted by any Lender or by any commercial bank organized under the laws of the United States or any state thereof or the District of Columbia that is (A) “adequately capitalized” (as defined in the regulations of its primary Federal banking regulator) and (B) has Tier 1 capital (as defined in such regulations) of not less than $250,000,000, in each case maturing within one year after issuance or acceptance thereof; and (v) shares of any money market mutual or similar funds that (A) has substantially all of its assets invested continuously in the types of investments referred to in clauses (i) through (iv) above, (B) has net assets of not less than $500,000,000 and (C) has the highest rating obtainable from either S&P or Moody’s.

     “CERCLA” means the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. §9601 et seq. and its implementing regulations and amendments.

     “CERCLIS” means the Comprehensive Environmental Response Compensation and Liability Information System established pursuant to CERCLA.

     “Change of Control” shall mean (a) any Person or two or more Persons acting in concert shall have acquired “beneficial ownership,” directly or indirectly, of, or shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of, or control over, Voting Stock of the Initial Borrower (or other securities convertible into such Voting Stock) representing 33-1/3% or more of the combined voting power of all Voting Stock of the Initial Borrower, (b) the replacement of greater than 50% of the Board of Directors of any Credit Party over a two year period from the directors who constituted the Board of Directors at the beginning of such period, and such replacements shall not have been approved or nominated by a vote of at least a majority of the Board of Directors of such Credit Party then still in office who were either members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved, (c) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of greater than 50% of the value of the assets of the Initial Borrower and its Subsidiaries taken as a whole to any

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“person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), (d) the adoption by the stockholders of the Initial Borrower of a plan or proposal for the liquidation or dissolution of the Initial Borrower, (e) at any time prior to the satisfaction of the Release Condition, the Initial Borrower shall fail to own, directly or indirectly, all of the issued and outstanding Capital Stock of CSF or (f) the occurrence of a change of control or similar term under any documentation entered into with respect to any 2009-2012 Debt Issuance . Notwithstanding the foregoing, solely for the purpose of determining whether there has been a Change of Control pursuant to clause (a) above, any purchase by one or more Excluded Persons which increases any of such Excluded Persons’ direct or indirect ownership interest (whether individually or in the aggregate) in the Voting Stock of the Initial Borrower shall not constitute a Change of Control even if the amount of Voting Stock acquired or controlled by such Excluded Person(s) exceeds (whether individually or in the aggregate) 33-1/3% of the combined voting power of all Voting Stock of the Initial Borrower; provided, however, that for so long as any of such Excluded Persons’ direct or indirect ownership interest in the Voting Stock of the Initial Borrower exceeds (individually or in the aggregate) 33-1/3% of the combined voting power of all Voting Stock of the Initial Borrower, the initiation by the Initial Borrower of any action intended to terminate or having the effect of terminating the registration of its securities under Section 12(g) of the Exchange Act or intended to suspend or having the effect of suspending its obligation to file reports with the U.S. Securities and Exchange Commission under Sections 13 and 15(d) of the Exchange Act, shall constitute a Change of Control. “Excluded Person” shall mean each of John Delaney, Farallon Capital Management, LLC, and Madison Dearborn Partners, LLC. As used herein, “beneficial ownership” shall have the meaning provided in Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act.

     “Charged-Off Investment Loan” means any Investment Loan of the Initial Borrower or any of its Consolidated Subsidiaries (or portion thereof deemed to be “charged-off”) as to which any of the following first occurs: (a) the Initial Borrower has determined in accordance with its Credit and Collection Policy that such asset is not collectible, or adequate collateral or other source of payment does not exist to repay the principal due, (b) any principal or interest payments (other than in respect of default rate interest) remain unpaid for at least 180 days from the original due date for such payment, in which case 100% of the asset balance shall be deemed to be “charged-off”, or (c) the Obligor is subject to an Insolvency Event, in which case not less than 50% of the asset balance shall be deemed to be “charged-off”; provided that, solely for the purposes of calculating “Qualified Available Assets”, the definition of Charged-Off Investment Loan shall also include any Investment Loan of the Initial Borrower or any of its Consolidated Subsidiaries (or portion thereof deemed to be “charged-off”) as to which any principal or interest payments remain unpaid for at least ninety (90) days from the original due date for such payment, in which case 50% of the asset balance shall be deemed to be “charged-off” for such purposes.

     “CHR” shall mean CapitalSource Healthcare REIT, a Maryland real estate investment trust.

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     “Class of Lenders” shall mean either the Non-Extending Lenders or the Extending Lenders, as context may require.

     “Closing Date” shall mean the date of this Credit Agreement.

     “Code” means the Internal Revenue Code of 1986, as amended, or any successor Federal tax code. Any reference to any provision of the Code shall also be deemed to be a reference to any successor provision or provisions thereof.

     “Collateral” shall mean a collective reference to the collateral which is identified in, and at any time covered by, the Security Documents and such other collateral in which a security interest is granted in favor of the Agent to secure the Credit Party Obligations.

     “Collateral Proceeds” shall mean, without duplication,

     (a) all cash proceeds received in connection with any sale, transfer, conveyance or contribution to any Person (other than to a Credit Party to the extent such sale, transfer, conveyance or contribution is permitted under Section 5.14) of any asset, property or investment constituting Collateral owned or held directly by any Credit Party;

     (b) all cash proceeds received in connection with any investment (other than Permitted Distributions) constituting Collateral owned or held directly by any Credit Party (including, without limitation, any cash proceeds received from scheduled principal collections, prepayments, or terminated commitments of any investment or loan, but specifically excluding proceeds attributable to fees, interest, reimbursements, indemnities and similar proceeds); provided, however, that the term “Collateral Proceeds” shall not include for purposes of this clause (b), any payments of principal received on account of any revolving loan held by any Credit Party without a reduction of the commitment of such Credit Party with respect to such revolving loan;

     (c) (i) the amount of secured debt or leverage obtained by any Credit Party after December 23, 2008 (other than secured Debt from any 2009-2012 Debt Issuance); and (ii) the amount of secured debt or leverage obtained after December 23, 2008 encumbering or secured by any (1) Real Property Owned that is owned or held by a Collateral Real Property Non-Credit Party, (2) CapitalSource Securitization Note that is owned or held by a Collateral Securitization Note Non-Credit Party, or (3) Capital Stock of any Collateral Real Property Non-Credit Party, Real Property Holdco or Collateral Securitization Note Non-Credit Party that, as applicable, owns or holds directly or indirectly Real Property Owned or a CapitalSource Securitization Note;

     (d) all cash proceeds received in connection with any sale, transfer, conveyance or contribution to any Person (other than to a Credit Party to the extent such sale, transfer, conveyance or contribution is permitted under Section 5.14) of any (1) Real Property Owned that is owned or held by a Collateral Real Property Non-Credit Party, (2) CapitalSource Securitization Note that is owned or held by a Collateral Securitization Note Non-Credit Party, (3) Capital Stock of any Collateral Real Property Non-Credit Party, Real Property Holdco, or

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Collateral Securitization Note Non-Credit Party that, as applicable, owns or holds directly or indirectly Real Property Owned or a CapitalSource Securitization Note, or (4) Capital Stock of a Trust Depositor Subsidiary; and

     (e) all cash proceeds received by any (1) Collateral Real Property Non-Credit Party on account of its investment in Real Property Owned that is owned or held, (2) Real Property Holdco on account of its direct or indirect investment in any Collateral Real Property Non-Credit Party that owns or holds Real Property Owned, or (3) Collateral Securitization Note Non-Credit Party on account of its investment in any CapitalSource Securitization Note that is owned or held.

     “Collateral Real Property Non-Credit Parties” shall mean any Domestic Real Property Owned Subsidiary that is not a Credit Party and directly owns Real Property Owned that is included in the calculation of Qualified Available Assets pursuant to clauses (e), (f) or (g) of the definition of Available Assets.

     “Collateral Securitization Note Non-Credit Parties” shall mean any Domestic Securitization Note Subsidiary that is not a Credit Party and directly owns a Capital Source Securitization Note that is included in the calculation of Qualified Available Assets pursuant to clause (c) of the definition of Available Assets.

     “Commitment” shall mean, with respect to each Lender, the commitment of such Lender to make Revolving Loans in an aggregate principal amount at any time outstanding up to an amount equal to such Lender’s Commitment Percentage of the Committed Amount as specified in Schedule 2.1(a) or in the Register, as such amount may be reduced or increased from time to time in accordance with the provisions hereof.

     “Commitment Fee” shall have the meaning set forth in Section 2.5(a).

     “Commitment Percentage” shall mean, for each Lender, the percentage identified as its Commitment Percentage on Schedule 2.1(a) or in the Register, as such percentage may be modified in connection with any assignment made in accordance with the provisions of Section 9.6(c) or in connection with any reduction in the Committed Amount of such Lender pursuant to Section 2.6, such modifications to be deemed made on the Transfer Effective Date for such assignment or the date of such reduction in the Committed Amount, as applicable.

     “Commitment Termination Date” shall mean (a) March 13, 2010 with respect to the Commitments of, and the Loans held by, the Non-Extending Lenders and (b) the Extending Lender Maturity Date with respect to the Commitments of, and the Loans held by, the Extending Lenders.

     “Commitment Transfer Supplement” shall mean a Commitment Transfer Supplement, in substantially the form of Exhibit J.

     “Committed Amount” shall have the meaning set forth in Section 2.1(a).

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     “Common Equity” means (a) the common equity of the Healthcare REIT and (b) the common equity of the Healthcare REIT that is issuable upon the conversion, exchange, redemption or surrender of the equity interest of any other Healthcare REIT Entity; provided that, at all times, such equity interest of any other Healthcare REIT Entity (i) is immediately, without any condition, restriction, obligation or limitation (other than reasonable notice to the Healthcare REIT), convertible, exchangeable, redeemable or able to be surrendered for common equity of the Healthcare REIT or cash in an amount equal to the fair market value of such common equity, (ii) for the sake of clarity, complies with the requirements specified in the definition of Qualified Available Assets, and (iii) is not subject to impairment in any respect, including, without limitation, in respect of exchange or redemption rights, as a result of a transfer or Lien grant contemplated by the definition of Qualified Available Assets.

     “Commonly Controlled Entity” shall mean an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code.

     “Compliance Certificate” shall have the meaning set forth in Section 5.2(a).

     “Consolidated Debt” shall mean as of the date of any determination thereof, the sum of the aggregate unpaid amount of all Debt of the Initial Borrower, its Consolidated Subsidiaries and the CapitalSource Bank Entities determined on a consolidated basis in accordance with GAAP.

     “Consolidated Subsidiary” means at any date any Subsidiary the accounts of which, in accordance with GAAP, would be consolidated with those of the Initial Borrower in its consolidated and consolidating financial statements as of such date.

     “Consolidated Tangible Net Worth” means, as of any date of determination, the GAAP assets less the liabilities of the Initial Borrower, its Consolidated Subsidiaries, the CapitalSource Bank Entities and each Healthcare REIT Consolidated Subsidiary, less intangible assets (including goodwill), less loans or advances to stockholders, directors, officers or employees.

     “Contractual Obligation” shall mean, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound.

     “Controlled Group” means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code.

     “Credit and Collection Policy” means the written credit policies and procedures manual of the Initial Borrower (which policies shall include without limitation policies on loss reserves, due diligence format, underwriting parameters and credit approval procedures) in the form

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provided to the Lenders prior to the Closing Date and attached hereto as Schedule 4.26, as it may be amended or supplemented from time to time in accordance with Section 5.30.

     “Credit Documents” shall mean this Credit Agreement, each of the Notes, the Letters of Credit, the LOC Documents, the Guaranty Agreement, any Joinder Agreement, the Security Documents and all other agreements, documents, certificates and instruments delivered to the Administrative Agent or any Lender by any Credit Party in connection therewith (including, without limitation, any joinder to the Security Agreement or the Pledge Agreement but excluding any agreement, document, certificate or instrument related to a Hedging Agreement).

     “Credit Party” shall mean any of the Borrower or Guarantors, and “Credit Parties” shall mean the Borrower and Guarantors collectively.

     “Credit Party Obligations” means all loans, advances, debts, liabilities and obligations, for monetary amounts owing by any Credit Party to the Lenders (including the Issuing Lender) and Administrative Agent, whenever arising, or any of their assigns, as the case may be, whether due or to become due, matured or unmatured, liquidated or unliquidated, contingent or non-contingent, and all covenants and duties regarding such amounts, of any kind or nature, present or future, arising under or in respect of any of this Credit Agreement, the Letters of Credit, the Notes, any fee letter (including, without limitation, any commitment letter) delivered in connection with this Credit Agreement or any Credit Document, as amended or supplemented from time to time, whether or not evidenced by any separate note, agreement or other instrument. The term Credit Party Obligations includes, without limitation, all Advances Outstanding, interest (including interest that accrues after the commencement against any Credit Party of any action under the Bankruptcy Code), breakage costs, fees, including, without limitation, any and all arrangement fees, loan fees, facility fees, and any and all other fees, expenses, costs, indemnities, or other sums (including reasonable attorney costs) chargeable to a Credit Party under any of the Credit Documents.

     “CSI” CapitalSource International Inc., a Delaware corporation.

     “Currency” shall mean Dollars or any Alternative Currency.

     “Customary Non-Recourse Exclusions” shall mean usual and customary exceptions and non-recourse carve-outs in non-recourse secured debt financings of real property including, without limitation, exceptions by reason of (i) any fraudulent misrepresentation made by the obligor in or pursuant to any document evidencing any Debt, (ii) any unlawful act on the part of the obligor in respect of the Debt, (iii) any waste or misappropriation of funds by the obligor in contravention of the provisions of the Debt, (iv) customary environmental indemnities associated with the Real Property securing the non-recourse debt financing, (v) voluntary bankruptcy of the obligor under the non-recourse debt financing or (vi) failure of the obligor to comply with applicable special purpose entity covenants, but excluding in each case exceptions by reason of (a) non-payment of the Debt (other than the first debt service payment thereon) incurred in such non-recourse financing, or (b) the failure of the relevant obligor to comply with financial covenants or similar financial requirements. For the avoidance of doubt, in the event the

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Borrower or any of its Subsidiaries shall become liable for one of the Customary Non-Recourse Exclusions, the guaranty will be included in Senior Unsecured Debt.

     “Debt” of any Person means at any date, without duplication (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (d) all obligations of such Person as lessee under Capital Leases, (e) all obligations of such Person to reimburse any bank or other Person in respect of amounts payable under a banker’s acceptance, (f) all obligations of such Person to redeem preferred stock or equity of such Person (whether or not such Person is a corporation), (g) all obligations (absolute or contingent) of such Person to reimburse any bank or other Person in respect of amounts which are available to be drawn or have been drawn under a letter of credit or similar instrument, (h) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (i) all Debt of others guaranteed by such Person, (j) all obligations, direct or indirect (absolute or contingent) of such Person to repurchase property or assets sold or otherwise transferred by such Persons, (k) all indebtedness, obligations or liabilities of that Person in respect of derivatives, determined as of such date on a net mark-to-market basis in accordance with customary market practice, and (l) the principal portion of all obligations of such Person under any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where such transaction in each case (i) is considered borrowed money indebtedness for tax purposes, and (ii) is classified as an operating lease under GAAP.

     “Debt Issuance” shall mean the issuance of any unsecured debt for borrowed money by the Borrower or any of its Subsidiaries other than (a) Debt issued and outstanding from any 2009-2012 Debt Issuance; and (b) Permitted Unsecured Debt; provided, however, that the term Debt Issuance shall include Permitted Unsecured Debt once (and shall be deemed issued and received when) any of the criteria set forth in the definition of Permitted Unsecured Debt is not satisfied.

     “Default” shall mean any of the events specified in Section 7.1, whether or not any requirement for the giving of notice or the lapse of time, or both, or any other condition, has been satisfied.

     “Defaulting Lender” shall mean, at any time, any Lender that, at such time (a) has failed to make a Loan required pursuant to the terms of this Credit Agreement, including the funding of a Participation Interest in accordance with the terms hereof and such default remains uncured, (b) has failed to pay to the Administrative Agent or any Lender an amount owed by such Lender pursuant to the terms of this Credit Agreement and such default remains uncured, or (c) has been deemed insolvent or has become subject to a bankruptcy or insolvency proceeding or to a receiver, trustee or similar official.

     “Dollar Equivalent” shall mean, on any day, the spot selling rate at which the Administrative Agent offers to sell such Alternative Currency for Dollars in the London foreign

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exchange market at approximately 11:00 a.m., London time for delivery two (2) Business Days later.

     “Dollars” and “$” shall mean dollars in lawful currency of the United States of America.

     “Domestic Lending Office” shall mean, initially, the office of each Lender designated as such Lender’s Domestic Lending Office shown on Schedule 9.2; and thereafter, such other office of such Lender as such Lender may from time to time specify to the Administrative Agent and the Initial Borrower as the office of such Lender at which Alternate Base Rate Loans of such Lender are to be made.

     “Domestic Real Property Owned Subsidiary” means single purpose entity that is a Wholly Owned Subsidiary of the Initial Borrower organized and existing under the laws of the United States or any state or commonwealth thereof or under the laws of the District of Columbia, created for the sole purpose of, and whose only business shall be, acquiring or owning Real Property Owned, whether pursuant to a Securitization Transaction or otherwise, and those activities incidental thereto.

     “Domestic Securitization Note Subsidiary” means single purpose entity that is a Wholly Owned Subsidiary of the Initial Borrower organized and existing under the laws of the United States or any state or commonwealth thereof or under the laws of the District of Columbia, created for the sole purpose of, and whose only business shall be, acquiring or owning CapitalSource Securitization Notes, whether pursuant to a Securitization Transaction or otherwise, and those activities incidental thereto.

     “Domestic Subsidiary” shall mean any Subsidiary that is organized and existing under the laws of the United States or any state or commonwealth thereof or under the laws of the District of Columbia.

     “Environmental Authorizations” means all licenses, permits, orders, approvals, notices, registrations or other legal prerequisites for conducting the business of the Credit Parties or their Subsidiaries required by any Environmental Requirement.

     “Environmental Laws” shall mean any and all applicable foreign, federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other requirement of Applicable Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time be in effect during the term of this Credit Agreement.

     “Environmental Liability” means any liability, whether accrued, contingent or otherwise, arising from and in any way associated with any Environmental Requirements.

     “Environmental Requirements” means any legal requirement relating to health, safety or the environment and applicable to the Credit Parties, any Subsidiary of the Credit Parties or the

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Properties, including but not limited to any such requirement under CERCLA or similar state legislation and all federal, state and local laws, ordinances, regulations, orders, writs, decrees and common law.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor law. Any reference to any provision of ERISA shall also be deemed to be a reference to any successor provision or provisions thereof.

     “EURIBOR” means, in relation to any Loan to be advanced to, or owing by, any Borrower hereunder in Euro and any Interest Period relating thereto:

     (a) The percentage rate per annum equal to the offered quotation which appears on the Screen for a duration equal to or comparable to the duration of such Interest Period at or about 11.00 a.m. (Brussels time) two Business Days prior to such Interest Period; or

     (b) If no quotation for Euro for the relevant Interest Period is displayed and the Agent has not selected an alternative service on which a quotation is displayed, the rate offered by the principal London office of the Administrative Agent to leading banks in immediately available funds in the European interbank market at approximately 11:00 a.m., Brussels time two Business Days prior to such Interest Period.

     “EURIBOR/LIBOR Lending Office” shall mean, initially, the office of each Lender designated as such Lender’s EURIBOR/LIBOR Lending Office shown on Schedule 9.2; and thereafter, such other office of such Lender as such Lender may from time to time specify to the Administrative Agent and the Initial Borrower as the office of such Lender at which the EURIBOR/LIBOR Rate Loans of such Lender are to be made.

     “EURIBOR/LIBOR Rate Loan” shall mean: (a) in the case of Loans denominated in any Currency (other than Euro), any such Loan during any period in which it bears interest at a rate based upon the LIBOR Rate; and (b) in the case of Loans denominated in Euro, any such Loan during any period in which it bears interest at a rate based upon the EURIBOR.

     “Eurocurrency Reserve Percentage” shall mean for any day, the percentage (expressed as a decimal and rounded upwards, if necessary, to the next higher 1/100th of 1%) which is in effect for such day as prescribed by the Federal Reserve Board (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) in respect of Eurocurrency liabilities, as defined in Regulation D of such Board as in effect from time to time, or any similar category of liabilities for a member bank of the Federal Reserve System in New York City.

     “Euro” shall mean the lawful currency of the Participating Member States.

     “Event of Default” shall mean any of the events specified in Section 7.1; provided, however, that any requirement for the giving of notice or the lapse of time, or both, or any other condition, has been satisfied.

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     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

     “Existing Letters of Credit” shall have the meaning set forth in Section 2.3(i).

     “Extension of Credit” shall mean, as to any Lender, the making of a Loan by such Lender or the issuance of, or participation in, a Letter of Credit by such Lender.

     “Extending Event” shall mean the occurrence of any of the following events:

     (a) on or before July 31, 2009, the Committed Amount of the Extending Lenders is reduced in accordance with Section 2.6(b) by an amount equal to at least $200,000,000 from Free Cash Flow or from one or more 2009 Equity Issuance(s) and the Borrower pays or prepays the Revolving Loans and the Swingline Loans of the Extending Lenders as provided in Section 2.6(b); provided that no Event of Default is in existence at any time from the effective date of Amendment No. 8 through the date of such Extending Event (that is not cured or waived prior to the end of such period) and no secured 2009-2012 Debt Issuance is consummated on or prior to July 31, 2009; or

     (b) (i) on or before July 31, 2009, the Committed Amount of the Extending Lenders is reduced in accordance with Section 2.6(b) by an amount equal to at least $100,000,000 from Free Cash Flow, one or more 2009 Equity Issuance(s) or 2009-2012 Debt Issuance(s) and the Borrower pays or prepays the Revolving Loans and the Swingline Loans of the Extending Lenders as provided in Section 2.6(b) and (ii) on or before September 30, 2009, the Committed Amount of the Extending Lenders is reduced in accordance with Section 2.6(b) by an amount equal to at least $200,000,000 (including any amounts paid down pursuant to clause (i) of this subsection (b)) from Free Cash Flow, one or more 2009 Equity Issuance(s) or 2009-2012 Debt Issuance(s) and the Borrower pays or prepays the Revolving Loans and the Swingline Loans of the Extending Lenders as provided in Section 2.6(b); provided that if any secured 2009-2012 Debt Issuance is consummated on or before September 30, 2009 then such amount shall be at least $300,000,000 (including any amounts paid down pursuant to clause (i) of this subsection (b)) and; provided further, that no Event of Default is in existence at any time from the effective date of Amendment No. 8 through the date of such Extending Event (that is not cured or waived prior to the end of such period).

     “Extending Lender Maturity Date” shall mean December 31, 2011.

     “Extending Lenders” shall mean each Lender that executes Amendment No. 8 to this Credit Agreement (and their respective successors and assigns); provided, however, that any Person that is an Extending Lender shall be deemed a Non-Extending Lender solely with respect to the Loans and Commitments acquired by such Person after the effective date of Amendment No. 8 to this Credit Agreement from a Person that is a Non-Extending Lender.

     “Facility Extension Request” shall have the meaning set forth in Section 2.20.

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     “Fair Market Value” shall mean with respect to Real Property Owned the “as is” appraised value of the Real Property Owned, provided that in no event shall the Fair Market Value of Real Property Owned be greater than the purchase price of the Real Property Owned.

     “Federal Funds Effective Rate” shall have the meaning set forth in the definition of “Alternate Base Rate”.

     “First Tier Domestic Subsidiary” shall mean a Domestic Subsidiary whose Capital Stock is directly owned by the Initial Borrower.

     “First Tier Foreign Subsidiary” shall mean a Subsidiary that is not a Domestic Subsidiary and whose Capital Stock is directly owned by the Initial Borrower.

     “Fiscal Month” means any fiscal month of the Initial Borrower.

     “Fiscal Quarter” means any fiscal quarter of the Initial Borrower.

     “Fiscal Year” means the fiscal year of the Initial Borrower for accounting purposes ending on December 31 of each calendar year and when preceded or followed by the designation of a calendar year (e.g. 2006 Fiscal Year means the Fiscal Year of the Initial Borrower ending on December 31 of such designated calendar year).

     “Fitch” means Fitch, Inc. or any successor thereto.

     “Foreign Currency Equivalent” shall mean, on any day, with respect to any amount in Dollars, the amount of Alternative Currency that would be required to purchase such amount of Dollars on such day, based on the rate appearing on the relevant display on the Reuters Monitor Money Rate Service for the sale of Dollars for such Alternative Currency in the London foreign exchange market at approximately 11:00 a.m. London time for delivery two (2) Business Days later, or, if not available, the spot selling rate at which the Administrative Agent offers to sell Dollars for such Alternative Currency in the London foreign exchange market at approximately 11:00 a.m., London time for delivery two (2) Business Days later.

     “Free Cash Flow” shall mean all unencumbered and unrestricted cash of the Credit Parties (other than as a result of any Lien granted by any Credit Party to Administrative Agent under the Credit Documents) that does not consist of, and was not generated or derived from, any Collateral Proceeds that are required to be applied to reduce the Committed Amount as provided in Section 2.6(b), issuance of any Debt or 2009 Equity Issuance by any Credit Party or any of its Subsidiaries that is required to be applied to reduce the Committed Amount as provided in Section 2.6(b), or any other matter or source required to be applied to reduce the Committed Amount pursuant to Section 2.6(b) hereof.

     “Fronting Fee” shall have the meaning set forth in Section 2.5(b).

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     “GAAP” shall mean, except as provided in Section 1.3, generally accepted accounting principles in effect as of any date of determination in the United States of America applied on a consistent basis.

     “Government Acts” shall have the meaning set forth in Section 2.19.

     “Governmental Authority” means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, any court or arbitrator and any accounting board or authority (whether or not a part of the government) which is responsible for the establishment or interpretation of national or international accounting principles.

     “Guarantor” shall have the meaning set forth in the first paragraph of this Credit Agreement, and shall also include CSI so long as the Guaranty Agreement is in effect; provided, however, that for purposes of Article X the term “Guarantor” shall not include CSI.

     “Guaranty” shall mean the guaranty of the Guarantors set forth in Article X.

     “Guaranty Agreement” shall mean that certain Guaranty Agreement, dated as of December 20, 2006, made by and among the Initial Borrower, CSI and the Agent for the benefit each of the Lenders, as amended, modified or supplemented from time to time.

     “Hazardous Materials” includes, without limitation, (a) solid or hazardous waste, as defined in the Resource Conservation and Recovery Act of 1980, 42 U.S.C. §6901 et seq. and its implementing regulations and amendments, or in any applicable state or local law or regulation, (b) any “hazardous substance”, “pollutant” or “contaminant”, as defined in CERCLA, or in any applicable state or local law or regulation, (c) gasoline, or any other petroleum product or by-product, including crude oil or any fraction thereof, (d) toxic substances, as defined in the Toxic Substances Control Act of 1976, or in any applicable state or local law or regulation, and (e) insecticides, fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable state or local law or regulation, as each such act, statute or regulation may be amended from time to time.

     “Healthcare REIT” shall mean the REIT resulting from the consummation of a spin-off, initial public offering, merger or other corporate transaction of the healthcare net-lease business of the Initial Borrower and its Subsidiaries after which the shares of such REIT (or its successor) are listed on a U.S. national securities exchange or the NASDAQ Stock Market.

     “Healthcare REIT Consolidated Subsidiary” means at any date any Healthcare REIT Entity, if such Healthcare REIT Entity’s accounts, in accordance with GAAP, would be consolidated with those of the Initial Borrower in its consolidated and consolidating financial statements as of such date.

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     “Healthcare REIT Entities” shall mean the Healthcare REIT and its Subsidiaries, as well as any direct or indirect Subsidiaries of the Initial Borrower that are formed for the sole purpose of establishing, structuring or capitalizing the Healthcare REIT.

     “Hedging Agreement” shall mean, with respect to any Person, any agreement entered into to protect such Person against fluctuations in interest rates, or currency or raw materials values, including, without limitation, any interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more counterparties, commodity purchase or option agreements or other interest or exchange rate hedging agreements.

     “HY Debt Documents” shall mean (i) the HY Indenture, (ii) the notes issued under the HY Indenture by the Initial Borrower in favor of the noteholders and (iii) all other documents, instruments and agreements executed or delivered in connection therewith.

     “HY Indenture” shall mean an indenture by and between the Initial Borrower and the HY Trustee in connection with a 2009-2012 Debt Issuance.

     “HY Intercompany Notes” shall mean the notes issued by certain Credit Parties to the Initial Borrower in connection with any 2009-2012 Debt Issuance, in form and substance substantially the same (other than adjustments to principal amount as appropriate to conform with the principal amount of any 2009-2012 Debt Issuance) as such notes issued on July 27, 2009 (and as in effect on such date) or otherwise reasonably satisfactory to the Agent.

     “HY Intercreditor Agreement” shall have the meaning set forth in clause (xvi) of the definition of Permitted Liens, as such agreement may be amended, modified or supplemented from time to time in accordance with its terms.

     “HY Trustee” shall mean U.S. Bank, National Association, as trustee for the holders of Debt, or any other trustee from time to time acting in such capacity on behalf of noteholders pursuant to a 2009-2012 Debt Issuance.

     “Impacted Lender” shall mean a Defaulting Lender or a Lender as to which (a) the Issuing Lender has a good faith belief that the Lender has defaulted in fulfilling its obligations under one or more other syndicated credit facilities, or (b) an entity that controls the Lender has been deemed insolvent or become subject to a bankruptcy or similar proceeding. As used in the foregoing sentence, “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise.

     “Initial Borrower” means CapitalSource Inc., a Delaware corporation.

     “Insolvency” shall mean, with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of such term as used in Section 4245 of ERISA.

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     “Insolvency Event” means with respect to a specified Person, (a) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Insolvency Law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person’s affairs, and such decree or order shall remain unstayed and in effect for a period of sixty (60) consecutive days, or (b) the commencement by such Person of a voluntary case under any applicable Insolvency Law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due, or the taking of action by such Person in furtherance of any of the foregoing.

     “Insolvency Laws” means the Bankruptcy Code and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, or similar debtor relief laws from time to time in effect affecting the rights of creditors generally.

     “Insolvency Proceeding” means any case, action or proceeding before any court or Governmental Authority relating to an Insolvency Event.

     “Interest Payment Date” shall mean (a) as to any Alternate Base Rate Loan or LMIR Loan, the first day of each April, July, October and January and on March 13, 2010 and the Extending Lender Maturity Date, (b) as to any EURIBOR/LIBOR Rate Loan having an Interest Period of three (3) months or less, the last day of such Interest Period, and (c) as to any EURIBOR/LIBOR Rate Loan having an Interest Period longer than three (3) months, (i) each three (3) month anniversary following the first day of such Interest Period, and (ii) the last day of such Interest Period.

     “Interest Period” shall mean, with respect to any EURIBOR/LIBOR Rate Loan,

     (a) initially, the period commencing on the Borrowing Date or conversion date, as the case may be, with respect to such EURIBOR/LIBOR Rate Loan and ending one (1), two (2), three (3) or six (6) months thereafter, as selected by the Borrower in the Notice of Borrowing or Notice of Conversion given with respect thereto; and

     (b) thereafter, each period commencing on the last day of the immediately preceding Interest Period applicable to such EURIBOR/LIBOR Rate Loan and ending one (1), two (2), three (3) or six (6) months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three (3) Business Days prior to the last day of the then current Interest Period with respect thereto; provided that the foregoing provisions are subject to the following:

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     (i) if any Interest Period pertaining to a EURIBOR/LIBOR Rate Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day;

     (ii) any Interest Period pertaining to a EURIBOR/LIBOR Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the relevant calendar month;

     (iii) if the Borrower shall fail to give notice as provided above, the Borrower shall be deemed to have selected an Alternate Base Rate Loan to replace the affected EURIBOR/LIBOR Rate Loan;

     (iv) any Interest Period in respect of any Loan that would otherwise extend beyond the Commitment Termination Date shall end on the Commitment Termination Date;

     (v) no more than ten EURIBOR/LIBOR Rate Loans may be in effect at any time. For purposes hereof, EURIBOR/LIBOR Rate Loans with different Interest Periods shall be considered as separate EURIBOR/LIBOR Rate Loans, even if they shall begin on the same date, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new EURIBOR/LIBOR Rate Loan with a single Interest Period.

Notwithstanding the foregoing, any Interest Period entered into prior to March 13, 2010 shall end on March 13, 2010 and shall be subject to Section 2.17.

     “Intermediate Holdco” shall mean a Wholly Owned Subsidiary:

     (a) that owns and holds directly, free and clear of all Liens (other than Permitted Liens), Capital Stock of a Domestic Real Property Owned Subsidiary that directly owns Real Property Owned free and clear of all Liens (other than Permitted Liens); and

     (b) that does not have any liabilities (other than immaterial liabilities incidental to its business), debt or engage in any operations or business (other than the ownership of equity interests in other Persons) and none of the assets of, or equity of or in, such Wholly Owned Subsidiary is subject to a Lien or other encumbrance.

     “Investment” means any investment in any Person, whether by means of purchase or acquisition of obligations or securities of such Person, capital contribution to such Person, loan or advance to such Person, making of a time deposit with such Person, guarantee or assumption of any obligation of such Person or otherwise.

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     “Investment Company Act” means the Investment Company Act of 1940, as amended, and all rules and regulations promulgated thereunder.

     “Investment Grade” shall mean an S&P rating of “BBB-” or better, a Fitch rating of “BBB-” or better, or a Moody’s rating of “Baa3” or better.

     “Investment Loan” means any senior or subordinated loan (including letters of credit issued under such loan) or lease (a) arising from the extension of credit to an Obligor by the Initial Borrower or a Consolidated Subsidiary (excluding an Unrestricted Subsidiary) in the ordinary course of business, (b) originated in accordance with the policies and procedures set forth in the Credit and Collection Policy, and (c) good and marketable title to which is owned by Initial Borrower or a Consolidated Subsidiary.

     “Investment Loan Subsidiary” shall mean any Person that becomes a Subsidiary as a result of the exercise of remedies by the Initial Borrower or any Consolidated Subsidiary under any Investment Loan.

     “Investments in Equity Instruments” means each Investment, that is made in accordance with the policies and procedures set forth in the Credit and Collection Policy, owned by the Initial Borrower or any Consolidated Subsidiary (excluding an Unrestricted Subsidiary) in (a) common stock, partnership interests or membership interests of any Person and that is classified as “Common Stock,” “Partnership Units” or “Membership Units” on the consolidated schedule of investments of the Initial Borrower for the then most recently ended Fiscal Quarter, (b) preferred stock (other than redeemable preferred stock) of any Person and that is classified as “Preferred Stock’ on the consolidated schedule of investments of the Initial Borrower for the then most recently ended Fiscal Quarter, (c) redeemable preferred stock of any Person and that is classified as “Redeemable Preferred Stock” on the consolidated schedule of investments of the Initial Borrower for the then most recently ended Fiscal Quarter, and (d) warrants to purchase common stock, partnership interests or membership interests of any Person and that is classified as “Common Stock Warrants,” “Partnership Unit Warrants” or “Membership Unit Warrants” on the consolidated schedule of investments of the Initial Borrower for the then most recently ended Fiscal Quarter.

     “Issuing Lender” shall mean Bank of America, N.A., Wachovia and any other consenting Lender in their capacity as such designated by the Initial Borrower with the consent of the Administrative Agent.

     “Issuing Lender Fees” shall have the meaning set forth in Section 2.5(c).

     “Joinder Agreement” shall mean a Joinder Agreement in substantially the form of Exhibit N executed and delivered by an Additional Credit Party in accordance with the provisions of Section 5.9.

     “Judgment Currency” shall have the meaning set forth in Section 9.19(b).

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     “Lender” shall have the meaning set forth in the first paragraph of this Credit Agreement (and, for the avoidance of doubt, shall include each Extending Lender and Non-Extending Lender; provided, however, that the term “Lender” shall not include Non-Extending Lenders on and after the date on which the Commitments of the Non-Extending Lenders have terminated and the Credit Party Obligations of the Non-Extending Lenders have been paid in full (other than unasserted contingent indemnification obligations)).

     “Letters of Credit” shall mean any letter of credit issued by the Issuing Lender pursuant to the terms hereof as such letter of credit may be amended, modified, extended, renewed or replaced from time to time.

     “Letter of Credit Fee” shall have the meaning set forth in Section 2.5(b).

     “LIBOR” means, in relation to any Loan other than an Alternate Base Rate Loan, to be advanced to, or owing by, any Borrower hereunder in any Currency (other than Euro) and any Interest Period relating thereto the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on the Screen as the London interbank offered rate for deposits in such Currency at approximately 11:00 A.M. (London time) two (2) Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If, for any reason, such rate is not available with respect to amounts denominated in such Currency on the Screen, then “LIBOR” shall mean (with respect to amounts denominated in such Currency) the rate per annum at which deposits in such Currency in an amount comparable to the Loans then requested are being offered to leading banks at approximately 11:00 A.M. London time, two (2) Business Days prior to the commencement of the applicable Interest Period for settlement in immediately available funds by leading banks in the London interbank market for a period equal to the Interest Period selected, as determined by the Administrative Agent.

     “LIBOR Market Index Rate” means, for any day, the one-month LIBOR Rate for Dollar deposits as reported on the Telerate Service, Telerate Page 3750 as of 11:00 A.M., London time, on such day, or if such day is not a Business Day, then the immediately preceding Business Day (or if not so reported, then as determined by the Swingline Lender from another recognized source for interbank quotation).

     “LIBOR Rate” for any Loan other than an Alternate Base Rate Loan, in any Currency (other than Euro), shall mean a rate per annum (rounded upwards, if necessary, to the next higher 1/100th of 1%) determined by the Administrative Agent pursuant to the following formula:

LIBOR Rate =	LIBOR
	1.00 - Eurocurrency Reserve Percentage

     “Lien” means, with respect to any asset, any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, security interest, security title, preferential arrangement constituting a security interest or encumbrance or encumbrance of any kind in respect of such asset to secure or assure payment of a Debt or a Guarantee, whether by consensual agreement or by operation of statute or other law, or by any agreement, contingent or otherwise, to provide any of the

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foregoing. An asset shall be deemed to be subject to a Lien if such asset is held by a special purpose entity (including any SPE Subsidiary) and the equity interests of such entity are themselves subject to a Lien. For the purposes of this Credit Agreement, a Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset.

     “Liquid Real Estate Assets” means (a) residential mortgage-backed securities that (i) have a rating of not less than “AA” by S&P/Fitch and “Aa2” by Moody’s, (ii) are purchased by Initial Borrower or its Consolidated Subsidiaries solely to meet REIT asset and income tests, and (iii) are leveraged through debt facilities utilizing leverage greater than 12 times the amount of equity investment in such Liquid Real Estate Assets and (b) residential mortgage whole loan purchases made by the Initial Borrower or its Consolidated Subsidiaries solely to meet REIT asset and income tests, all in accordance with the Residential Mortgage Policies and Procedures.

     “LMIR Loan” means a Swingline Loan, or portion thereof, during any period in which it bears interest at a rate based upon the LIBOR Market Index Rate.

     “Loan” shall mean a Revolving Loan or a Swingline Loan, as appropriate.

     “LOC Commitment” shall mean the commitment of the Issuing Lender to issue Letters of Credit and with respect to each Lender that has a Commitment, the commitment of such Lender to purchase participation interests in the Letters of Credit in an amount equal to such Lender’s Commitment Percentage of LOC Committed Amount, as such amount may be reduced or increased from time to time in accordance with the provisions hereof.

     “LOC Committed Amount” shall mean $80,000,000; provided, however, that notwithstanding the foregoing, when the aggregate Committed Amount is less than or equal to (a) $300,000,000, the term “LOC Committed Amount” shall mean $60,000,000 and (b) $100,000,000, the term “LOC Committed Amount” shall mean $20,000,000.

     “LOC Documents” shall mean, with respect to any Letter of Credit, such Letter of Credit, any amendments thereto, any documents delivered in connection therewith, any application therefor, and any agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (a) the rights and obligations of the parties concerned, or (b) any collateral security for such obligations.

     “LOC Obligations” shall mean, at any time, the sum of (a) the maximum amount which is, or at any time thereafter may become, available to be drawn under Letters of Credit then outstanding, assuming compliance with all requirements for drawings referred to in such Letters of Credit, plus (b) the aggregate amount of all drawings under Letters of Credit honored by the Issuing Lender but not theretofore reimbursed.

     “Lockbox Agreement” shall mean that certain Fourth Amended and Restated Intercreditor and Lockbox Administration Agreement, dated as of June 30, 2005, by and among

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Bank of America, N.A., the financing agents party thereto, CSF and Capital Source Funding Inc., as such agreement is amended, amended and restated, supplemented or modified from time to time.

     “Majority Extending Lenders” shall mean the Extending Lenders holding in the aggregate more than 50% of the sum of all Loans and LOC Obligations of the Extending Lenders then outstanding at such time plus the aggregate unused Commitments of the Extending Lenders at such time (treating for purposes hereof in the case of (i) LOC Obligations and the Issuing Lender, only the portion of the LOC Obligations of the Issuing Lender which are not subject to the Participation Interests of the other Extending Lenders, (ii) the Swingline Loans and the Swingline Lender, only the portion of the Swingline Loans of the Swingline Lender which are not subject to the Participation Interests of the other Extending Lenders and (iii) Extending Lenders other than the Issuing Lender and the Swingline Lender, the Participation Interests of such Extending Lenders in LOC Obligations and Swingline Loans hereunder, in each case, as direct obligations).

     “Mandatory Cost Rate” shall mean the percentage rate per annum calculated in accordance with and in the manner set forth in Exhibit O.

     “Mandatory LOC Borrowing” shall have the meaning set forth in Section 2.3(e).

     “Mandatory Reduction Payment Date” shall have the meaning set forth in Section 2.6(b)(i).

     “Mandatory Swingline Borrowing” shall have the meaning set forth in Section 2.4(b)(ii).

     “Margin Stock” means “margin stock” as defined in Regulations T, U or X of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder.

     “Material Adverse Change” means the occurrence of a Material Adverse Effect.

     “Material Adverse Effect” means with respect to any event or circumstance, a material adverse effect on (a) the business, financial condition, operations, performance or properties of the Borrower and its Subsidiaries, taken as a whole, (b) the validity, enforceability or collectibility of this Credit Agreement or any other Credit Document, (c) the rights and remedies of the Administrative Agent or any Lender under this Credit Agreement or any Credit Document, (d) the ability of the Borrower and its Subsidiaries, taken as a whole, to perform its obligations under this Credit Agreement or any other Credit Document, or (e) the enforceability or priority of the Agent’s Liens with respect to the Collateral as a result of an action or failure to act on the part of the Credit Parties.

     “Material Contract” shall mean (a) any contract or other agreement of the Initial Borrower or any of its Subsidiaries listed by the Initial Borrower as a “material contract” in its

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public filings with the SEC, and (b) any other written contract, agreement, permit or license, of the Borrower or any of its Subsidiaries the failure to comply with which could reasonably be expected to have a Material Adverse Effect.

     “Monthly Report” has the meaning set forth in Section 5.2(b).

     “Moody’s” means Moody’s Investors Service, Inc., or any successor thereto.

     “Most Favored Provisions” has the meaning set forth in Section 9.21.

     “Multiemployer Plan” shall have the meaning set forth in Section 4001(a)(3) of ERISA.

     “National Currency” shall mean the currency, other than Euro, of a member state of the European Union.

     “Net Proceeds of Capital Stock/Conversion of Debt” means any and all proceeds (whether cash or non-cash) or other consideration received by the Initial Borrower, its Consolidated Subsidiaries or the CapitalSource Bank Entities, on a consolidated basis, in respect of the issuance of Capital Stock to a Person other than the Initial Borrower or its Consolidated Subsidiaries (including, without limitation, the aggregate amount of any and all Debt converted into Capital Stock), after deducting therefrom all reasonable and customary costs and expenses incurred by the Initial Borrower, such Consolidated Subsidiary and CapitalSource Bank Entity in connection with the issuance of such Capital Stock in each case to the extent classified as equity on the consolidated balance sheet of the Initial Borrower, its Consolidated Subsidiaries and the CapitalSource Bank Entities; provided, however, that such proceeds shall exclude any consideration received in connection with an initial public offering of the Healthcare REIT.

     “Non-Extending Lenders” shall mean each Lender that does not execute Amendment No. 8 to this Credit Agreement (and their respective successors and assigns); provided, however, that any Person that is a Non-Extending Lender shall be deemed an Extending Lender solely with respect to the Loans and Commitments acquired by such Person after the effective date of Amendment No. 8 to this Credit Agreement from a Person that is an Extending Lender.

     “Note” or “Notes” shall mean the Revolving Notes, and/or the Swingline Note, collectively, separately or individually, as appropriate.

     “Notice of Borrowing” shall mean a request for a Revolving Loan borrowing pursuant to Section 2.1(b)(i).

     “Notice of Conversion” shall mean the written notice of extension or conversion as referenced and defined in Section 2.10(a).

     “Notice of Swingline Borrowing” shall mean a request for a Swingline Loan borrowing pursuant to Section 2.4(b)(i).

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     “Obligor” means with respect to any Investment, the Person or Persons obligated to make payments pursuant to such Investment or in the case of Investments in Equity, the issuer of such equity, including any guarantor thereof.

     “OFAC” shall mean the U.S. Department of the Treasury’s Office of Foreign Assets Control.

     “OREO Property” shall mean real property, securing an Investment, that has been acquired by the Initial Borrower or an Affiliate of the Initial Borrower through foreclosure or a deed in lieu of foreclosure.

     “Other Parties” shall have the meaning set forth in Section 10.7(c).

     “Participant” shall have the meaning set forth in Section 9.6(b).

     “Participating Member State” shall mean any member state of the European Union that adopts or has adopted Euro as its lawful currency in accordance with legislation of the European Union relating to the European Economic and Monetary Union.

     “Participation Interest” shall mean a participation interest purchased by (a) a Lender in LOC Obligations as provided in Section 2.3(c), or (b) a participation interest purchased by a Lender in Swingline Loans as provided in Section 2.4.

     “PATRIOT Act” shall have the meaning set forth in Section 9.18.

     “PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.

     “Permitted CHR Preferred Stock” shall mean up to 125 shares of Series A Cumulative Non-Voting Preferred Shares, $0.01 par value per share, of CHR; provided that (a) such shares have no voting rights, and (b) the aggregate liquidation preference for such shares shall not at any time exceed $125,000 plus accrued and unpaid dividends thereon plus the applicable redemption premium (which in no event shall exceed, for all such shares collectively, an aggregate amount equal to $25,000).

     “Permitted Country” means each of Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Japan, Luxembourg, Portugal, Spain, Sweden, Switzerland, The Netherlands, The United Kingdom or the United States of America.

     “Permitted Distributions” means (a) all cash dividends or other distributions made to the Borrower or any Subsidiary on account of the Capital Stock owned by such Person in a Subsidiary, or (b) the repayment of intercompany indebtedness (other than the HY Intercompany Note) (for the avoidance of doubt, intercompany debt shall not include any CapitalSource Securitization Note), in each case which is permitted under this Agreement.

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     “Permitted Liens” shall mean:

     (i) Liens held by Agent to secure the Credit Party Obligations;

     (ii) Liens for taxes, assessments, charges or other governmental levies not yet due or as to which the period of grace, if any, related thereto has not expired or which are being contested in good faith by appropriate proceedings; provided that adequate reserves with respect thereto are maintained on the books of the applicable Credit Party in conformity with GAAP;

     (iii) statutory Liens such as carriers’, warehousemen’s, mechanics’, materialmen’s, landlords’, repairmen’s or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith by appropriate proceedings;

     (iv) pledges or deposits in connection with workers’ compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements;

     (v) easements, rights of way, restrictions and other similar encumbrances affecting real property which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the applicable Person;

     (vi) rights of setoff or bankers’ liens upon deposits of cash in favor of banks or other depository institutions, solely to the extent (A) incurred in connection with the maintenance of such deposit accounts in the ordinary course of business or (B) provided for in the Lockbox Agreement or any control agreement, in form and substance satisfactory to the Administrative Agent, executed pursuant to the Credit Documents; and

     (vii) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness (including Capitalized Lease Obligations) and so long as (a) such Lien attaches only to the asset purchased or acquired or leased, accessions to such property and the proceeds thereof, and (b) such Lien only secures the Debt that was incurred to acquire the asset purchased or acquired;

     (viii) deposits to secure (a) the performance of tenders, bids, trade contracts, licenses and leases, statutory obligations, and other obligations of a like nature incurred in the ordinary course of business and consistent with past practices and not in connection with the borrowing of money, or (b) indemnification obligations entered into in the ordinary course of business consistent with past practice relating to any disposition permitted hereunder;

     (ix) Liens securing judgments, awards or orders for the payment of money that do not constitute an Event of Default pursuant to Section 7.1(g);

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     (x) ground leases with respect to real property owned or leased by the Borrower or any Subsidiary not interfering in any material respect with the business of the Borrower or any Subsidiary;

     (xi) non-exclusive licenses of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of business;

     (xii) Liens deemed to exist in connection with investments in repurchase agreements entered into in the ordinary course of business consistent with past practice;

     (xiii) Liens existing on the date hereof and listed on Schedule P-1 and any renewals or extensions thereof, provided that any renewal or extension of the obligations secured or benefited thereby is permitted by this Agreement and the other Credit Documents and so long as the replacement Lien only encumbers the assets that secured the original obligation;

     (xiv) earn-out or similar obligations issued in connection with an acquisition otherwise permitted hereunder (to the extent such earn-out or similar obligation is unsecured but deemed a Lien);

     (xv) Liens on cash collateral securing letters of credit issued on behalf of Obligors, in the ordinary course of business and consistent with past practice, pursuant to any Investment Loan in existence on December 23, 2008 that is part of the Collateral and is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement; provided that (a) the amount of the obligations being cash collateralized is not less than the amount of the cash collateral, (b) such Lien does not attach to any other asset of any Credit Party or any Subsidiary, and (c) the aggregate amount of all of the outstanding obligations secured by all such Liens does not exceed $25,000,000 at any time plus the amount of such obligations that are non-recourse in any respect to any Credit Party or Subsidiary (“Cash Collateralized Letters of Credit”);

     (xvi) Liens in and to the Collateral to secure the Debt and other obligations owing in respect of the 2009-2012 Debt Issuance; provided, that, (a) such Debt is issued under the 2009-2012 Debt Documentation, (b) the Borrower is the sole issuer of such Debt (other than any guaranties provided by any of the Credit Parties), (c) such Debt is permitted by Section 5.28(c) and (d) such Liens (i) do not cover or attach to any asset that is not part of the Collateral other than the HY Intercompany Notes and (ii) are subject to that certain Intercreditor Agreement, dated as of July 27, 2009 (the “HY Intercreditor Agreement”), among the Agent, Wachovia Bank, National Association, as Collateral Agent and U.S. Bank National Association;

     (xvii) Liens in and to the collateral to secure the Debt and other obligations owing in respect of the HY Intercompany Notes; provided, that, such Liens do not cover or attach to any asset that is not part of the Collateral; and

     (xviii) other Liens so long as (a) any Debt secured thereby does not constitute Debt for borrowed money and (b) does not exceed $250,000 in the aggregate at any time outstanding.

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     “Permitted Lines of Business” shall mean the line or lines of business conducted by the Initial Borrower and its Subsidiaries on the Closing Date (including, among other things, the lines of business contemplated for a Bank Subsidiary, investment management business, financial services business, the loan servicing business, commercial lending business, real estate investment business and mortgage lending business).

     “Permitted Purchase Money Indebtedness” means, as of any date of determination, Purchase Money Indebtedness in an aggregate principal amount outstanding at any one time not in excess of $2,000,000.

     “Permitted Unsecured Debt” shall mean all outstanding senior unsecured debt for borrowed money issued by the Initial Borrower; provided that, at all times, it satisfies each of the following criteria:

     (a) the outstanding aggregate principal balance of such debt does not exceed the prescribed limits established by the TLGP and is less than $320,000,000;

     (b) such debt is fully guaranteed by the Federal Deposit Insurance Company pursuant to the TLGP;

     (c) the TLGP prohibits the Initial Borrower from using the proceeds of such debt to prepay the Credit Party Obligations; and

     (d) such debt otherwise satisfies all of the criteria established by the TLGP.

     “Person” means an individual, a corporation, a limited liability company, a partnership (including without limitation, a joint venture), an unincorporated association, a trust or any other entity or organization, including, but not limited to, a government or political subdivision or an agency or instrumentality thereof.

     “Plan” means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (a) maintained by a member of the Controlled Group for employees of any member of the Controlled Group, or (b) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five (5) plan years made contributions.

     “Pledge Agreement” shall mean the Pledge Agreement executed by each of the Credit Parties in favor of the Administrative Agent, as the same may from time to time be amended, supplemented or otherwise modified in accordance with the terms hereof and thereof.

     “Portfolio Investments” means Investments made by the Initial Borrower or a Consolidated Subsidiary in the ordinary course of business and consistently with practices

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existing on the date hereof in a Person that is accounted for under GAAP as a portfolio investment of the Initial Borrower or a Consolidated Subsidiary.

     “Pounds Sterling” shall mean the lawful currency of the United Kingdom.

     “Prime Rate” shall have the meaning set forth in the definition of Alternate Base Rate.

     “Prohibited Stock” means any Capital Stock that by its terms is mandatorily redeemable on or before a date that is less than 90 days after March 31, 2012, or, on or before the date that is less than 90 days after March 31, 2012, is redeemable at the option of the holder thereof for cash or assets or securities; provided, however, that for the purposes of the definition of 2009 Equity Issuance, “Prohibited Stock” shall mean any Capital Stock that by its terms is mandatorily redeemable on or before March 31, 2013, or, on or before March 31, 2013, is redeemable at the option of the holder thereof for cash or assets or securities.

     “Properties” means all real property owned, leased or otherwise used or occupied by any Credit Party or any Subsidiary of a Credit Party, wherever located.

     “Purchase Money Indebtedness” means Debt (other than the Credit Party Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 90 days after, the acquisition, construction or improvement of any capital asset or fixed asset for the purpose of financing all or any part of the acquisition cost thereof.

     “Purchasing Lender” shall have the meaning set forth in Section 9.6(c).

     “Qualified Available Assets” shall mean Available Assets (a) good and marketable title to which is 100% owned directly by a Credit Party (or directly by (x) a Collateral Real Property Non-Credit Party in the case of Real Property Owned that is located in the United States or (y) a Collateral Securitization Note Non-Credit Party in the case of CapitalSource Securitization Note), (b) free and clear of any Lien or encumbrance of any Person (other than Permitted Liens), (c) that are not the subject of a contractual or other prohibition or restraint (exclusive of (x) in the case of Real Property Owned by Subsidiaries of Healthcare REIT, restraints that in the reasonable opinion of counsel are advisable for such Subsidiary to avoid material tax liabilities as a result of its failure to comply with its tax status as a REIT and (y) in the case of any CapitalSource Securitization Note held by a Collateral Securitization Note Non-Credit Party, restrictions imposed by any sale agreement or related agreement on the creation of Liens in a Securitization Transaction, so long as such restrictions are substantially similar to those contained in the documentation for any Securitization Transaction entered into prior to December 23, 2008 or otherwise permitted pursuant to Section 5.36(iv)(B)) that, directly or indirectly, prohibits or restrains or has the effect of prohibiting or restraining (i) any Credit Party or other Person from transferring the Available Assets to any Credit Party, or (ii) any Credit Party or other Person from granting the Administrative Agent and Lenders a Lien on such Available Assets, (d) originated or acquired without any fraud or material misrepresentation, and (e) in material compliance with all Applicable Laws; provided, however, that in no event shall any Charged-Off Investment Loan be a Qualified Available Asset.

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     “Real Estate Loans” shall mean any loan that is an extension of credit fully secured by and underwritten to the value of the related Obligor’s interest in real property.

     “Real Property Holdcos” shall mean each Intermediate Holdco, Tier 1 Real Property Intermediate Holdco and Tier 2 Real Property Intermediate Holdco.

     “Real Property Owned” shall mean any real property owned in fee simple by the Initial Borrower or a Consolidated Subsidiary of the Initial Borrower; provided, however, that such term shall not include OREO Properties.

     “Reduction Event Proceeds” shall have the meaning set forth in Section 2.6(b)(i).

     “Register” shall have the meaning set forth in Section 9.6(d).

     “Reimbursement Obligation” shall mean the obligation of the Borrower to reimburse the Issuing Lender pursuant to Section 2.3(d) for amounts drawn under Letters of Credit.

     “REIT” shall mean a “real estate investment trust” as defined in Section 856(c)(5)(B) of the Code.

     “REIT Revocation Date” shall mean January 1, 2009.

     “Related Property” means with respect to any Investment, any property or other assets of the Obligor thereunder pledged as collateral to secure the repayment of such Investment.

     “Release Condition” means the satisfaction of each of the following conditions: (a) all indebtedness (as defined in Section 10.1) that CSF owes to the Administrative Agent and/or the Lenders in its capacity as a Borrower has been indefeasibly paid in full in cash (or, in the case of Letters of Credit of which CSF is the actual account party, each such Letter of Credit has been cash collateralized in an amount equal to 103% of the stated and undrawn amount of such Letter of Credit and in the Currency in which such Letter of Credit was issued and otherwise on terms and conditions satisfactory to the applicable Issuing Lender) and there remains no commitment to make Revolving Loans to CSF; (b) the Administrative Agent shall have received written notice from CSF of its desire to terminate its rights as a Borrower with respect to the Commitment and LOC Commitment in accordance with Section 2.6(a)(ii); and (c) no Default or Event of Default shall have occurred and be continuing at the time of such termination pursuant to Section 2.6(a)(ii) or would result from such termination or the termination of the Guaranty Agreement.

     “Relevant Time” shall have the meaning set forth in Section 2.22(c).

     “Reorganization” shall mean, with respect to any Multiemployer Plan, the condition that such Plan is in reorganization within the meaning of such term as used in Section 4241 of ERISA.

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     “Reportable Event” shall mean any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty (30) day notice period is waived under PBGC Reg. §4043.

     “Required Lenders” shall mean (i) Lenders holding in the aggregate more than 50% of the sum of all Loans and LOC Obligations then outstanding at such time plus the aggregate unused Commitments at such time (treating for purposes hereof in the case of (a) LOC Obligations and the Issuing Lender, only the portion of the LOC Obligations of the Issuing Lender which are not subject to the Participation Interests of the other Lenders, (b) Swingline Loans and the Swingline Lender, only the portion of the Swingline Loans of the Swingline Lender which are not subject to the Participation Interests of the other Lenders and, (c) Lenders other than the Issuing Lender and the Swingline Lender, the Participation Interests of such Lenders in LOC Obligations and Swingline Loans hereunder, in each case, as direct obligations) and (ii) Majority Extending Lenders; provided, however, that if any Lender shall be a Defaulting Lender at such time, then there shall be excluded from the determination of Required Lenders, Loans and LOC Obligations (including Participation Interests) owing to such Defaulting Lender and such Defaulting Lender’s Commitments, or after termination of the Commitments, the principal balance of the Loans and LOC Obligations owing to such Defaulting Lender.

     “Residential Mortgage Policies and Procedures” shall mean the written residential mortgage policies and procedures manual of the Initial Borrower in the form provided to the Lenders prior to the Closing Date and attached hereto as Schedule 1.1(a) as it may be amended or supplemented from time to time.

     “Responsible Officer” shall mean, as to (a) the Borrower, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer, and (b) any other Credit Party, any duly authorized officer thereof.

     “Restricted Payment” means (a) any dividend or other distribution on any shares of the Initial Borrower’s Capital Stock (except dividends payable solely in shares of its Capital Stock) or (b) any payment on account of the purchase, redemption, retirement or acquisition of (i) any shares of the Initial Borrower’s Capital Stock (except shares acquired upon the conversion thereof into other shares of its capital stock) or (ii) any option, warrant or other right to acquire shares of the Initial Borrower’s Capital Stock.

     “Revolving Loans” shall have the meaning set forth in Section 2.1.

     “Revolving Note” shall have the meaning set forth in Section 2.1(e).

     “Risk Rating Level” means risk rating levels of 1 through 6, each as determined by the Initial Borrower in accordance with the risk rating scale as denoted on Schedule 1.1(b), as of any date of determination, and pertaining to any Investment Loan.

     “Risk Rated 1 Investment Loan” means any Investment Loan with a Risk Rating Level of 1.

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     “Risk Rated 2 Investment Loan” means any Investment Loan with a Risk Rating Level of 2.

     “Risk Rated 3 Investment Loan” means any Investment Loan with a Risk Rating Level of 3.

     “Risk Rated 4 Investment Loan” means any Investment Loan with a Risk Rating Level of 4.

     “Risk Rated 5 Investment Loan” means any Investment Loan with a Risk Rating Level of 5.

     “Risk Rated 6 Investment Loan” means any Investment Loan with a Risk Rating Level of 6.

     “S&P” shall mean Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., and any successor thereto.

     “Sanctioned Entity” shall mean (i) an agency of the government of, (ii) an organization directly or indirectly controlled by, or (iii) a person resident in a country that is subject to a sanctions program identified on the list maintained by OFAC and available at http://www.treas.gov/offices/eotffc/ofac/sanctions/index.html, or as otherwise published from time to time as such program may be applicable to such agency, organization or person.

     “Sanctioned Person” shall mean a person named on the list of Specially Designated Nationals or Blocked Persons maintained by OFAC available at http://www.treas.gov/offices/eotffc/ofac/sdn/index.html, or as otherwise published from time to time.

     “Screen” shall mean, for:

     (a) any Currency (other than Euro), the relevant display page for LIBOR for such Currency (as determined by the Administrative Agent) on the Telerate Service; provided that, if the Administrative Agent determines in its reasonable judgment that there is no such relevant display page for LIBOR for such Currency, “Screen” means the relevant display page for LIBOR for such Currency (as determined by the Administrative Agent) on the Reuters Monitor Money Rates Service; and

     (b) the Euro, the relevant display page for EURIBOR on the Telerate Screen (as determined by the Administrative Agent), which page shall display an average rate of the Banking Federation of the European Union for Euro; provided that, if such page or such service shall cease to be available, such other page or such other service for the purpose of displaying an average rate of the Banking Federation of the European Union as the Agent shall select.

     “SEC” shall mean the United States Securities and Exchange Commission.

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     “Securitization Transaction” means any financing transaction undertaken by the Initial Borrower or a Subsidiary of the Initial Borrower that is secured, directly or indirectly, by an Investment Loan or Real Property Owned or any portion thereof or interest therein, including any sale, lease, whole loan sale, asset securitization, secured loan or other transfer of one or more Investment Loans or Real Property Owned or any portion thereof.

     “Security Agreement” shall mean the Security Agreement executed by each of the Credit Parties in favor of the Administrative Agent, as amended, modified or supplemented from time to time in accordance with its terms.

     “Security Documents” shall mean the Security Agreement, the Pledge Agreement, and such other documents executed and delivered in connection with the granting, attachment and perfection of the Administrative Agent’s security interests and liens arising thereunder, including, without limitation, UCC financing statements and patent, trademark and copyright filings.

     “Senior Unsecured Debt” shall mean any Debt that is not secured by a Lien and is not junior in right to payment with respect to any other Debt (including, without limitation, the Permitted Unsecured Debt), determined on a consolidated basis in accordance with GAAP. For clarity, (i) the amount of Senior Unsecured Debt attributable to a revolving loan facility shall be the amount of Debt outstanding as of the date of determination, (ii) guaranties in respect of non-recourse secured real property financings that are limited to Customary Non-Recourse Exclusions shall not constitute Senior Unsecured Debt, and (iii) redemption obligations in respect of preferred stock (unless expressly senior in accordance with its terms) are deemed junior in right of payment to other Debt.

     “SPE Subsidiary” means a bankruptcy remote, special purpose entity that is a Wholly Owned Subsidiary of the Initial Borrower, created for the sole purpose of, and whose only business shall be, acquisition of Investment Loans or Real Property Owned pursuant to a Securitization Transaction and those activities incidental to the Securitization Transaction.

     “Stockholders Equity” means, at any time, the stockholders’ equity of the Initial Borrower, its Consolidated Subsidiaries and the CapitalSource Bank Entities, as set forth or reflected on the most recent consolidated balance sheet of the Initial Borrower, its Consolidated Subsidiaries and the CapitalSource Bank Entities prepared in accordance with GAAP.

     “Subsidiary” shall mean, as to any Person, a corporation, partnership, limited liability company, trust or estate, or other entity of which (or in which) (a) shares of stock or other ownership interests (beneficial or otherwise) having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person or (b) more than 50% of the beneficial interest in such trust or estate is otherwise held, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise

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qualified, all references to a “Subsidiary” or to “Subsidiaries” in this Credit Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower or the Guarantors; provided, however, that, the term “Subsidiary” shall not include any Person that constitutes an Investment in Equity Instruments or an Investment Loan Subsidiary; provided, further that the term “Subsidiary” shall not include an Unrestricted Subsidiary unless as noted otherwise.

     “Swingline Commitment” shall mean the commitment of the Swingline Lender to make Swingline Loans in an aggregate principal amount at any time outstanding up to the Swingline Committed Amount, and the commitment of the Lenders to purchase participation interests in the Swingline Loans as provided in Section 2.4(b)(ii), as such amounts may be reduced or increased from time to time in accordance with the provisions hereof.

     “Swingline Committed Amount” shall mean: (a) prior to March 13, 2010, $40,000,000; (b) for the period commencing on March 13, 2010 and ending on December 30, 2010, $30,000,000; and (c) for the period commencing on December 31, 2010 and ending on the Extending Lender Maturity Date, $20,000,000.

     “Swingline Lender” shall mean Wachovia and any successor swingline lender in their capacity as such.

     “Swingline Loan” shall have the meaning set forth in Section 2.4(a).

     “Swingline Note” shall mean the promissory note of the Initial Borrower in favor of the Swingline Lender evidencing the Swingline Loans provided pursuant to Section 2.4(d), as such promissory note may be amended, modified, supplemented, extended, renewed or replaced from time to time.

     “Tangible Book Value” shall mean Book Value less goodwill and other intangible assets.

     “Taxes” shall have the meaning set forth in Section 2.18(a).

     “Tier 1 Real Property Intermediate Holdco” shall mean a Wholly Owned Subsidiary:

     (a) that owns and holds directly, free and clear of all Liens (other than Permitted Liens), all of the Capital Stock of a Domestic Real Property Owned Subsidiary that directly owns Real Property Owned free and clear of all Liens (other than Permitted Liens);

     (b) that does not have any liabilities (other than immaterial liabilities incidental to its business), debt or engage in any operations or business (other than the ownership of equity interests in other Persons) and none of the assets of, or equity of or in, such Wholly Owned Subsidiary is subject to a Lien or other encumbrance (other than operations or business, if such Wholly Subsidiary is CHR, consisting of any management agreement between CHR and any Credit Party and any matters incidental thereto); and

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     (c) all of the Capital Stock of which is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement.

     “Tier 2 Real Property Intermediate Holdco” shall mean a Wholly Owned Subsidiary:

     (a) that owns and holds directly, free and clear of all Liens (other than Permitted Liens), all of the Capital Stock of an Intermediate Holdco;

     (b) that does not have any liabilities (other than immaterial liabilities incidental to its business), debt or engage in any operations or business (other than the ownership of equity interests in other Persons) and none of the assets of, or equity of or in, such Wholly Owned Subsidiary is subject to a Lien or other encumbrance (other than operations or business, if such Wholly Owned Subsidiary is CHR, consisting of any management agreement between CHR and any Credit Party and any matters incidental thereto); and

     (c) all of the Capital Stock of which is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement (except in the case that such Tier 2 Real Property Intermediate Holdco is CHR, then, at any time on or prior to January 15, 2009, only 97% of all of the Capital Stock of CHR shall be required for purposes of this clause (c) to be subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement).

     “TLGP” shall mean the Temporary Liquidity Guarantee Program (12 CFR Part 370).

     “Transferee” shall have the meaning assigned in Section 9.6(f).

     “Transfer Effective Date” shall have the meaning set forth in each Commitment Transfer Supplement.

     “Trust Depositor Subsidiary” shall mean each of CapitalSource Commercial Loan Trust 2007-1, CapitalSource Commercial Loan Trust 2007-2, CapitalSource Commercial Loan Trust 2006-1, CapitalSource Commercial Loan Trust 2006-2, CapitalSource Funding III LLC, CS Funding VII Depositor LLC, CapitalSource Funding VIII LLC, CapitalSource Funding V Trust, CapitalSource Real Estate Loan Trust 2006-A, CapitalSource Real Estate Loan LLC, 2007A and CSE QRS Funding I LLC.

     “UCC” means the Uniform Commercial Code as from time to time in effect in the applicable jurisdiction or jurisdictions.

     “United States” means the United States of America.

     “Unrestricted Subsidiary” means any Person otherwise constituting a Subsidiary that is (a) a Bank Subsidiary, (b) the Healthcare REIT or (c) a Subsidiary designated as an “Unrestricted Subsidiary” in writing by the Initial Borrower to the Administrative Agent from time to time and

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consented to by the Required Lenders. Any direct or indirect Subsidiary of an Unrestricted Subsidiary shall automatically constitute an Unrestricted Subsidiary.

     “Voting Stock” shall mean, with respect to any Person, Capital Stock issued by such Person the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such contingency.

     “Wachovia” shall mean Wachovia Bank, National Association, a national banking association.

     “WCM” shall mean Wells Fargo Securities, LLC (f/k/a Wachovia Capital Markets, LLC).

     “Wholly Owned Subsidiary” means any Subsidiary all of the shares of Capital Stock or other ownership interests of which (except directors’ qualifying shares) are at the time directly or indirectly owned by the Initial Borrower; provided, however, that for purposes of Section 5.9 and for the definition of the terms “Intermediate Holdco,” “Tier 1 Real Property Intermediate Holdco,” and “Tier 2 Intermediate Holdco,” the term Wholly-Owned Subsidiary shall also include CHR but only to the extent that all of the Capital Stock of CHR is owned directly or indirectly by the Initial Borrower other than the Permitted CHR Preferred Stock.

     Section 1.2. Other Definitional Provisions.

     (a) Unless otherwise specified therein, all terms defined in this Credit Agreement shall have the defined meanings when used in the Notes or other Credit Documents or any certificate or other document made or delivered pursuant hereto.

     (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

     (c) The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Credit Agreement shall refer to this Credit Agreement as a whole and not to any particular provision of this Credit Agreement, and Section, subsection, Schedule and Exhibit references are to this Credit Agreement unless otherwise specified.

     (d) The words “include”, “includes” and “including” shall be deemed to be followed by “without limitation” whether or not they are in fact followed by such words or words of like import.

     (e) The words “writing”, “written” and comparable terms shall refer to printing, typing, computer disk, e-mail, facsimile and other means of reproducing words in a visible form.

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     (f) References to any agreement or contract are to such agreement or contract as amended, restated, supplemented or otherwise modified from time to time in accordance with the terms hereof and thereof. References to any Person include the successors and permitted assigns of such Person.

     Section 1.3. Accounting Terms.

     Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP applied on a basis consistent with the most recent audited consolidated financial statements of the Initial Borrower and its Consolidated Subsidiaries delivered to the Lenders; provided that, if the Initial Borrower notifies the Administrative Agent that it wishes to amend any covenant in Section 5.32 to eliminate the effect of any change in GAAP on the operation of such covenant (or if the Administrative Agent notifies the Initial Borrower that the Required Lenders wish to amend Section 5.32 for such purpose), then the Initial Borrower’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Initial Borrower and the Required Lenders.

     Section 1.4. Computation of Time Periods.

     All time references in this Credit Agreement and the other Credit Documents shall be to Charlotte, North Carolina time unless otherwise indicated. For purposes of computation of periods of time hereunder, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.”

     Section 1.5. Currencies Generally.

     (a) At any time, any reference in the definition of the term “Alternative Currency” or in any other provision of this Credit Agreement to the Currency of any particular nation means the lawful currency of such nation at such time whether or not the name of such Currency is the same as it was on the date hereof. For purposes of determining (i) whether the amount of any Revolving Loan, together with all other Revolving Loans, Swingline Loans and LOC Obligations outstanding or to be borrowed or issued at the same time as such Revolving Loan, would exceed the Committed Amount then in effect, (ii) whether the LOC Obligations exceed the LOC Committed Amount, and (iii) whether any Lender’s Commitment Percentage of any Revolving Loan (together with its Commitment Percentage of all other Revolving Loans, Swingline Loans and LOC Obligations then outstanding or to be borrowed or issued at the same time as such Revolving Loan) would exceed the amount of such Lender’s Commitment, the outstanding principal amount of any Revolving Loan or LOC Obligation that is denominated in any Alternative Currency shall be deemed to be the Dollar Equivalent of such amount of Alternative Currency determined as of the date of such Revolving Loan or LOC Obligation. Wherever in this Credit Agreement in connection with a Revolving

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Loan or LOC Obligation an amount, such as a required minimum or multiple amount, is expressed in Dollars, but such Revolving Loan or LOC Obligation is denominated in any Alternative Currency, such amount shall be the relevant Foreign Currency Equivalent of such Dollar amount (rounded to the nearest one thousandth). In addition, for purposes of complying with any requirement of this Credit Agreement stated in Dollars or calculating any ratio or other test set forth in this Credit Agreement, the amount of any Revolving Loan and LOC Obligation that is denominated in any Alternative Currency shall be deemed to be the Dollar Equivalent of such amount of Alternative Currency determined as of the date of such calculation.

     (b) Each obligation hereunder of any party hereto that is denominated in the National Currency of a state that is not a Participating Member State on the date hereof shall, effective from the date on which such state becomes a Participating Member State, be redenominated in Euro in accordance with the legislation of the European Union applicable to the European Monetary Union; provided that, if and to the extent that any such legislation provides that any such obligation of any such party payable within such Participating Member State by crediting an account of the creditor can be paid by the debtor either in Euro or such National Currency, such party shall be entitled to pay or repay such amount either in Euro or in such National Currency. If the basis of accrual of interest or fees expressed in this Credit Agreement with respect to any Alternative Currency of any country that becomes a Participating Member State after the date on which such currency becomes an Alternative Currency shall be inconsistent with any convention or practice in the interbank market for the basis of accrual of interest or fees in respect of Euro, such convention or practice shall replace such expressed basis effective as of and from the date on which such state becomes a Participating Member State; provided that, with respect to any Revolving Loan denominated in such currency that is outstanding immediately prior to such date, such replacement shall take effect at the end of the Interest Period therefor.

     (c) Without prejudice to the respective liabilities of the Borrower to the Lenders and the Lenders to the Borrower under or pursuant to this Agreement, each provision of this Credit Agreement shall be subject to such reasonable changes of construction as the Administrative Agent may from time to time, in consultation with the Initial Borrower, reasonably specify to be necessary or appropriate to reflect the introduction or changeover to Euro in any country that becomes a Participating Member State after the date hereof; provided that the Administrative Agent shall provide the Initial Borrower and each Lender with prior notice of the proposed change with an explanation of such change in sufficient time to permit the Initial Borrower and the Lenders an opportunity to respond to such proposed change.

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ARTICLE II

THE LOANS; AMOUNT AND TERMS

     Section 2.1. Revolving Loans.

     (a) Revolving Commitment. Prior to the Commitment Termination Date, subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans in Dollars or in any Alternative Currency to the Borrower (“Revolving Loans”) from time to time for the purposes hereinafter set forth; provided, however, that (i) with regard to each Lender individually, the sum of such Lender’s share of outstanding Revolving Loans, plus such Lender’s Commitment Percentage of outstanding Swingline Loans, plus such Lender’s Commitment Percentage of LOC Obligations shall not exceed such Lender’s Commitment Percentage of the aggregate Committed Amount, and (ii) with regard to the Lenders collectively, the Advances Outstanding shall not exceed the aggregate Committed Amount then in effect. For purposes hereof, the aggregate amount available hereunder shall be NINE HUNDRED MILLION DOLLARS ($900,000,000.00) (as such aggregate maximum amount may be reduced from time to time as provided in Section 2.6, the “Committed Amount”) (for the avoidance of doubt, the Committed Amount of any Lender or Class of Lenders shall mean the aggregate Commitments of such Lender or Class of Lenders); provided, however, that the aggregate principal amount of all outstanding Revolving Loans and LOC Obligations in Alternative Currencies shall not exceed the Alternative Currency Sub Limit. Revolving Loans denominated in Dollars may consist of Alternate Base Rate Loans or EURIBOR/LIBOR Rate Loans, or a combination thereof, as the Initial Borrower may request, and may be repaid and reborrowed in accordance with the provisions hereof. Revolving Loans denominated in any Alternative Currency may consist of Alternate Base Rate Loans or EURIBOR/LIBOR Rate Loans, or a combination thereof, as the Borrower may request, and may be repaid and reborrowed in accordance with the provisions hereof. Notwithstanding the foregoing, any Revolving Loans made on the Closing Date or on either of the two Business Days immediately following the Closing Date may only consist of Alternate Base Rate Loans denominated in Dollars. Any Loans denominated in Dollars shall be made by each Lender at its Domestic Lending Office and any Loans denominated in any Alternative Currency shall be made by each Lender at its EURIBOR/LIBOR Lending Office.

     (b) Revolving Loan Borrowings.

          (i) Notice of Borrowing. The Borrower shall request a Revolving Loan borrowing by written notice (or telephone notice promptly confirmed in writing which confirmation may be by fax) to the Administrative Agent not later than 11:00 A.M. on the same Business Day of the requested borrowing in the case of Alternate Base Rate Loans denominated in Dollars, and on the third Business Day prior to the date of the requested borrowing in the case of EURIBOR/LIBOR Rate Loans denominated in

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Dollars, and on the fourth Business Day prior to the date of the requested borrowing in the case of Alternate Base Rate Loans or EURIBOR/LIBOR Rate Loans denominated in any Alternative Currency. Each such request for borrowing shall be irrevocable and shall specify (A) that a Revolving Loan is requested, (B) the date of the requested borrowing (which shall be a Business Day), (C) the aggregate principal amount to be borrowed, and (D) whether the borrowing shall be comprised of Alternate Base Rate Loans, EURIBOR/LIBOR Rate Loans or a combination thereof, the Currency therefor, and if EURIBOR/LIBOR Rate Loans are requested, the Interest Period(s) therefor. A form of Notice of Borrowing (a “Notice of Borrowing”) is attached as Exhibit A. If the Borrower shall fail to specify in any such Notice of Borrowing (1) an applicable Interest Period in the case of a EURIBOR/LIBOR Rate Loan, then such notice shall be deemed to be a request for an Interest Period of one month, (2) the type of Revolving Loan requested, then such notice shall be deemed to be a request for an Alternate Base Rate Loan hereunder or (3) the Currency of the Revolving Loan requested, then such notice shall be deemed to be a request by the Initial Borrower for an Alternate Base Rate Loan denominated in Dollars hereunder. The Administrative Agent shall give notice to each Lender promptly upon receipt of each Notice of Borrowing, the contents thereof and each such Lender’s share thereof.

          (ii) Minimum Amounts. Each Revolving Loan shall be in a minimum aggregate amount of $5,000,000 and integral multiples of $100,000 in excess thereof (or the remaining amount of the Committed Amount, if less).

          (iii) Advances. Each Lender will make its Commitment Percentage of each Revolving Loan borrowing available to the Administrative Agent for the account of the applicable Borrower at the office of the Administrative Agent specified in Section 9.2, or at such other office as the Administrative Agent may designate in writing, upon reasonable advance notice by 1:00 P.M. on the date specified in the applicable Notice of Borrowing, in the Currency of such Revolving Loan and in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the applicable Borrower by the Administrative Agent by crediting the account of the applicable Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent.

     (c) Repayment. The principal amount of all Revolving Loans shall be due and payable in full in the Currency of such Revolving Loan on the Commitment Termination Date.

     (d) Interest. Subject to the provisions of Section 2.9, Revolving Loans shall bear interest as follows:

          (i) Alternate Base Rate Loans. During such periods as any Revolving Loans shall be comprised of Alternate Base Rate Loans, each such Alternate Base Rate Loan shall bear interest at a per annum rate equal to the Alternate Base Rate; and

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          (ii) EURIBOR/LIBOR Rate Loans. During such periods as any Revolving Loans shall be comprised of EURIBOR/LIBOR Rate Loans, each such Loan denominated in (a) any Currency (other than Euro) shall bear interest at a per annum rate equal to the sum of the applicable LIBOR Rate plus the Applicable Percentage, and (b) Euro shall bear interest at a per annum rate equal to the sum of the applicable EURIBOR plus the Applicable Percentage.

     Interest on Revolving Loans shall be payable in arrears on each Interest Payment Date.

     (e) Revolving Notes. The Borrower’s obligation to pay each Lender’s Revolving Loans shall be evidenced by a revolving note made payable to such Lender in substantially the form of Exhibit B, if requested by such Lender (“Revolving Note”).

     Section 2.2. Intentionally Omitted.

     Section 2.3. Letter of Credit Subfacility.

     (a) Issuance. Subject to Section 2.3(c) and (h) and the other terms and conditions hereof and of the LOC Documents, if any, and any other terms and conditions which the Issuing Lender may reasonably require, prior to the Extending Lender Maturity Date, the Issuing Lender shall issue, and the Lenders shall participate in, Letters of Credit for the account of the Borrower from time to time upon request in a form acceptable to the Issuing Lender; provided, however, that (i) the aggregate amount of the LOC Obligations shall not at any time exceed the LOC Committed Amount (other than in connection with a reduction of the LOC Committed Amount pursuant to the definition thereof, but only if such excess has been cash collateralized in accordance with the terms hereof), (ii) the Advances Outstanding shall not at any time exceed the aggregate Committed Amount then in effect, (iii) the Advances Outstanding in Alternative Currencies shall not exceed the Alternative Currency Sub Limit, (iv) all Letters of Credit shall be issued in Dollars or in an Alternative Currency (without limiting the provisions of Section 2.3(h), Letters of Credit issued in Dollars shall only be issued for the account of the Initial Borrower and Letters of Credit issued in Alternative Currencies shall be issued for the account of any Borrower) and (v) Letters of Credit shall be issued for any lawful corporate purposes and may be issued as standby letters of credit, and trade letters of credit. Except for the Existing Letters of Credit or as otherwise expressly agreed upon by all the Lenders, no Letter of Credit shall have an original expiry date more than twelve (12) months from the date of issuance; provided, however, so long as no Default or Event of Default has occurred and is continuing and subject to the other terms and conditions to the issuance of Letters of Credit hereunder, the expiry dates of Letters of Credit may be extended annually or periodically from time to time at the request of the applicable Borrower or by operation of the terms of the applicable Letter of Credit to a date not more than twelve (12) months from the then current date of expiry; provided, further, that no Letter of Credit, as originally issued or as extended, shall have an expiry date extending beyond the date that is one month prior to the Extending Lender Maturity Date (except to the extent it is cash collateralized as provided herein). Furthermore, unless

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otherwise agreed to by the Issuing Lender, no trade Letter of Credit shall have an expiry date more than 180 days from the date of issuance. With respect to any Letter of Credit outstanding on March 12, 2010 and expiring after March 13, 2010, the Borrower shall deposit cash collateral with the Issuing Lender on March 13, 2010 in an amount equal to 103% of the stated and undrawn amount of such Letter of Credit and in the Currency in which such Letter of Credit was issued; provided, however, that, notwithstanding the foregoing, the Borrower shall not be obligated to cash collateralize such Letter of Credit to the extent that (w) the Extending Event has occurred, (x) an Event of Default is not in existence on March 13, 2010 and (y) the Advances Outstanding of the Extending Lenders would not exceed the Committed Amount on March 13, 2010, after giving effect to the termination of the Commitments of the Non-Extending Lenders. Notwithstanding the foregoing, with the consent of the Administrative Agent and the Issuing Lender, Letters of Credit may have an expiry date extending beyond the date that is one month prior to March 31, 2012 if the Extending Event has occurred provided that the Borrower deposits cash collateral (30 days prior to March 31, 2012) with the Issuing Lender in an amount equal to 103% of the stated and undrawn amount of the Letter of Credit and in the Currency in which such Letter of Credit was issued. Each Letter of Credit shall comply with the related LOC Documents. The issuance date and expiry date of each Letter of Credit shall be a Business Day. Except for the Existing Letters of Credit, any Letters of Credit issued hereunder shall be in a minimum original face amount of $25,000. Notwithstanding the foregoing or any other provision of this Agreement, the Issuing Lender shall have no obligation to issue any Letter of Credit if a default of any Lender’s obligations to fund under this Section 2.3 exists or any Lender is at such time an Impacted Lender, unless the Issuing Lender has entered into cash collateral arrangements or other arrangements with the applicable Borrower or any other party which are satisfactory to the Issuing Lender in its sole and absolute discretion to eliminate the Issuing Lender’s risk with respect to such Impacted Lender. Any requirement imposed on the applicable Borrower to provide cash collateral hereunder shall be expressly permitted, notwithstanding any negative pledge or other restriction elsewhere in this Agreement or any other Credit Document.

     (b) Notice and Reports. Unless otherwise agreed to by the Issuing Lender and the applicable Borrower, the request for the issuance of a standby Letter of Credit shall be submitted to the Issuing Lender at least three (3) Business Days prior to the requested date of issuance, and the request for the issuance of a trade Letter of Credit shall be submitted to the Issuing Lender at least one (1) Business Day prior to the requested date of issuance. The Issuing Lender will on the date of issuance of each Letter of Credit and promptly upon request provide to the Administrative Agent a detailed report specifying the Letters of Credit which are then issued and outstanding and any activity with respect thereto which may have occurred since the date of any prior report, and including therein, among other things, the account party, the beneficiary, the face amount, expiry date as well as any payments or expirations which may have occurred. The Issuing Lender will further provide to the Administrative Agent promptly upon request copies of the Letters of Credit. The Issuing Lender will provide to the Administrative Agent, and any

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requesting Lender, promptly upon request a summary report of the nature and extent of LOC Obligations then outstanding.

     (c) Participations. Each Lender (other than the Issuing Lender of such Letter of Credit), upon issuance of any Letter of Credit (or upon such Person becoming a Lender hereunder), shall be deemed to have purchased without recourse a risk participation from the Issuing Lender in such Letter of Credit and the obligations arising thereunder and any collateral relating thereto, in each case in an amount equal to its Commitment Percentage of the obligations under such Letter of Credit and shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and be obligated to pay to the Issuing Lender therefor and discharge when due, its Commitment Percentage of the obligations arising under such Letter of Credit; provided, however, that if (1) the Extending Event has occurred and (2) such Letter of Credit has been cash collateralized if required under subsection (a) of this Section 2.3 above, then on March 13, 2010 (i) such risk participations of the Non-Extending Lenders in outstanding Letters of Credit shall terminate and (ii) the Extending Lenders shall be deemed to have purchased without recourse such risk participations in such outstanding Letters of Credit (so that they hold all of the risk participations in all outstanding Letters of Credit in accordance with their respective Commitment Percentages). Without limiting the scope and nature of each Lender’s participation in any Letter of Credit, to the extent that the Issuing Lender has not been reimbursed as required hereunder or under any LOC Document, each such Lender shall pay to the Issuing Lender its Commitment Percentage of such unreimbursed drawing in the Currency of such unreimbursed drawing and in same day funds on the day of notification by the Issuing Lender of an unreimbursed drawing pursuant to the provisions of subsection (d) below (for the avoidance of doubt, the Non-Extending Lenders shall not have any such obligation with respect to any Letter of Credit issued (1) on or after March 13, 2010 or (2) prior to March 13, 2010 if the Extending Lenders are required pursuant to the immediately preceding sentence to purchase the risk participations of the Non-Extending Lenders in such Letter of Credit). The obligation of each Lender to so reimburse the Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of a Default, an Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of the Borrower to reimburse the Issuing Lender under any Letter of Credit, together with interest as hereinafter provided.

     (d) Reimbursement. In the event of any drawing under any Letter of Credit, the Issuing Lender will promptly notify the Initial Borrower and the Administrative Agent. The Borrower shall reimburse the Issuing Lender on the day of drawing under any Letter of Credit (either with the proceeds of a Revolving Loan obtained hereunder or otherwise) in the Currency of such drawing and in same day funds as provided herein or in the LOC Documents. If the Borrower shall fail to reimburse the Issuing Lender as provided herein, the unreimbursed amount of such drawing shall bear interest at a per annum rate equal to the Alternate Base Rate applicable to the Currency of such drawing plus 2%. Unless the Borrower shall immediately notify the Issuing Lender and the

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Administrative Agent of its intent to otherwise reimburse the Issuing Lender, the Borrower shall be deemed to have requested a Revolving Loan in the Currency and the amount of the drawing as provided in subsection (e) below, the proceeds of which will be used to satisfy the reimbursement obligations. The Borrower’s reimbursement obligations hereunder shall be absolute and unconditional under all circumstances irrespective of any rights of set-off, counterclaim or defense to payment the Borrower may claim or have against the Issuing Lender, the Administrative Agent, the Lenders, the beneficiary of the Letter of Credit drawn upon or any other Person, including without limitation any defense based on any failure of the Borrower to receive consideration or the legality, validity, regularity or unenforceability of the Letter of Credit. The Issuing Lender will promptly notify the other Lenders of the Currency and amount of any unreimbursed drawing and each Lender shall promptly pay to the Administrative Agent for the account of the Issuing Lender, in such Currency and in immediately available funds, the amount of such Lender’s Commitment Percentage of such unreimbursed drawing (for the avoidance of doubt, if (i) the Extending Event has occurred, the Non-Extending Lenders shall not have any obligation to make such payment with respect to any unreimbursed drawing occurring on or after March 13, 2010 with respect to any Letter of Credit issued on or after March 13, 2010 and (ii) that if (1) the Extending Event has occurred and (2) such Letter of Credit has been cash collateralized if required under subsection (a) of this Section 2.3, then the Non-Extending Lenders shall not have any obligation to make such payment with respect to any unreimbursed drawing occurring on or after March 13, 2010 with respect to any Letter of Credit issued prior to March 13, 2010). Such payment shall be made on the day such notice is received by such Lender from the Issuing Lender if such notice is received at or before 2:00 P.M., otherwise such payment shall be made at or before 12:00 Noon on the Business Day next succeeding the day such notice is received. If such Lender does not pay such amount to the Issuing Lender in full upon such request, such Lender shall, on demand, pay to the Administrative Agent for the account of the Issuing Lender interest on the unpaid amount during the period from the date of such drawing until such Lender pays such amount to the Issuing Lender in full at a rate per annum equal to (i), if such unpaid amount is owed in Dollars and paid within two Business Days of such date, the Federal Funds Effective Rate, and thereafter at a rate equal to the Alternate Base Rate or (ii) if such unpaid amount is owed in any Alternative Currency, the Alternate Base Rate. Each Lender’s obligation to make such payment to the Issuing Lender, and the right of the Issuing Lender to receive the same, shall be absolute and unconditional, shall not be affected by any circumstance whatsoever and without regard to the termination of this Credit Agreement or the Commitments hereunder, the existence of a Default or Event of Default or the acceleration of the Credit Party Obligations hereunder and shall be made without any offset, abatement, withholding or reduction whatsoever.

     (e) Repayment with Revolving Loans. On any day on which the Borrower shall have requested, or been deemed to have requested, a Revolving Loan to reimburse a drawing under a Letter of Credit, the Administrative Agent shall give notice to the Lenders that a Revolving Loan has been requested or deemed requested in connection

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with a drawing under a Letter of Credit, in which case a Revolving Loan borrowing shall be immediately made comprised entirely of Revolving Loans in the Currency of such drawing and bearing interest at the Alternate Base Rate applicable to the Currency of such drawing (each such borrowing, a “Mandatory LOC Borrowing”) pro rata based on each Lender’s respective Commitment Percentage (determined before giving effect to any termination of the Commitments pursuant to Section 7.2) and the proceeds thereof shall be paid directly to the Issuing Lender for application to the respective LOC Obligations. Each Lender hereby irrevocably agrees to make such Revolving Loans immediately upon any such request or deemed request on account of each Mandatory LOC Borrowing in the amount and in the manner specified in the preceding sentence and on the same such date (or, in the case of Mandatory LOC Borrowings in Alternative Currency, on the next Business Day) notwithstanding that (i) the amount of Mandatory LOC Borrowing may not comply with the minimum amount for borrowings of Revolving Loans otherwise required hereunder, (ii) whether any conditions specified in Section 3.2 are then satisfied, (iii) whether a Default or an Event of Default then exists, (iv) failure for any such request or deemed request for Revolving Loan to be made by the time otherwise required in Section 2.1(b), (v) the date of such Mandatory LOC Borrowing, or (vi) any reduction in the Committed Amount after any such Letter of Credit may have been drawn upon. In the event that any Mandatory LOC Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower), then each such Lender hereby agrees that it shall forthwith fund (as of the date the Mandatory LOC Borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) its Participation Interests in the outstanding LOC Obligations; provided, further, that in the event any Lender shall fail to fund its Participation Interest on the day the Mandatory LOC Borrowing would otherwise have occurred, then the amount of such Lender’s unfunded Participation Interest therein shall bear interest payable by such Lender to the Issuing Lender upon demand, at the rate equal to (i), if such unfunded Participation Interest is owed in Dollars and paid within two Business Days of such date, the Federal Funds Effective Rate, and thereafter at a rate equal to the Alternate Base Rate or (ii) if such unfunded Participation Interest is owed in any Alternative Currency, the Alternate Base Rate.

     (f) Modification, Extension. The issuance of any supplement, modification, amendment, renewal, or extension to any Letter of Credit shall, for purposes hereof, be treated in all respects the same as the issuance of a new Letter of Credit hereunder; provided that such supplement, modification, amendment, renewal or extension shall not cause the Borrower to pay an additional Fronting Fee on such Letter of Credit except for any Fronting Fees due with respect to any increase in the stated amount of such Letter of Credit.

     (g) Letter of Credit Governing Law. Unless otherwise expressly agreed by the Issuing Lender and the Initial Borrower, when a Letter of Credit is issued, (i) the rules

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of the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance) shall apply to each standby Letter of Credit, and (ii) the rules of the Uniform Customs and Practice for Documentary Credits, as most recently published by the International Chamber of Commerce at the time of issuance, shall apply to each trade Letter of Credit.

     (h) Designation of Subsidiaries as Account Parties. Notwithstanding anything to the contrary set forth in this Credit Agreement, including without limitation Section 2.3(a), a Letter of Credit issued hereunder may contain a statement to the effect that such Letter of Credit is issued for the account of a Subsidiary of the Initial Borrower; provided that, notwithstanding such statement, the Initial Borrower shall be the actual account party for all purposes of this Credit Agreement for such Letter of Credit and such statement shall not affect the Initial Borrower’s reimbursement obligations hereunder with respect to such Letter of Credit. In no event shall a Letter of Credit be issued for the account of an SPE Subsidiary in connection with a Securitization Transaction or for the account of a Bank Subsidiary. Nothing in this Section 2.3(h) shall be construed to require the Issuing Lender to issue Letters of Credit for the account of a Subsidiary of the Initial Borrower where the Subsidiary is the actual account party.

     (i) Existing Letters of Credit. The letters of credit previously issued by Bank of America, N.A. and identified on Schedule 2.3(i) (the “Existing Letters of Credit”) shall be deemed to be Letters of Credit issued by the Issuing Lender pursuant to the Credit Agreement and shall be expressly subject to all of the terms and conditions of this Section 2.3. Notwithstanding anything to the contrary set forth in the Existing Letters of Credit, the Initial Borrower shall be deemed to be the account party for all purposes of this Credit Agreement. The Letter of Credit Fee shall be payable with respect to the Existing Letters of Credit pursuant to Section 2.5(b) for the period commencing on the date of this Credit Agreement to the expiry date of the applicable Existing Letters of Credit.

     Section 2.4. Swingline Loan Subfacility.

     (a) Swingline Commitment. Prior to the Extending Lender Maturity Date, subject to the terms and conditions hereof, the Swingline Lender, in its individual capacity, agrees to make certain revolving credit loans to the Initial Borrower (each a “Swingline Loan” and, collectively, the “Swingline Loans”) for the purposes hereinafter set forth; provided, however, that (i) the aggregate amount of Swingline Loans outstanding at any time shall not exceed the Swingline Committed Amount, and (ii) the sum of the Advances Outstanding shall not exceed the Committed Amount. Swingline Loans hereunder may be repaid and reborrowed in accordance with the provisions hereof. Swingline Loans shall be made only in Dollars.

     (b) Swingline Loan Borrowings.

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          (i) Notice of Borrowing and Disbursement. The Swingline Lender will make Swingline Loans available to the Initial Borrower on any Business Day upon delivery of a Notice of Swingline Borrowing by the Initial Borrower to the Administrative Agent not later than 2:00 P.M. on such Business Day. A form of Notice of Swingline Borrowing (a “Notice of Swingline Borrowing”) is attached as Exhibit E. Swingline Loan borrowings hereunder shall be made in minimum amounts of $100,000 and in integral amounts of $100,000 in excess thereof.

          (ii) Repayment of Swingline Loans. Each Swingline Loan borrowing shall be due and payable upon the earlier of (a) thirty (30) days after the Swingline Loan advance and (b) the Extending Lender Maturity Date. In addition, any Swingline Loan borrowing outstanding on March 13, 2010 shall be due and payable on March 12, 2010 and no new Swingline Loans shall be made on March 12, 2010 or March 13, 2010. The Swingline Lender may, at any time, in its sole discretion, by written notice to the Initial Borrower and the Administrative Agent, demand repayment of its Swingline Loans by way of a Revolving Loan borrowing, in which case the Initial Borrower shall be deemed to have requested a Revolving Loan borrowing denominated in Dollars comprised entirely of Alternate Base Rate Loans in the amount of such Swingline Loans; provided, however that, in the following circumstances, any such demand shall also be deemed to have been given one Business Day prior to each of (A) March 13, 2010, (B) the Extending Lender Maturity Date, (C) the occurrence of any Event of Default described in Section 7.1(f), (D) acceleration of the Credit Party Obligations hereunder, whether on account of an Event of Default described in Section 7.1(f) or any other Event of Default, and (E) the exercise of remedies in accordance with the provisions of Section 7.2 hereof (each such Revolving Loan borrowing made on account of any such deemed request therefor as provided herein being hereinafter referred to as “Mandatory Swingline Borrowing”). Each Lender hereby irrevocably agrees to make such Revolving Loans promptly upon any such request or deemed request on account of each Mandatory Swingline Borrowing in the amount and in the manner specified in the preceding sentence and on the same such date notwithstanding (1) the amount of Mandatory Swingline Borrowing may not comply with the minimum amount for borrowings of Revolving Loans otherwise required hereunder, (2) whether any conditions specified in Section 3.2 are then satisfied, (3) whether a Default or an Event of Default then exists, (4) failure of any such request or deemed request for Revolving Loans to be made by the time otherwise required in Section 2.1(b)(i), (5) the date of such Mandatory Swingline Borrowing, or (6) any reduction in the Committed Amount or termination of the Commitments immediately prior to such Mandatory Swingline Borrowing or contemporaneously therewith. In the event that any Mandatory Swingline Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code), then each Lender hereby agrees that it shall forthwith purchase (as of the date the Mandatory Swingline Borrowing would otherwise have occurred, but adjusted for any payments received from the Initial Borrower on or after such date and prior to such purchase) from the Swingline Lender such participations in the outstanding Swingline

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Loans as shall be necessary to cause each such Lender to share in such Swingline Loans ratably based upon its respective Commitment Percentage (determined before giving effect to any termination of the Commitments pursuant to Section 7.2); provided that (x) all interest payable on the Swingline Loans shall be for the account of the Swingline Lender until the date as of which the respective participation is purchased, and (y) at the time any purchase of participations pursuant to this sentence is actually made, the purchasing Lender shall be required to pay to the Swingline Lender interest on the principal amount of such participation purchased for each day from and including the day upon which the Mandatory Swingline Borrowing would otherwise have occurred to but excluding the date of payment for such participation, at the rate equal to, if paid within two Business Days of the date of the Mandatory Swingline Borrowing, the Federal Funds Effective Rate, and thereafter at a rate equal to the Alternate Base Rate.

     (c) Interest on Swingline Loans. Subject to the provisions of Section 2.9(b), Swingline Loans shall bear interest at a per annum rate equal to the LIBOR Market Index Rate plus the Applicable Percentage. Interest on Swingline Loans shall be payable in arrears on each Interest Payment Date.

     (d) Swingline Note. The Swingline Loans shall be evidenced by a duly executed promissory note of the Initial Borrower to the Swingline Lender in the original amount of the Swingline Committed Amount and substantially in the form of Exhibit F.

     Section 2.5. Fees.

     (a) Commitment Fee. In consideration of the Commitment, the Borrower agrees to pay to the Administrative Agent, for the benefit of the Lenders based on their respective Commitments, a commitment fee (the “Commitment Fee”) in an amount equal to the Applicable Percentage per annum on the average daily unused amount of the Committed Amount during the calendar quarter for which such fee is payable. For purposes of computation of the Commitment Fee, LOC Obligations shall be considered usage, but Swingline Loans shall not be considered usage, of the Committed Amount. The Commitment Fee shall be payable quarterly in arrears not later than five (5) Business Days following the last day of each calendar quarter for the prior calendar quarter or if earlier with respect to any Class of Lenders, the Commitment Termination Date for such Class of Lenders.

     (b) Letter of Credit Fees. In consideration of the LOC Commitments, the Borrower agrees to pay to the Administrative Agent for the benefit of the Lenders based on their respective Commitments (including the Issuing Lender) a fee (the “Letter of Credit Fee”) equal to the Applicable Percentage for EURIBOR/LIBOR Rate Loans per annum on the average daily maximum amount available to be drawn under each Letter of Credit from the date of issuance to the date of expiration. The Letter of Credit Fee shall be payable quarterly in arrears not later than five (5) Business Days following the last day of each calendar quarter for the prior calendar quarter. In addition to the Letter of Credit Fee, the Borrower agrees to pay to the Issuing Lender, for its own account, a fronting fee

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(the “Fronting Fee”) equal to the greater of (i) one-eighth of one percent (0.125%) of the face amount of each Letter of Credit when issued, or (ii) $250. The Fronting Fee shall be payable quarterly in arrears not later than five (5) Business Days following the last day of each calendar quarter for the prior calendar quarter or if earlier with respect to any Class of Lenders, the Commitment Termination Date for such Class of Lenders.

     (c) Issuing Lender Fees. In addition to the Letter of Credit Fees and Fronting Fee payable pursuant to subsection (b) above, the Borrower shall pay to the Issuing Lender for its own account the reasonable and customary charges from time to time of the Issuing Lender with respect to the amendment, transfer, administration, cancellation and conversion of, and drawings under, such Letters of Credit (collectively, the “Issuing Lender Fees”).

     (d) Administrative Fee. The Borrower agrees to pay to the Administrative Agent, for its own account, an annual administrative fee of $35,000, due and payable quarterly, in advance, commencing on the Closing Date until the Commitments have been terminated and the Credit Party Obligations have been paid in full.

     (e) No Duplication. The fees payable under this Section 2.5 shall be owed and payable by the Initial Borrower; provided that if there is more than one Borrower hereunder and each has any LOC Obligations outstanding, the fees payable in subsections (b) and (c) above shall be payable by the Borrower that is the actual account party.

     Section 2.6. Commitment Reductions.

     (a) Voluntary Reductions.

          (i) The Initial Borrower shall have the right to terminate or permanently reduce the unused portion of the Committed Amount or the Alternative Currency Sub Limit at any time or from time to time upon not less than three (3) Business Days’ (or four (4) Business Days in the case of the Alternative Currency Sub Limit) prior written notice to the Administrative Agent (which shall notify the Lenders thereof as soon as practicable) of such termination or reduction, which notice shall specify the effective date thereof and the amount of any such reduction which shall be in a minimum amount of (except in connection with any reduction permitted under Section 5.21) $1,000,000 or a whole multiple of $1,000,000 in excess thereof and shall be irrevocable and effective upon receipt by the Administrative Agent; provided that no such reduction or termination shall be permitted if after giving effect thereto, and to any prepayments of the Revolving Loans made on the effective date thereof, the Advances Outstanding would exceed the aggregate Committed Amount and/or the Alternative Currency Sub Limit then in effect (or in the case of any Class of Lenders, the Advances Outstanding of such Class of Lenders would exceed the Committed Amount and/or Alternative Currency Sub-Limit then in effect of such Class of Lenders); provided, further that, in the case of the proposed reduction or termination of the Alternative Currency Sub Limit, no Default or Event of Default shall have occurred and be

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continuing at the time of such proposed reduction or termination or would result from such reduction or termination.

          (ii) CSF shall have the right to terminate its rights as a Borrower with respect to the Commitment and LOC Commitment hereunder at any time or from time to time upon not less than three (3) Business Days’ (or four (4) Business Days’ in the case of the Alternative Currency Sub Limit) prior written notice to the Administrative Agent (which shall notify the Lenders thereof as soon as practicable) of such termination, which notice shall specify the effective date thereof and shall be irrevocable and effective upon receipt by the Administrative Agent; provided that (1) all indebtedness (as defined in Section 10.1) that CSF owes to the Administrative Agent and/or the Lenders in its capacity as a Borrower has been indefeasibly paid in full in cash (or, in the case of Letters of Credit of which CSF is the actual account party, each such Letter of Credit has been cash collateralized in an amount equal to 103% of the stated and undrawn amount of such Letter of Credit and in the Currency in which such Letter of Credit was issued and otherwise on terms and conditions satisfactory to the applicable Issuing Lender), and (2) no Default or Event of Default shall have occurred and be continuing at the time of such termination pursuant to this Section 2.6(a) or would result from such termination or the termination of the Guaranty Agreement.

     (b) Mandatory Reductions.

          (i) Reduction Event Proceeds Stepdowns. The Committed Amount shall be reduced on each date that, without duplication: (1) Collateral Proceeds are received after December 23, 2008, by an amount equal to 75% of such Collateral Proceeds; or (2) cash proceeds from any Debt Issuance are received after December 23, 2008, by an amount equal to 75% of such proceeds (such proceeds referred to in clauses (1) and (2) are referred to collectively as, the “Reduction Event Proceeds”); provided, however, that notwithstanding the foregoing, the Committed Amount shall only be reduced pursuant to clauses (1) and (2) above in increments of $20,000,000 (or such lesser amount that is equal to the then Committed Amount), so that the Committed Amount shall not be reduced until the aggregate amount of all of the Reduction Event Proceeds required to be applied to reduce the Committed Amount pursuant to clauses (1) and (2) above equals or exceeds $20,000,000 (or such lesser amount that is equal to the then Committed Amount) and, after such reduction, the Committed Amount would not be reduced pursuant to this Section 2.6(b)(i) (except as provided in the last two sentences of this paragraph) again until the aggregate amount of all Reduction Event Proceeds required to be applied to reduce the Committed Amount pursuant to clauses (1) and (2) above (and not previously applied to reduce the Committed Amount) equals or exceeds $20,000,000 (or such lesser amount that is equal to the then Committed Amount). Notwithstanding the foregoing, at the time that any payments required to be made in connection with any reduction of the Committed Amount pursuant to Sections 2.6(b)(ii)(a) or (c) below (“Mandatory Reduction Payment Date”), the Borrower shall be entitled to apply any balance of previously unapplied Reduction Event Proceeds that are

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less than $20,000,000 to reduce the Committed Amount pursuant to this Section (such previously unapplied Reduction Event Proceeds will, for clarity, be allocated between the Committed Amount of Extending Lenders and Non-Extending Lenders on the same basis as would apply when Reduction Event Proceeds exceed $20,000,000). Notwithstanding anything to the contrary contained herein, on February 24, 2010, the Borrower shall apply any balance of previously unapplied Reduction Event Proceeds (rounded down to the nearest million) as of February 22, 2010 (including if the aggregate amount of such previously unapplied amounts is less than $20,000,0000) to reduce the Committed Amount.

        (ii) Other Stepdowns.

     (a) Notwithstanding anything to the contrary contained herein, the Committed Amount of the Non-Extending Lenders (to the extent not reduced to the following amount prior to December 31, 2009 pursuant to Section 2.6(b)(i)) shall automatically be reduced without the act of any party to $94,859,813 on December 31, 2009 and to $0 on March 13, 2010.

     (b) (1) The Committed Amount of the Extending Lenders shall be reduced (A) no later than the sixth Business Day following the date that the Borrower receives cash proceeds from any 2009 Equity Issuance, by an amount equal to 100% of such proceeds (net of customary and reasonable fees and expenses); provided, however, that no reduction shall occur pursuant to this clause (A) to the extent that an Extending Event shall have occurred on or prior to such sixth Business Day and (B) not later than one Business Day after the date that any Credit Party receives cash proceeds from any 2009-2012 Debt Issuance consummated on or prior to September 30, 2009, by an amount equal to 100% of such proceeds (net of customary and reasonable fees and expenses). (2) To the extent that the Committed Amount of the Extending Lenders is not reduced to the following amounts prior to July 31, 2009 and September 30, 2009, respectively, pursuant to the clause (1) of this Section 2.6(b)(ii)(b), the Committed Amount of the Extending Lenders shall, unless otherwise approved by all of the Extending Lenders, automatically be reduced without the act of any party (x) on July 31, 2009 to $678,037,383 and (y) on September 30, 2009 to $578,037,383, provided that if any secured 2009-2012 Debt Issuance is consummated on or prior to such date then such Committed Amount of the Extending Lenders shall be reduced to $478,037,383. (3) Not later than one Business Day after the date that any Credit Party receives cash proceeds from any 2009-2012 Debt Issuance consummated during the period commencing on November 1, 2009 and ending on November 30, 2009, (x) the Committed Amount of the Non-Extending Lenders shall be reduced by an amount equal to 75% of the aggregate principal amount of such 2009-2012 Debt Issuance on the date of issuance and (y) the Committed Amount of the Extending Lenders shall be reduced by an amount equal to 25% of the aggregate principal amount of such

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2009-2012 Debt Issuance on the date of issuance; provided that if the amounts calculated pursuant to clause (x) exceed the Committed Amount of the Non-Extending Lenders, then such excess shall be used to reduce the Committed Amount of the Extending Lenders (which for avoidance of doubt shall be over and above the reduction contemplated in clause (y)). (4) Not later than one Business Day after the date that any Credit Party receives cash proceeds from any 2009-2012 Debt Issuance consummated on or after December 1, 2009, the Committed Amount of the Lenders shall be reduced by an amount equal to 100% of such proceeds, which Commitment reduction shall be pro rata among the Lenders (based on the aggregate Commitments of the Lenders at such time).

     (c) Notwithstanding anything to the contrary contained herein, the Committed Amount of the Extending Lenders (to the extent not reduced to the following amounts prior to the following respective dates pursuant to Section 2.6(b)(i) and (ii) above) shall automatically be reduced, without the act of any party, on each date specified below to the amount specified opposite such date in the second column of the table:

Date of Commitment
Reduction of	Committed Amount of the Extending
Extending Lenders	Lenders
April 30, 2010	$	200,000,000
January 31, 2011	$	185,000,000
February 28, 2011	$	170,000,000
March 31, 2011	$	155,000,000
April 30, 2011	$	140,000,000
May 31, 2011	$	125,000,000
June 30, 2011	$	110,000,000
July 31, 2011	$	95,000,000
August 31, 2011	$	80,000,000
September 30, 2011	$	65,000,000
October 31, 2011	$	50,000,000
November 30, 2011	$	35,000,000
December 31, 2011	$	0

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          (iii) For the avoidance of doubt, to the extent that (1) the Advances Outstanding shall exceed the aggregate Committed Amount as a result of any reduction pursuant to Sections 2.6(b)(i) or Section 2.6(c), the Borrower shall promptly (and in any event within three Business Days) pay or prepay the Revolving Loans and Swingline Loans and (after all Revolving Loans and Swingline Loans have been repaid) cash collateralize the LOC Obligations in an amount sufficient to eliminate such excess in each case as provided in Section 2.7(b); (2) the Advances Outstanding of the Non-Extending Lenders shall exceed the aggregate Committed Amount of the Non-Extending Lenders as a result of any reduction pursuant to Section 2.6(b)(ii)(a), the Borrower shall promptly (and in any event within three Business Days) pay or prepay the Revolving Loans and Swingline Loans of the Non-Extending Lenders; (3) the Advances Outstanding of any Class of Lenders shall exceed the aggregate Committed Amount of such Class of Lenders as a result of any reduction pursuant to Section 2.6(b)(ii)(b), the Borrower shall promptly (and in any event on the same Business Day) pay or prepay the Revolving Loans and Swingline Loans of such Class of Lenders; and (4) the Advances Outstanding of the Extending Lenders shall exceed the aggregate Committed Amount of the Extending Lenders as a result of any reduction pursuant to Sections 2.6(b)(ii)(c), the Borrower shall promptly (and in any event within three Business Days) pay or prepay the Revolving Loans and Swingline Loans of the Extending Lenders and (after all such Revolving Loans and Swingline Loans have been repaid) cash collateralize the LOC Obligations of the Extending Lenders in an amount sufficient to eliminate such excess in each case as provided in Section 2.7(b).

     (c) Commitment Termination Date. The Commitment, the Swingline Commitment and the LOC Commitment of any Class of Lenders shall automatically terminate (and any Advances Outstanding of such Class of Lenders shall be repaid in full) on the Commitment Termination Date for such Class of Lenders.

     (d) Calculation Of Mandatory Reductions; Notice. In connection with any reduction of the Committed Amount pursuant to Section 2.6(b), the Borrower shall provide the Agent with written notice of such reduction as promptly as possible and, in any event, within three (3) Business Days of such reduction, which notice shall specify (i) the effective date of such reduction, (ii) the amount of such reduction, (iii) the source of the proceeds that are being applied to such reduction and (iv) the group of Lenders to

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which such reduction applies (i.e. the Extending Lenders, the Non-Extending Lenders or all Lenders).

     (e) Amendments to Schedule 2.1(a). On the date of any reduction in the Commitments of any Lender pursuant to this Section 2.6, Schedule 2.1(a) shall be deemed to be amended to reflect such reduction in the Committed Amount of such Lender and any change in the Commitment Percentage of such Lender and the Agent is authorized to record such reductions and changes in the Register

     Section 2.7. Prepayments.

     (a) Optional Prepayments. The Borrower shall have the right to prepay Loans in whole or in part from time to time; provided, however, that each partial prepayment of Revolving Loans shall be in a minimum principal amount of (except in connection with any prepayment made pursuant to Section 5.21) $1,000,000 and integral multiples of $100,000 in excess thereof, and each partial prepayment of a Swingline Loan shall be in a minimum principal amount of $100,000 and integral multiples of $100,000 in excess thereof. The Borrower shall give irrevocable notice of such prepayment in writing to the Administrative Agent (which shall notify the Lenders thereof as soon as practicable), which notice shall be at least: (i) three (3) Business Days prior to the proposed date of prepayment in the case of EURIBOR/LIBOR Rate Loans denominated in Dollars, (ii) one (1) Business Day prior to the proposed date of prepayment of Alternate Base Rate Loans denominated in Dollars, and (iii) four (4) Business Days prior to the proposed date of prepayment of Alternate Base Rate Loans and/or EURIBOR/LIBOR Rate Loans denominated in any Alternative Currency. Amounts prepaid under this Section 2.7(a) shall be applied to the outstanding Loans as the Borrower may elect; provided, that each Lender shall receive its pro rata share of any such prepayment based on its Commitment Percentage. All prepayments under this Section 2.7(a) shall be subject to Section 2.17, but otherwise without premium or penalty. Interest on the principal amount prepaid shall be payable on the next occurring Interest Payment Date that would have occurred had such Loan not been prepaid or, at the request of the Administrative Agent, interest on the principal amount prepaid shall be due and payable on any date that a prepayment is made hereunder through the date of prepayment. Amounts prepaid on the Revolving Loans and Swingline Loans may be reborrowed in accordance with the terms hereof.

     (b) Mandatory Prepayments.

          (i) Committed Amount. If at any time after the Closing Date, the Advances Outstanding shall exceed the aggregate Committed Amount then in effect, the Borrower immediately shall prepay the Revolving Loans (subject to any timing requirements set forth in Section 2.6(b)(iii)) and Swingline Loans and (after all Revolving Loans and Swingline Loans have been repaid) cash collateralize the LOC Obligations in an amount sufficient to eliminate such excess and all such payments shall be made pro rata among the Lenders in accordance with the Lender’s Commitments; provided, however, that, notwithstanding the foregoing, any payment on account of (a)

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Commitment reduction pursuant to Section 2.6(b)(ii)(a) shall be pro rata among the Non-Extending Lenders (based on the aggregate Commitments of the Non-Extending Lenders at such time), (b) any Commitment reduction pursuant to Section 2.6(b)(ii)(b) shall be pro rata among the applicable Class of Lenders (based on the aggregate Commitments of such Class of Lenders at such time), or (c) any Commitment reduction pursuant to Section 2.6(b)(ii)(c) shall be pro rata among the Extending Lenders (based on the aggregate Commitments of the Extending Lenders at such time). All amounts required to be paid pursuant to this Section 2.7(b)(i) shall be paid and applied as follows: (A) first to the payment of outstanding Swingline Loans, (B), second, to the payment of outstanding Revolving Loans in the Currency in which such loans are owed; and (C) third, to a cash collateral account in respect of LOC Obligations in the Currency in which such LOC Obligations were issued. All prepayments under this Section 2.7(b)(i) shall be subject to Section 2.17 and be accompanied by interest on the principal amount prepaid through the date of prepayment.

          (ii) If at any time after the Closing Date, the aggregate principal amount of all outstanding Revolving Loans denominated in any Alternative Currency plus all outstanding LOC Obligations denominated in any Alternative Currency shall exceed 105% of the aggregate Alternative Currency Sub-Limit, the Borrower immediately shall prepay such Alternative Currency Revolving Loans and (after all such Revolving Loans have been repaid) cash collateralize such LOC Obligations in an amount sufficient to eliminate such excess. All amounts required to be paid pursuant to this Section 2.7(b)(ii) shall be paid and applied as follows: (A) first, to the payment of outstanding Revolving Loans in the Currency in which such loans are owed; and (B) second, to a cash collateral account in respect of LOC Obligations in the Currency in which such LOC Obligations were issued. All prepayments under this Section 2.7(b)(ii) shall be subject to Section 2.17 and be accompanied by interest on the principal amount prepaid through the date of prepayment. For purposes of the calculations set forth in this Section 2.7(b)(ii), Revolving Loans and LOC Obligations denominated in Alternative Currencies shall be redenominated in Dollars in an amount equal to the Dollar Equivalent thereof.

     Section 2.8. Minimum Principal Amounts.

     All borrowings, payments and prepayments in respect of Revolving Loans shall be in such amounts and be made pursuant to such elections so that after giving effect thereto the aggregate principal amount of the Revolving Loans comprising any borrowing shall be $1,000,000 or a whole multiple of $100,000 in excess thereof.

     Section 2.9. Default Rate and Payment Dates.

     (a) If (i) all or a portion of the principal amount of any EURIBOR/LIBOR Rate Loan shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the rate that would otherwise be applicable thereto plus 2%, until the end of the Interest

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Period applicable thereto and thereafter the unpaid portion of such Revolving Loan shall, if such Revolving Loan is not denominated in Dollars, automatically be redenominated in Dollars on the last day of such Interest Period in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such overdue amount shall bear interest at a rate per annum which is equal to the Alternate Base Rate applicable to Dollars plus 2% (the “ABR Default Rate”), (ii) all or a portion of the principal amount of any Alternate Base Rate Loan shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the ABR Default Rate, (iii) if any interest payable on the principal amount of any Loan shall not be paid when due (after the applicable grace period), such overdue amount, if such Loan is not denominated in Dollars, shall automatically be redenominated in Dollars on the due date therefor in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such overdue amount shall bear interest at a rate per annum which is equal to the ABR Default Rate, and (iv) if any fee or other amount shall not be paid when due, such overdue amount shall bear interest at a rate per annum which is equal to the ABR Default Rate, in each case noted above from the date of such non-payment until such amount is paid in full (after as well as before judgment).

     (b) Upon the occurrence, and during the continuance, of any other Event of Default hereunder, the principal of and, to the extent permitted by law, interest on the Loans and any other amounts owing hereunder shall bear interest, payable on demand, at a per annum rate which is (A) in the case of principal, the rate that would otherwise be applicable thereto, plus 2%, or (B) in the case of interest, fees or other amounts, the Alternate Base Rate applicable to the Currency of such Loan plus 2% (after as well as before judgment). The Required Lenders shall have the right to revoke the imposition of any default interest imposed under this Section 2.9(b).

     (c) Interest on each Loan shall be payable in arrears on each Interest Payment Date; provided that interest accruing pursuant to subsection (b) of this Section 2.9 shall be payable from time to time on demand.

     Section 2.10. Conversion Options.

     (a) The Borrower may, in the case of Revolving Loans elect from time to time to convert Alternate Base Rate Loans to EURIBOR/LIBOR Rate Loans by giving the Administrative Agent at least: (i) three (3) Business Days’ prior irrevocable written notice of such election in the case of Loans denominated in Dollars and (ii) at least four (4) Business Days’ prior irrevocable written notice of such election in the case of Loans denominated in any Alternative Currency. In addition, the Borrower may elect from time to time to convert EURIBOR/LIBOR Rate Loans to Alternate Base Rate Loans by giving the Administrative Agent irrevocable written notice by 11:00 A.M. one Business Day prior to the proposed date of conversion. A form of Notice of Conversion is attached as Exhibit C (the “Notice of Conversion”). If the date upon which an Alternate Base Rate

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Loan is to be converted to a EURIBOR/LIBOR Rate Loan is not a Business Day, then such conversion shall be made on the next succeeding Business Day. All or any part of outstanding Alternate Base Rate Loans may be converted as provided herein; provided that (i) no Loan may be converted into a EURIBOR/LIBOR Rate Loan when any Default or Event of Default has occurred and is continuing, and (ii) partial conversions shall be in an aggregate principal amount of $1,000,000 or a whole multiple of $100,000 in excess thereof. EURIBOR/LIBOR Rate Loans may only be converted to Alternate Base Rate Loans on the last day of the applicable Interest Period. If the date upon which a EURIBOR/LIBOR Rate Loan is to be converted to an Alternate Base Rate Loan is not a Business Day, then such conversion shall be made on the next succeeding Business Day and during the period from such last day of an Interest Period to such succeeding Business Day such Loan shall bear interest as if it were an Alternate Base Rate Loan.

     (b) Any EURIBOR/LIBOR Rate Loan may be continued as such upon the expiration of an Interest Period with respect thereto by the Borrower giving the Administrative Agent at least four (4) Business Days prior irrevocable notice of such election (or the Initial Borrower giving the Administrative Agent at least three (3) Business Days’ prior irrevocable written notice of such election in the case of EURIBOR/LIBOR Rate Loans denominated in Dollars); provided, that no EURIBOR/LIBOR Rate Loan may be continued as such when any Default or Event of Default has occurred and is continuing, in which case such Loan shall be automatically converted to an Alternate Base Rate Loan at the end of the applicable Interest Period with respect thereto. If the Borrower shall fail to give timely notice of an election to continue any EURIBOR/LIBOR Rate Loan, or the continuation of any EURIBOR/LIBOR Rate Loan is not permitted hereunder, such EURIBOR/LIBOR Rate Loan shall be automatically converted to an Alternate Base Rate Loan at the end of the applicable Interest Period with respect thereto.

     Section 2.11. Computation of Interest and Fees.

     (a) Interest payable hereunder with respect to any Alternate Base Rate Loan based on the Prime Rate or any Alternative Currency borrowing denominated in Pounds Sterling shall be calculated on the basis of a year of 365 days (or 366 days, as applicable) for the actual days elapsed. Subject to the foregoing, all fees, interest and all other amounts payable hereunder shall be calculated on the basis of a 360 day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Initial Borrower and the Lenders of each determination of EURIBOR and a LIBOR Rate on the Business Day of the determination thereof. Any change in the interest rate on a Loan resulting from a change in the Alternate Base Rate shall become effective as of the opening of business on the day on which such change in the Alternate Base Rate shall become effective. The Administrative Agent shall as soon as practicable notify the Initial Borrower and the Lenders of the effective date and the amount of each such change.

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     (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Credit Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Initial Borrower, deliver to the Initial Borrower a statement showing the computations used by the Administrative Agent in determining any interest rate.

     (c) It is the intent of the Lenders and the Credit Parties to conform to and contract in strict compliance with applicable usury law from time to time in effect. All agreements between the Lenders and the Credit Parties are hereby limited by the provisions of this paragraph which shall override and control all such agreements, whether now existing or hereafter arising and whether written or oral. In no way, nor in any event or contingency (including but not limited to prepayment or acceleration of the maturity of any Loan), shall the interest taken, reserved, contracted for, charged, or received under this Credit Agreement, under the Notes or otherwise, exceed the maximum nonusurious amount permissible under Applicable Law. If, from any possible construction of this Credit Agreement or any other document, interest would otherwise be payable in excess of the maximum nonusurious amount, any such construction shall be subject to the provisions of this paragraph and such interest shall be automatically reduced to the maximum nonusurious amount permitted under Applicable Law, without the necessity of execution of any amendment or new document. If any Lender shall ever receive anything of value which is characterized as interest on the Loans under Applicable Law and which would, apart from this provision, be in excess of the maximum nonusurious amount, an amount equal to the amount which would have been excessive interest shall, without penalty, be applied to the reduction of the principal amount owing on the Loans and not to the payment of interest, or refunded to the Borrower or the other payor thereof if and to the extent such amount which would have been excessive exceeds such unpaid principal amount of the Loans. The right to demand payment of the Loans or any other amount required to be paid hereunder does not include the right to receive any interest which has not otherwise accrued on the date of such demand, and the Lenders do not intend to charge or receive any unearned interest in the event of such demand. All interest paid or agreed to be paid to the Lenders with respect to the Loans shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated, and spread throughout the full stated term (including any renewal or extension) of the Loans so that the amount of interest on account of such indebtedness does not exceed the maximum nonusurious amount permitted by Applicable Law.

     Section 2.12. Pro Rata Treatment and Payments.

     (a) Allocation of Payments Before Event of Default. Each borrowing of Revolving Loans and any reduction of the Commitments shall be made pro rata according to the respective Commitment Percentages of the Lenders; provided, however, that, notwithstanding the foregoing, (i) any Commitment reduction pursuant to Section 2.6(b)(ii)(a) shall be pro rata among the Non-Extending Lenders (based on the aggregate

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Commitments of the Non-Extending Lenders at such time), (ii) any Commitment reduction pursuant to Section 2.6(b)(ii)(b) shall be pro rata among the applicable Class of Lenders (based on the aggregate Commitments of such Class of Lenders at such time) and (iii) any Commitment reduction pursuant to Section 2.6(b)(ii)(c) shall be pro rata among the Extending Lenders (based on the aggregate Commitments of the Extending Lenders at such time). Each payment under this Credit Agreement or any Note shall be applied, first, to any fees then due and owing by the Borrower pursuant to Section 2.5, second, to interest then due and owing hereunder and under the Notes and, third, to principal then due and owing hereunder and under the Notes. Each payment on account of any fees pursuant to Section 2.5 shall be made pro rata in accordance with the respective amounts due and owing (except as to the Fronting Fees and the Issuing Lender Fees). Each optional prepayment on account of principal of the Loans shall be applied in accordance with Section 2.7(a); provided, that prepayments made pursuant to Section 2.15 shall be applied in accordance with such Section. Each mandatory prepayment on account of principal of the Loans shall be applied in accordance with Section 2.7(b). All payments (including prepayments) to be made by the Borrower on account of principal, interest and fees shall be made without defense, set-off or counterclaim (except as provided in Section 2.18(b)) and shall be made to the Administrative Agent for the account of the Lenders at the Administrative Agent’s office specified on Section 9.2 in immediately available funds not later than 1:00 P.M. on the date when due. All amounts owing under this Credit Agreement are payable in Dollars; provided, however, that the principal of, and interest on, any Revolving Loan denominated in any Alternative Currency (except as otherwise provided in Section 2.9), breakage costs relating to, and participations in, and reimbursements of drawings under Letters of Credit denominated in, any Alternative Currency, shall only be payable in such Alternative Currency. In addition, the cash collateralization of outstanding Letters of Credit denominated in any Alternative Currency (when required under this Credit Agreement) shall be in such Alternative Currency. The Administrative Agent shall distribute such payments to the Lenders entitled thereto promptly upon receipt in like funds as received. If any payment hereunder (other than payments on EURIBOR/LIBOR Rate Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a EURIBOR/LIBOR Rate Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day.

     (b) Allocation of Payments After Exercise of Remedies. Notwithstanding any other provisions of this Credit Agreement to the contrary, after the Commitments shall have been terminated and the Loans and all other amounts under the Credit Documents shall have become due and payable in accordance with the terms of Section 7.2 hereof, all amounts collected or received by the Administrative Agent or any Lender on account

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of the Credit Party Obligations or any other amounts outstanding under any of the Credit Documents or in respect of the Collateral shall be paid over or delivered as follows:

     FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable attorneys’ and consultants’ fees) of the Administrative Agent in connection with enforcing the rights of the Lenders under the Credit Documents and any protective advances made by the Administrative Agent with respect to the Collateral under or pursuant to the terms of the Security Documents;

     SECOND, to payment of any fees owed to the Administrative Agent;

     THIRD, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation, reasonable attorneys’ and consultants’ fees) of each of the Lenders in connection with enforcing its rights under the Credit Documents or otherwise with respect to the Credit Party Obligations owing to such Lender;

     FOURTH, to the payment of all accrued fees and interest;

     FIFTH, to the payment of the outstanding principal amount of the Loans and the payment or cash collateralization of the outstanding LOC Obligations;

     SIXTH, to all other Credit Party Obligations and other obligations due and payable hereunder or otherwise and not repaid pursuant to clauses “FIRST” through “FIFTH” above; and

     SEVENTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus.

In carrying out the foregoing: (i) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category; (ii) each of the Lenders shall receive an amount equal to its pro rata share (based on the proportion of the then outstanding Loans and LOC Obligations held by such Lender) of amounts available to be applied pursuant to clauses ”THIRD,” “FOURTH,” “FIFTH” and “SIXTH” above; and (iii) to the extent that any amounts available for distribution pursuant to clause “FIFTH” above are attributable to the issued but undrawn amount of outstanding Letters of Credit, such amounts shall be held by the Administrative Agent in a cash collateral account and applied (A) first, to reimburse the Issuing Lender from time to time for any drawings under such Letters of Credit, and (B) then, following the expiration of all Letters of Credit, to all other obligations of the types described in clauses “FIFTH” and “SIXTH” above in the manner provided in this Section 2.12(b).

     Section 2.13. Non-Receipt of Funds by the Administrative Agent.

     (a) Except as provided in Section 2.13(d), unless the Administrative Agent shall have been notified in writing by a Lender prior to the date a Loan is to be made by such Lender (which notice shall be effective upon receipt) that such Lender does not

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intend to make the proceeds of such Loan available to the Administrative Agent, the Administrative Agent may assume that such Lender has made such proceeds available to the Administrative Agent on such date, and the Administrative Agent may in reliance upon such assumption (but shall not be required to) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent, the Administrative Agent shall be able to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent’s demand therefor, the Administrative Agent will promptly notify the Initial Borrower, and the Borrower shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from such Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent at a per annum rate equal to (i) from the Borrower at the applicable rate for the applicable borrowing pursuant to the Notice of Borrowing, and (ii) from a Lender at the Federal Funds Effective Rate with respect to Loans denominated in Dollars and at the Alternative Base Rate with respect to Loans denominated in any Alternative Currency.

     (b) Except as provided in Section 2.13(d), unless the Administrative Agent shall have been notified in writing by the Borrower, prior to the date on which any payment is due from it hereunder (which notice shall be effective upon receipt) that the Borrower does not intend to make such payment, the Administrative Agent may assume that such Borrower has made such payment when due, and the Administrative Agent may in reliance upon such assumption (but shall not be required to) make available to each Lender on such payment date an amount equal to the portion of such assumed payment to which such Lender is entitled hereunder, and if the Borrower has not in fact made such payment to the Administrative Agent, such Lender shall, on demand, repay to the Administrative Agent the amount made available to such Lender. If such amount is repaid to the Administrative Agent on a date after the date such amount was made available to such Lender, such Lender shall pay to the Administrative Agent on demand interest on such amount in respect of each day from the date such amount was made available by the Administrative Agent to such Lender to the date such amount is recovered by the Administrative Agent at a per annum rate equal to the Federal Funds Effective Rate with respect to Loans denominated in Dollars and at the Alternative Base Rate with respect to Loans denominated in any Alternative Currency.

     (c) A certificate of the Administrative Agent submitted to the Initial Borrower or any Lender with respect to any amount owing under this Section 2.13 shall be conclusive in the absence of manifest error.

     (d) On the date of any borrowing of a Revolving Loan in any Alternative Currency, the Administrative Agent shall make available to the applicable Borrower the proceeds of such borrowing only upon actual receipt by the Administrative Agent from

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each Lender of such Lender’s pro rata portion of such borrowing in such Alternative Currency. On the date that any payment of the principal of or interest on any Revolving Loan denominated in any Alternative Currency is due, the Administrative Agent shall make available to each Lender such Lender’s pro rata portion of such payment only upon actual receipt by the Administrative Agent from the Borrower of such payment.

     Section 2.14. Inability to Determine Interest Rate.

     Notwithstanding any other provision of this Credit Agreement, if (a) the Administrative Agent shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that, by reason of circumstances affecting the relevant market, reasonable and adequate means do not exist for ascertaining EURIBOR and/or LIBOR for any Currency for any Interest Period, or (b) the Required Lenders shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that EURIBOR and/or the LIBOR Rate does not adequately and fairly reflect the cost to such Lenders of funding EURIBOR/LIBOR Rate Loans that the Borrower has requested during such Interest Period, the Administrative Agent shall forthwith give telephone notice of such determination, confirmed in writing, to the Initial Borrower, and the Lenders at least two Business Days prior to the first day of such Interest Period. Unless the Initial Borrower shall have notified the Administrative Agent upon receipt of such telephone notice that it wishes to rescind or modify the request regarding such EURIBOR/LIBOR Rate Loans, any Loans that were requested to be made as EURIBOR/LIBOR Rate Loans shall be made as Alternate Base Rate Loans in the applicable Currency and any Loans that were requested to be converted into or continued as EURIBOR/LIBOR Rate Loans shall remain as or be converted into Alternate Base Rate Loans in the applicable Currency. Until any such notice has been withdrawn by the Administrative Agent, no further Loans shall be made as, continued as, or converted into, EURIBOR/LIBOR Rate Loans for the Interest Periods so affected.

     Section 2.15. Illegality.

     Notwithstanding any other provision of this Credit Agreement, if the adoption of or any change in any requirement of Applicable Law or in the interpretation or application thereof by the relevant Governmental Authority to any Lender shall make it unlawful for such Lender or its EURIBOR/LIBOR Lending Office to make or maintain EURIBOR/LIBOR Rate Loans in any Currency as contemplated by this Credit Agreement or to obtain in the interbank eurodollar market through its EURIBOR/LIBOR Lending Office the funds with which to make such Loans, (a) such Lender shall promptly notify the Administrative Agent and the Initial Borrower thereof, (b) the commitment of such Lender hereunder to make or continue EURIBOR/LIBOR Rate Loans in such Currency shall forthwith be suspended until the Administrative Agent shall give notice that the condition or situation which gave rise to the suspension shall no longer exist, and (c) such Lender’s Loans then outstanding as EURIBOR/LIBOR Rate Loans, if any, shall be converted on the last day of the Interest Period for such Loans or within such earlier period as required by law as Alternate Base Rate Loans. The Borrower hereby agrees promptly to pay any Lender, upon its demand, any additional amounts necessary to compensate such Lender for

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actual and direct costs (but not including anticipated profits) reasonably incurred by such Lender in making any repayment in accordance with this Section 2.15 including, but not limited to, any interest or fees payable by such Lender to lenders of funds obtained by it in order to make or maintain its EURIBOR/LIBOR Rate Loans hereunder. A certificate as to any additional amounts payable pursuant to this Section 2.15 submitted by such Lender, through the Administrative Agent, to the Initial Borrower shall be conclusive in the absence of manifest error. Each Lender agrees to use reasonable efforts (including reasonable efforts to change its EURIBOR/LIBOR Lending Office) to avoid or to minimize any amounts which may otherwise be payable pursuant to this Section 2.15; provided, however, that such efforts shall not cause the imposition on such Lender of any additional costs or legal or regulatory burdens deemed by such Lender to be material.

     Section 2.16. Requirements of Law.

     (a) If the adoption of or any change in any requirement of Applicable Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:

          (i) shall subject such Lender to any tax of any kind whatsoever with respect to any Letter of Credit, any participation therein or any application relating thereto, any EURIBOR/LIBOR Rate Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for changes in the rate of tax on the overall net income of such Lender);

          (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of EURIBOR or the LIBOR Rate hereunder; or

          (iii) shall impose on such Lender any other condition;

and the result of any of the foregoing is to increase the cost to such Lender of making or maintaining EURIBOR/LIBOR Rate Loans or the Letters of Credit or the participations therein or to reduce any amount receivable hereunder or under any Note, then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such additional cost or reduced amount receivable which such Lender reasonably deems to be material as determined by such Lender with respect to its EURIBOR/LIBOR Rate Loans or Letters of Credit.

     (b) Without prejudice to paragraph (a) (but without double-counting), if and so long as any Lender is required by (i) the Bank of England or any other monetary or other authority of the United Kingdom or (ii) the European Central Bank to make special deposits, to maintain reserve asset ratios or to pay fees, in each case in respect of such

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Lender’s EURIBOR/LIBOR Rate Loans, such Lender may require the Borrower to pay, contemporaneously with each payment of interest on each of such Loans, additional interest on such Loan at a rate per annum equal to the Mandatory Cost Rate.

     (c) A certificate as to any additional amounts payable pursuant to this Section 2.16 submitted by such Lender, through the Administrative Agent, to the Initial Borrower shall be conclusive in the absence of manifest error. Each Lender agrees to use reasonable efforts (including reasonable efforts to change its Domestic Lending Office or EURIBOR/LIBOR Lending Office, as the case may be) to avoid or to minimize any amounts which might otherwise be payable pursuant to this paragraph of this Section 2.16; provided, however, that such efforts shall not cause the imposition on such Lender of any additional costs or legal or regulatory burdens deemed by such Lender to be material.

     (d) If any Lender shall have reasonably determined that the adoption of or any change in any requirement of Applicable Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or Governmental Authority made subsequent to the date hereof does or shall have the effect of reducing the rate of return on such Lender’s or such corporation’s capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy) by an amount reasonably deemed by such Lender to be material, then from time to time, within fifteen (15) days after demand by such Lender, the Borrower shall pay to such Lender such additional amount as shall be certified by such Lender as being required to compensate it for such reduction. Such a certificate as to any additional amounts payable under this Section 2.16 submitted by a Lender (which certificate shall include a description of the basis for the computation), through the Administrative Agent, to the Initial Borrower shall be conclusive absent manifest error.

     (e) The agreements in this Section 2.16 shall survive the termination of this Credit Agreement and payment of the Notes and all other amounts payable hereunder.

     Section 2.17. Indemnity.

     The Borrower hereby agrees to indemnify each Lender and to hold such Lender harmless from any funding loss or expense which such Lender may sustain or incur as a consequence of (a) the failure by the Borrower to pay the principal amount of or interest on any Loan by such Lender in accordance with the terms hereof, (b) the failure of the Borrower to accept a borrowing after the Borrower has given a notice in accordance with the terms hereof, (c) the failure of the Borrower to make any prepayment after the Borrower has given a notice in accordance with the terms hereof, and/or (d) the making by the Borrower of a prepayment of a Loan, or the conversion thereof, on a day which is not the last day of the Interest Period with respect thereto,

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in each case including, but not limited to, any such loss or expense arising from interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain its Loans hereunder. In addition, the Borrower agrees to indemnify and hold each Lender harmless from any loss, cost or expense which such Lender may sustain or incur as a result or consequence of (a) the payment of any LOC Obligation denominated in Alternative Currency on a date other than the due date thereof or (b) the payment of any Credit Party Obligation denominated in Alternative Currency in a different Currency. A certificate as to any additional amounts payable pursuant to this Section 2.17 submitted by any Lender, through the Administrative Agent, to the Initial Borrower (which certificate must be delivered to the Administrative Agent within thirty (30) days following such default, prepayment or conversion) shall be conclusive in the absence of manifest error. The agreements in this Section 2.17 shall survive termination of this Credit Agreement and payment of the Notes and all other amounts payable hereunder.

     Section 2.18. Taxes.

     (a) All payments made by the Borrower hereunder or under any Note will be, except as provided in Section 2.18(b), made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any Governmental Authority or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding any tax imposed on or measured by the net income or profits of a Lender pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of such Lender is located or any subdivision thereof or therein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as “Taxes”). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Credit Agreement or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. The Borrower will furnish to the Administrative Agent as soon as practicable after the date the payment of any Taxes is due pursuant to Applicable Law certified copies (to the extent reasonably available and required by law) of tax receipts evidencing such payment by the Borrower. The Borrower agrees to indemnify and hold harmless each Lender, and reimburse such Lender upon its written request, for the amount of any Taxes so levied or imposed and paid by such Lender.

     (b) Each Lender that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) agrees to deliver to the Initial Borrower and the Administrative Agent on or prior to the Closing Date, or in the case of a Lender that is an assignee or transferee of an interest under this Credit Agreement pursuant to Section 9.6(c) (unless the respective Lender was already a Lender hereunder immediately prior to such assignment or transfer), on the date of such assignment or transfer to such Lender, (i) if the Lender is a “bank” within the meaning of Section 881(c)(3)(A) of the Code, two

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accurate and complete original signed copies of Internal Revenue Service Form W-8BEN, W-8ECI or W-8IMY (or successor forms) certifying such Lender’s entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Credit Agreement and under any Note, or (ii) if the Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, Internal Revenue Service Form W-8BEN, W-8ECI or W-8IMY as set forth in clause (i) above, or (A) a certificate substantially in the form of Exhibit L (any such certificate, a “2.18 Certificate”), and (B) two accurate and complete original signed copies of Internal Revenue Service Form W-8BEN (or successor form) certifying such Lender’s entitlement to an exemption from United States withholding tax with respect to payments of interest to be made under this Credit Agreement and under any Note. In addition, each Lender agrees that it will deliver upon the Initial Borrower’s request updated versions of the foregoing, as applicable, whenever the previous certification has become obsolete or inaccurate in any material respect, together with such other forms as may be required in order to confirm or establish the entitlement of such Lender to a continued exemption from or reduction in United States withholding tax with respect to payments under this Credit Agreement and any Note. Notwithstanding anything to the contrary contained in Section 2.18(a), but subject to the immediately succeeding sentence, (1) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold Taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable hereunder for the account of any Lender which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. federal income tax purposes to the extent that such Lender has not provided to the Initial Borrower U.S. Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding, and (2) the Borrower shall not be obligated pursuant to Section 2.18(a) hereof to gross-up payments to be made to a Lender in respect of Taxes imposed by the United States if (I) such Lender has not provided to the Initial Borrower the Internal Revenue Service Forms required to be provided to the Initial Borrower pursuant to this Section 2.18(b), or (II) in the case of a payment, other than interest, to a Lender described in clause (ii) above, to the extent that such Forms do not establish a complete exemption from withholding of such Taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 2.18, the Borrower agrees to pay additional amounts and to indemnify each Lender in the manner set forth in Section 2.18(a) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any amounts deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the Closing Date in any Applicable Law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of Taxes.

     (c) Each Lender agrees to use reasonable efforts (including reasonable efforts to change its Domestic Lending Office or EURIBOR/LIBOR Lending Office, as the case may be) to avoid or to minimize any amounts which might otherwise be payable pursuant to this Section 2.18; provided, however, that such efforts shall not cause the imposition

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on such Lender of any additional costs or legal or regulatory burdens deemed by such Lender in its sole discretion to be material.

     (d) If the Borrower pays any additional amount pursuant to this Section 2.18 with respect to a Lender, such Lender shall use reasonable efforts to obtain a refund of tax or credit against its tax liabilities on account of such payment; provided that such Lender shall have no obligation to use such reasonable efforts if either (i) it is in an excess foreign tax credit position, or (ii) it believes in good faith, in its sole discretion, that claiming a refund or credit would cause adverse tax consequences to it. In the event that such Lender receives such a refund or credit, such Lender shall pay to the Initial Borrower an amount that such Lender reasonably determines is equal to the net tax benefit obtained by such Lender as a result of such payment by the Borrower. In the event that no refund or credit is obtained with respect to the Borrower’s payments to such Lender pursuant to this Section 2.18, then such Lender shall upon request provide a certification that such Lender has not received a refund or credit for such payments. Nothing contained in this Section 2.18 shall require a Lender to disclose or detail the basis of its calculation of the amount of any tax benefit or any other amount or the basis of its determination referred to in the proviso to the first sentence of this Section 2.18 to the Borrower or any other party.

     (e) The agreements in this Section 2.18 shall survive the termination of this Credit Agreement and the payment of the Notes and all other amounts payable hereunder.

     Section 2.19. Indemnification; Nature of Issuing Lender’s Duties.

     (a) In addition to its other obligations under Section 2.3, the Borrower hereby agrees to protect, indemnify, pay and save the Issuing Lender and each Lender harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys’ fees) that the Issuing Lender or such Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit, or (ii) the failure of the Issuing Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions, herein called “Government Acts”).

     (b) As between the Borrower and the Issuing Lender and each Lender, the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. Neither the Issuing Lender nor any Lender shall be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of

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a Letter of Credit to comply fully with conditions required in order to draw upon a Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (vii) for any consequences arising from causes beyond the control of the Issuing Lender or any Lender, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of the Issuing Lender’s rights or powers hereunder.

     (c) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Issuing Lender or any Lender, under or in connection with any Letter of Credit or the related certificates, if taken or omitted in the absence of gross negligence or willful misconduct, shall not put such Issuing Lender or such Lender under any resulting liability to the Borrower. It is the intention of the parties that this Credit Agreement shall be construed and applied to protect and indemnify the Issuing Lender and each Lender against any and all risks involved in the issuance of the Letters of Credit, all of which risks are hereby assumed by the Borrower, including, without limitation, any and all risks of the acts or omissions, whether rightful or wrongful, of any Government Authority. The Issuing Lender and the Lenders shall not, in any way, be liable for any failure by the Issuing Lender or anyone else to pay any drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of the Issuing Lender and the Lenders.

     (d) Nothing in this Section 2.19 is intended to limit the reimbursement obligation of the Borrower contained in Section 2.3(d) hereof. The obligations of the Borrower under this Section 2.19 shall survive the termination of this Credit Agreement. No act or omissions of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Issuing Lender and the Lenders to enforce any right, power or benefit under this Credit Agreement.

     (e) Notwithstanding anything to the contrary contained in this Section 2.19, the Borrower shall have no obligation to indemnify the Issuing Lender or any Lenders in respect of any liability incurred by the Issuing Lender or such Lender arising out of the gross negligence or willful misconduct of the Issuing Lender (including action not taken by the Issuing Lender or such Lender), as determined by a court of competent jurisdiction or pursuant to arbitration.

     Section 2.20. Extension of Commitment Termination Date.

     Prior to March 14, 2008, Initial Borrower may extend the Commitment Termination Date (as defined in this Credit Agreement on March 14, 2008) to a date that is not later than twelve (12) months after the then-effective Commitment Termination Date, no more than one time, upon: (a) delivery of a Facility Extension Request in the form attached hereto as Exhibit M (the “Facility Extension Request”) to Administrative Agent; (b) payment to Administrative Agent for

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the benefit of the Lenders of a facility extension fee equal to twenty basis points (0.20%) on the then-existing Committed Amount (i.e., 0.20% times the Committed Amount); and (c) payment by Borrower of all fees and expenses to Administrative Agent and the Lenders to the extent then due. Such extension shall be evidenced by delivery of written confirmation of the same by Administrative Agent to Initial Borrower; provided, that:

     (i) no Default or Event of Default shall have occurred and be continuing; and

     (ii) the representations and warranties contained in this Credit Agreement shall be true and correct on and as of the Facility Extension Request as if made on and as of such date (or, if any such representation and warranty is expressly stated to have been made as of a specific date, such representations and warranties shall be true and correct as of such specific date).

     Section 2.21. Replacement of Lenders.

     If Borrower becomes obligated to pay additional amounts to any Lender pursuant to Section 2.16 or Section 2.18, then Initial Borrower may within sixty (60) days thereafter designate another bank or financial institution which is acceptable to Agent in its reasonable discretion (such other bank or financial institution being called a “Replacement Lender”) to purchase the Loans of such Lender and such Lender’s rights hereunder, without recourse to or warranty by, or expense to, such Lender, for a purchase price equal to the outstanding principal amount of the Loans payable to such Lender plus any accrued but unpaid interest on such Loans and all accrued but unpaid fees owed to such Lender and any other amounts payable to such Lender under this Credit Agreement (all such amounts shall only be payable in the Currency in which they are owed under this Agreement), and to assume all the obligations of such Lender hereunder, and, upon such purchase and assumption (pursuant to a Commitment Transfer Supplement), such Lender shall no longer be a party hereto or have any rights hereunder (other than rights with respect to indemnities and similar rights applicable to such Lender prior to the date of such purchase and assumption) and shall be relieved from all obligations to Borrower hereunder, and the Replacement Lender shall succeed to the rights and obligations of such Lender hereunder. Nothing in this Section 2.21 shall be deemed to relieve Borrower of its obligation to pay additional amounts to any Lender pursuant to Section 2.16 or Section 2.18.

     Section 2.22. Additional Limitations on CSF as Borrower. Notwithstanding anything to the contrary contained in this Agreement (but subject to Section 2.3(h)), in no event shall any Revolving Loan or Letter of Credit be issued to, or for the account of, CSF if the Guaranty Agreement is not in full force and effect with respect to the Initial Borrower and CSI.

     Section 2.23. Several Liability of the Borrower. Without limiting the obligations of the Initial Borrower or CSI as a guarantor under the Guaranty Agreement or of CSF as a Guarantor under the Guaranty in Article X hereof, each Borrower shall be severally (and not jointly) liable for any and all of the Revolving Loans made directly to it as a Borrower, and Letters of Credit issued for the actual account of it as a Borrower.

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     Section 2.24. Currency Conversion of Loans. Except as otherwise provided in Section 2.9, in no event shall the Currency in which any outstanding Alternate Base Rate Loan or EURIBOR/LIBOR Rate Loan is denominated be changed or converted into another Currency (including, without limitation, if any such Loan is converted to an Alternate Base Rate Loan or LIBOR Rate Loan pursuant to Section 2.10).

     Section 2.25. Additional Repayments of Loans. Notwithstanding anything to the contrary contained in this Article II, in no event shall: (i) the Advances Outstanding of any Class of Lenders exceed the aggregate Committed Amount of such Class of Lenders then in effect, (ii) the Advances Outstanding of any Lender exceed the aggregate Commitment of such Lender, (iii) with regard to any Class of Lenders, the sum of such Class of Lenders’ share of outstanding Revolving Loans plus such Class of Lenders’ Commitment Percentage of outstanding Swingline Loans plus such Class of Lenders’ Commitment Percentage of LOC Obligations exceed such Class of Lenders’ Commitment Percentage of the aggregate Committed Amount and (iv) with regard to any Lender individually, the sum of such Lender’s share of outstanding Revolving Loans plus such Lender’s Commitment Percentage of outstanding Swingline Loans plus such Lender’s Commitment Percentage of LOC Obligations exceed such Lender’s Commitment Percentage of the aggregate Committed Amount. On the date of any reduction in the Committed Amount of any Class of Lenders pursuant to Section 2.6 prior to the date on which the Commitments of the Non-Extending Lenders have been terminated and the Credit Party Obligations of the Non-Extending Lenders have been paid in full (other than unasserted contingent indemnification obligations), the Initial Borrower shall also pay or repay Advances Outstanding of such Class of Lenders in an amount required, after giving effect to such reduction, so that the ratio of the aggregate Advances Outstanding to Commitments of such Class of Lenders equals the ratio of the aggregate Advances Outstanding to Commitments of the other Class of Lenders

ARTICLE III

CONDITIONS PRECEDENT

     Section 3.1. Conditions to Closing.

     This Credit Agreement shall become effective upon, and the obligation of each Lender to make the initial Loans, and the Issuing Lender to issue Letters of Credit on the Closing Date is subject to, the satisfaction of the following conditions precedent:

     (a) Execution of Credit Agreement and Credit Documents. The Administrative Agent shall have received (i) counterparts of this Credit Agreement, executed by a duly authorized officer of each party hereto, (ii) a Note, for the account of each Lender that requests a Note, (iii) for the account of the Swingline Lender, the Swingline Note, and (iv) counterparts of any other Credit Document, executed by the duly authorized officers of the parties thereto.

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     (b) Authority Documents. The Administrative Agent shall have received the following:

     (i) Certificate of Incorporation, Etc. Copies of the certificate of incorporation or other charter or formation documents of each Credit Party certified to be true and complete as of a recent date by the appropriate governmental authority of the state of its incorporation or formation, as the case may be.

     (ii) Resolutions. Copies of resolutions of the board of directors or other comparable managing body of each Credit Party approving and adopting the Credit Documents, the transactions contemplated therein and authorizing execution and delivery thereof, certified by an officer or the managing member of such Credit Party as of the Closing Date to be true and correct and in force and effect as of such date.

     (iii) Bylaws. A copy of the bylaws and/or operating agreement of each Credit Party certified by an officer or managing member of such Credit Party as of the Closing Date to be true and correct and in force and effect as of such date.

     (iv) Good Standing. Copies of certificates of good standing, existence or its equivalent with respect to each Credit Party certified as of a recent date by the appropriate governmental authorities of the state of incorporation or formation, as the case may be, and each other state in which such Credit Party is qualified to do business.

     (v) Incumbency. An incumbency certificate of each Credit Party certified by a secretary or assistant secretary pursuant to the Secretary Certificate substantially in the form of Exhibit D (“Secretary’s Certificate”) to be true and correct as of the Closing Date, in form and substance satisfactory to Administrative Agent.

     (c) Personal Property Collateral. The Administrative Agent shall have received, in form and substance satisfactory to the Administrative Agent: (i) searches of UCC filings in the jurisdiction of the chief executive office and state of incorporation of each Credit Party and each jurisdiction where Credit Party’s personal property is located; and (ii) copies of the financing statements on file in such jurisdictions.

     (d) Legal Opinions of Counsel. The Administrative Agent shall have received an opinion of counsel for each Credit Party from Hogan and Hartson LLP dated the Closing Date and addressed to the Administrative Agent and the Lenders in form and substance satisfactory to Administrative Agent.

     (e) Fees. The Administrative Agent and the Lenders shall have received all fees, if any, owing pursuant to Section 2.5 and any fee or commitment letter.

     (f) Litigation. There shall not exist any pending or threatened litigation, investigation, bankruptcy or insolvency, injunction, order or claim affecting or relating to any Credit Party or any of their Subsidiaries, this Credit Agreement and the other Credit

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Documents, that has not been settled, dismissed, vacated, discharged or terminated prior to the Closing Date which could reasonably be expected to result in a Material Adverse Effect.

     (g) Government Consent. The Administrative Agent shall have received evidence that all governmental, shareholder and material third party consents and approvals necessary in connection with the financings and other transactions contemplated hereby have been obtained.

     (h) Compliance with Laws. The Loans and other transactions contemplated hereby shall be in compliance with all Applicable Laws and regulations (including all applicable securities and banking laws, rules and regulations).

     (i) Bankruptcy. There shall be no Insolvency Proceedings with respect to any Credit Party or any of their Subsidiaries.

     (j) Financial Statements. The Administrative Agent and the Lenders shall have received copies of the financial statements referred to in Section 5.1 hereof, each in form and substance satisfactory to it.

     (k) No Material Adverse Change. Since December 31, 2005, there has been no Material Adverse Change with respect to the Borrower and its Subsidiaries taken as a whole.

     (l) Financial Condition Certificate. The Administrative Agent shall have received a certificate, substantially in the form of Exhibit G (“Solvency Certificate”) and certified as accurate by a Responsible Officer, demonstrating compliance by the Borrower and its Subsidiaries as of the Closing Date with the financial covenants contained in Section 5.32 hereof.

     (m) Officer’s Certificate. The Administrative Agent shall have received a certificate executed by a Responsible Officer of each Credit Party as of the Closing Date stating that (i) no action, suit, investigation or proceeding is pending or, to the knowledge of each such Credit Party, threatened in any court or before any arbitrator or governmental instrumentality that purports to affect the Credit Parties or the transactions contemplated by the Credit Documents, if such action, suit, investigation or proceeding could reasonably be expected to have a Material Adverse Effect, and (ii) immediately after giving effect to this Credit Agreement (including the initial Loans hereunder), the other Credit Documents, and all the transactions contemplated therein or thereby to occur on such date, (A) no Default or Event of Default exists, and (B) all representations and warranties contained herein and in the other Credit Documents are true and correct in all material respects.

     (n) Borrower Information Certificate. The Administrative Agent shall have received a certificate substantially in the form of Exhibit K (“Borrower Information

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Certificate”), for benefit of itself and the Lenders, provided by each Credit Party that sets forth information required by the PATRIOT Act including, without limitation, the identity of each Credit Party, the name and address of each Credit Party and other information that will allow the Administrative Agent or any Lender, as applicable, to identify each Credit Party in accordance with the PATRIOT Act.

     (o) Additional Matters. All other documents and legal matters in connection with the transactions contemplated by this Credit Agreement shall be reasonably satisfactory in form and substance to the Administrative Agent and its counsel.

     Section 3.2. Conditions to All Extensions of Credit.

     The obligation of each Lender to make any Extension of Credit hereunder is subject to the satisfaction of the following conditions precedent on the date of making such Extension of Credit:

     (a) Representations and Warranties. The representations and warranties made by the Credit Parties herein, in the Security Documents or which are contained in any certificate furnished at any time under or in connection herewith shall be true and correct on and as of the date of such Extension of Credit as if made on and as of such date (except for those which expressly relate to an earlier date, in which case, such representations and warranties shall be true and correct as of such earlier date).

     (b) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Extension of Credit to be made on such date unless such Default or Event of Default shall have been waived in accordance with this Credit Agreement.

     (c) Compliance with Covenants. Immediately after giving effect to the making of any such Extension of Credit, each Credit Party is in compliance with each of the covenants set forth herein.

     (d) Compliance with Commitments. Immediately after giving effect to the making of any such Extension of Credit (and the application of the proceeds thereof), (i) the sum of the aggregate principal amount of outstanding Revolving Loans, plus outstanding Swingline Loans, plus LOC Obligations shall not exceed the Committed Amount then in effect, (ii) the LOC Obligations shall not exceed the LOC Committed Amount (other than in as a result of a reduction of the LOC Committed Amount pursuant to the definition thereof, but only if such excess has been cash collateralized in accordance with the terms hereof), (iii) the Swingline Loans shall not exceed the Swingline Committed Amount, and (iv) the aggregate principal amount of outstanding Revolving Loans denominated in any Alternative Currency plus LOC Obligations denominated in any Alternative Currency shall not exceed the Alternative Currency Sub-Limit. For purposes of completing the calculations set forth in this Section 3.2(d),

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Revolving Loans and LOC Obligations denominated in Alternative Currencies shall be redenominated in Dollars in an amount equal to the Dollar Equivalent thereof.

     (e) Additional Conditions to Revolving Loans. If such Loan is made pursuant to Section 2.1, all applicable conditions set forth in such Section shall have been satisfied.

     (f) Additional Conditions to Letters of Credit. If such Extension of Credit is made pursuant to Section 2.3, all applicable conditions set forth in such Section shall have been satisfied.

     (g) Material Adverse Change. There shall have been no Material Adverse Change to the Credit Parties and their Subsidiaries taken as whole.

     Each request for an Extension of Credit and each acceptance by the Borrower of any such Extension of Credit shall be deemed to constitute a representation and warranty by each Credit Party as of the date of such Extension of Credit that the applicable conditions in paragraphs (a) through (g) of this Section 3.2 have been satisfied.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

     To induce the Lenders to enter into this Credit Agreement and to make the Extension of Credit herein provided for, each of the Credit Parties hereby represents and warrants to the Administrative Agent and to each Lender that:

     Section 4.1. Existence and Power. Each of the Credit Parties (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) is duly qualified to transact business in every jurisdiction where, by the nature of its business, such qualification is necessary, except for such jurisdictions where the failure to so qualify could not reasonably be expected to have a Material Adverse Effect, and (c) has all organizational powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except for those licenses, permits or other approvals, the absence of which could not reasonably be expected to have a Material Adverse Effect.

     Section 4.2. Organizational and Governmental Authorization; No Contravention. The execution, delivery and performance by each Credit Party of the Credit Documents to which each such Credit Party is a party (a) are within each such Credit Party’s organizational powers, (b) have been duly authorized by all necessary organizational action, (c) except for filings relating to the perfection of security interests under the Security Documents (all of which have been obtained to the extent required thereunder) require no action by or in respect of, or filing with, any governmental body, agency or official, (d) do not contravene any provision of any Applicable Law or regulation or of the organizational documents of each Credit Party or of any judgment, injunction, order, decree, or constitute a default under any material agreement binding upon the Credit Parties or any of their Subsidiaries, and (e) except as contemplated by the

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Security Documents, do not result in the creation or imposition of any Lien on any asset of the Credit Parties or any of their Subsidiaries.

     Section 4.3. Binding Effect. This Credit Agreement constitutes a valid and binding agreement of each Credit Party enforceable in accordance with its terms, and the Notes and the other Credit Documents, when executed and delivered in accordance with this Credit Agreement, will constitute valid and binding obligations of the Credit Parties enforceable in accordance with their respective terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to Insolvency Laws.

     Section 4.4. Financial Information. (a) The consolidated balance sheet of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries) as of December 31, 2005 and the related consolidated statements of income, shareholders’ equity and cash flows for the Fiscal Year then ended, reported on by a Big 4 Accounting Firm, copies of which have been delivered to each of the Lenders, fairly present, in conformity with GAAP, the consolidated financial position of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries) as of such dates and their consolidated results of operations and cash flows for such periods stated.

     (b) Since December 31, 2005, there has been no event, act, condition or occurrence which has had or could reasonably be expected to have a Material Adverse Effect.

     Section 4.5. Litigation. There is no investigation, action, suit or proceeding pending, or to the knowledge of the Credit Parties threatened, against or affecting any Credit Party or any Subsidiary (including Unrestricted Subsidiaries) of a Credit Party before any court or arbitrator or any governmental body, agency or official which could reasonably be expected to have a Material Adverse Effect or which purports to affect the validity or enforceability of the Credit Documents.

     Section 4.6. Compliance with ERISA. (a) The Borrower and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA.

     (b) Neither the Borrower nor any member of the Controlled Group is or ever has been obligated to contribute to any Multiemployer Plan.

     (c) The assets of Borrower or any Subsidiary do not and will not constitute “plan assets,” within the meaning of ERISA, the Code and the respective regulations promulgated thereunder. The execution, delivery and performance of this Credit Agreement, and the borrowing and repayment of amounts hereunder, do not and will not constitute “prohibited transactions” under ERISA or the Code.

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     Section 4.7. Taxes. There have been filed on behalf of the Borrower and its Subsidiaries all Federal tax returns and, to the Borrower’s knowledge all state and local income, excise, property and other tax returns which are required to be filed by them and all taxes due (including pursuant to such returns or pursuant to any assessment received) by or on behalf of the Borrower or any Subsidiary have been paid prior to becoming delinquent (other than taxes currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower). The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate.

     Section 4.8. Subsidiaries. Each of the Borrower’s Subsidiaries (including Unrestricted Subsidiaries) (a) is an entity duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, except as could not reasonably be expected to have a Material Adverse Effect, (b) is duly qualified to transact business in every jurisdiction where, by the nature of its business, such qualification is necessary, except for such jurisdictions where the failure to qualify could not reasonably be expected to have a Material Adverse Effect, and (c) has all organizational powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted except those licenses, permits or other approvals, the absence of which could not reasonably be expected to have a Material Adverse Effect. As of the date hereof, the Borrower has no Subsidiaries except those Subsidiaries listed on Schedule 4.8, which accurately sets forth each such Subsidiary’s complete name and jurisdiction of incorporation.

     Section 4.9. Investment Company Act. None of the Credit Parties is (i) an “investment company” or a company controlled by an “investment company” that has elected to be regulated as a “business development company” within the meaning of the Investment Company Act, or (ii) a person qualifying for treatment as a “regulated investment company” under the Code.

     Section 4.10. [Reserved]

     Section 4.11. Ownership of Property. Each Credit Party and each of their Subsidiaries has title to its properties sufficient for the conduct of its business and, in the case of the Credit Parties, free and clear of all Liens (other than Permitted Liens).

     Section 4.12. No Default. None of the Credit Parties nor any of their respective Subsidiaries is in default under or with respect to any agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound which could reasonably be expected to have a Material Adverse Effect. No event has occurred and is continuing and no condition exists, or would result from the Extension of Credit or from the application of the proceeds therefrom, which constitutes a Default or Event of Default.

     Section 4.13. Full Disclosure.

     (a) None of the factual information (other than projections) heretofore furnished (including any information furnished in public filings) in writing by any Credit

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Party for purposes of or in connection with this Credit Agreement contains any untrue statement of a material fact, or when taken together with all other written information so furnished omits to state any material fact necessary to make any information not materially misleading.

     (b) Any projections heretofore furnished by the Borrower to the Administrative Agent for purposes of or in connection with the Credit Agreement were prepared in good faith on the basis of the assumptions stated therein, which assumptions were fair in light of the conditions existing at the time of delivery of such forecasts, and represented, at the time of the delivery, the Borrower’s best estimate of its future financial performance.

     (c) Each Credit Party has disclosed to the Lenders in writing any and all facts which are reasonably likely to have a Material Adverse Effect.

     Section 4.14. Environmental Matters. Except as could not reasonably be expected to have a Material Adverse Effect:

     (a) None of the Credit Parties nor any of their Subsidiaries (including Unrestricted Subsidiaries) is subject to any Environmental Liability and none of the Credit Parties or any their Subsidiaries (including Unrestricted Subsidiaries) has been designated as a potentially responsible party under CERCLA. None of the Properties has been identified on any current or proposed (i) National Priorities List under 40 C.F.R. § 300, (ii) CERCLIS list, or (iii) any list arising from a state statute similar to CERCLA.

     (b) No Hazardous Materials have been or are being used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed or otherwise handled at, or shipped or transported to or from the Properties or are otherwise present at, on, in or under the Properties, or, to the best of the knowledge of any Credit Party, at or from any adjacent site or facility, except for Hazardous Materials, such as cleaning solvents, pesticides and other materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, and managed or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Requirements.

     (c) Each Credit Party and each of their Subsidiaries (including Unrestricted Subsidiaries) has procured all Environmental Authorizations necessary for the conduct of its business, and is in compliance with all Environmental Requirements in connection with the operation of the Properties and the Credit Parties, and each of their respective Subsidiary’s (including Unrestricted Subsidiaries) respective businesses.

     Section 4.15. Compliance with Laws. Each Credit Party and each Subsidiary (including Unrestricted Subsidiaries) of the Credit Parties is in compliance with all Applicable Laws, including, without limitation, all Environmental Laws except in such instances in which failure

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to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

     Section 4.16. Capital Stock. All Capital Stock, debentures, bonds, notes and all other securities of the Credit Parties and their Subsidiaries presently issued and outstanding are validly issued in accordance with all Applicable Laws, including, but not limited to, the “Blue Sky” laws of all applicable states and the federal securities laws. As of the Closing Date the issued shares of Capital Stock of each Credit Party’s respective Wholly Owned Subsidiaries are owned by the Credit Parties free and clear of any Lien or adverse claim except for Liens described on Schedule 4.16.

     Section 4.17. Margin Stock. None of the Credit Parties or any of their Subsidiaries is engaged in the business of extending credit for the purpose of “purchasing” or “carrying” any Margin Stock. The Credit Parties do not own any Margin Stock (other than any shares of Capital Stock of the Healthcare REIT listed on a U.S. national securities exchange or the NASDAQ Stock Market and which are held by a Credit Party), and no portion of the proceeds of any Loan hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying any Margin Stock, for the purpose of reducing or retiring any Debt that was originally incurred to purchase or carry any Margin Stock or for any other purpose that might cause any portion of such proceeds to be considered a “purpose credit” within the meaning of Regulation T, U or X of the Board of Governors of the Federal Reserve System. The Credit Parties will not take or permit to be taken any action that might cause any Credit Document to violate any regulation of the Board of Governors of the Federal Reserve System.

     Section 4.18. Insolvency. After giving effect to the execution and delivery of the Credit Documents and each Extension of Credit under this Credit Agreement, none of the Credit Parties will be “insolvent,” within the meaning of such term as defined in the Bankruptcy Code or Section 2 of the Uniform Fraudulent Transfer Act, or any other applicable state law pertaining to fraudulent transfers, as each may be amended from time to time, or be unable to pay its debts generally as such debts become due, or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated.

     Section 4.19. Available Assets. The information contained in the Monthly Report delivered pursuant to Section 5.2(b) is an accurate and complete listing in all material respects of all Qualified Available Assets, and the information contained therein with respect to the identity of such Qualified Available Assets and the amounts owing thereunder is true and correct in all material respects. Each of the Credit Parties, the Collateral Real Property Non-Credit Parties and the Collateral Securitization Note Non-Credit Parties owns and has good and marketable title to the Qualified Available Assets attributable to it and each such Qualified Available Asset and the Related Property is free and clear of any Lien of any Person (other than Permitted Liens). All of the Available Assets are owned directly by a Credit Party (or directly by (x) a Collateral Real Property Non-Credit Party in the case of Real Property Owned or (y) a Collateral Securitization Note Non-Credit Party in the case of CapitalSource Securitization Notes). At all times on and after January 15, 2009, the Agent’s Liens in such Available Assets (or in the case of (x) Real

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Property Owned, the Capital Stock of, as applicable, a Collateral Real Property Non-Credit Party, Tier 1 Real Property Owned Subsidiary or Tier 2 Real Property Owned Subsidiary or (y) CapitalSource Securitization Notes, the Capital Stock of a Collateral Securitization Note Non-Credit Party) are validly created, perfected and first priority Liens, subject only to Permitted Liens which by operation of law or contract have priority over the Liens securing the Credit Party Obligations.

     Section 4.20. Labor Matters. There are no significant strikes, lockouts, slowdowns or other labor disputes against the Credit Parties pending or, to the knowledge of the Credit Parties, threatened. The hours worked by and payment made to employees of the Credit Parties and each Subsidiary of the Credit Parties have not been in violation of the Fair Labor Standards Act or any other applicable federal, state or foreign law dealing with such matters, except in such instances in which the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

     Section 4.21. Patents, Trademarks, Etc. To the best of their knowledge, the Credit Parties and each Subsidiary of the Credit Parties owns, or is licensed to use, all patents, trademarks, trade names, copyrights, technology, know-how and processes, service marks and rights with respect to the foregoing that are (a) necessary for the conduct of their respective businesses as currently conducted, and (b) material to the businesses, financial condition, operations, or properties, of the Credit Parties and their Subsidiaries taken as a whole. To the Credit Parties knowledge, the use of such patents, trademarks, trade names, copyrights, technology, know-how, processes and rights with respect to the Credit Parties and their Subsidiaries, does not infringe on the rights of any Person in any manner which could reasonably be expected to cause a Material Adverse Effect.

     Section 4.22. Tax Shelter Regulations. Borrower does not intend to treat the Loans and advances and related transactions as being a “reportable transaction” (within the meaning of Treasury Regulation Section 1.6011-4). In the event Borrower determines to take any action inconsistent with such intention, it will promptly notify Administrative Agent thereof. If Borrower so notifies Administrative Agent, Borrower acknowledges that one or more of the Lenders may treat its Revolving Loans and/or its interest in Swingline Loans as part of a transaction that is subject to Treasury Regulation 301.6112-1, and that such Lender or Lenders, as applicable, will maintain the lists and other records required by such Treasury Regulation.

     Section 4.23. All Consents Required. All approvals, authorizations, consents, orders or other actions of any Person or of any Governmental Authority (if any) required in connection with the due execution, delivery and performance by the Credit Parties of this Credit Agreement and any Credit Document to which the Credit Parties are a party, have been obtained.

     Section 4.24. Selection Procedures. No procedures believed by the Credit Parties to be adverse to the interests of the Administrative Agent and the Lenders were utilized by the Credit Parties in identifying and/or selecting the Investments that are part of the Available Assets and Qualified Available Assets; it being understood that the selection procedures used by the Credit Parties for the inclusion of Investments in one or more of its Securitization Transactions or other

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financing facilities and which are solely intended to obtain the most beneficial advance rates thereunder and/or otherwise maximize the efficiency of such facilities shall not be deemed to be adverse procedures for the purposes of this Section.

     Section 4.25. Location of Collateral. As of December 23, 2008 and as of the 45^th calendar day following each calendar quarter (or, with respect to any calendar quarter, such earlier time as when the Initial Borrower delivers its quarterly report on Form 10-Q for such quarter to the Administrative Agent), set forth on Schedule 4.25 is a list (as such list may be updated from time to time by the Borrower by giving written notice thereof to the Administrative Agent) of: (a) the Properties of the Credit Parties located in the United States with street address, county and state where located; (b) all locations where any material tangible personal property (other than personal property in transit) of the Credit Parties is located; and (c) the state of formation or organization, chief executive office and principal place of business of each of the Credit Parties.

     Section 4.26. Credit and Collection Policy; Residential Mortgage Policies and Procedures. The copy of the Residential Mortgage Policies and Procedures and the Credit and Collection Policy, attached hereto as Schedule 1.1(a) and Schedule 4.26, respectively, are true, complete and accurate as of the Closing Date. Since the date hereof, there have been no material changes in any Credit and Collection Policy or the Residential Mortgage Policies and Procedures other than in accordance with this Credit Agreement. Since December 31, 2005, no Material Adverse Change has occurred in the overall rate of collection of the Investment Loans and Investments in Equity Instruments, and Borrower has at all times complied in all material respects and to the extent applicable with the Credit and Collection Policy with respect to each Investment Loan and each Investment in Equity Instruments.

     Section 4.27. Compliance with OFAC Rules and Regulations. None of the Borrower, any Subsidiary (including Unrestricted Subsidiaries) of the Borrower, any Guarantor or, to the Borrower’s knowledge, any Affiliate of the Borrower or any Guarantor (i) is a Sanctioned Person, or (ii) derives any of its operating income from investments in, or transactions with, Sanctioned Persons or Sanctioned Entities. The proceeds of any Loan will not be used and have not been used to fund any operations in, finance any investments or activities in or make any payments to, a Sanctioned Person or a Sanctioned Entity.

     Section 4.28. REIT Status. Until the REIT Revocation Date, the Initial Borrower will: (a) operate its business so as to satisfy all requirements necessary to qualify as a REIT, and will not intentionally take any action that will cause Initial Borrower to fail to so qualify; (b) maintain adequate records so as to comply with all record-keeping requirements relating to its qualification as a REIT as required by the Code and applicable regulations of the Department of Treasury promulgated thereunder and will properly prepare and timely file with the Internal Revenue Service all returns and reports required thereby to qualify as a REIT; and (c) will timely request (has requested) from its shareholders all information required by the Code and applicable regulations of the Department of Treasury promulgated thereunder to qualify as a REIT.

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     Section 4.29. Security Documents. The Security Documents create, or, when executed and delivered in accordance with the requirements hereof, will create, valid security interests in, and Liens on, the Collateral purported to be covered thereby, which security interests and Liens are currently (or will be, upon the execution of such Security Document, including control agreements with respect to deposit and securities accounts and the filing or recording of appropriate financing statements, in each case in favor of the Administrative Agent on behalf of the Lenders) perfected security interests and Liens to the extent required therein, prior to all other Liens (other than Permitted Liens which by operation of law or contract have priority over the Liens securing the Credit Party Obligations).

     Section 4.30. Deposit Accounts. Set forth on Schedule 4.30 (as updated pursuant to the provisions of the Security Agreement from time to time) is a listing of all of each Credit Parties’ deposit accounts, including, with respect to each bank or securities intermediary (a) the name and address of such Person, and (b) the account numbers of the deposit accounts maintained with such Person.

     Section 4.31. Holding Company. CS FII is a holding company and does not have any liabilities (other than liabilities arising under the Credit Documents or immaterial liabilities incidental to its status as a holding company) or engage in any operations or business (other than the ownership of Capital Stock of certain Persons, which Capital Stock is held free and clear of all Liens (other than Permitted Liens) and is subject to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Pledge Agreement.

ARTICLE V

COVENANTS

     Each Credit Party hereby covenants and agrees that, on the Closing Date, and thereafter for so long as this Credit Agreement is in effect and until all of the Commitments have terminated, no Note remains outstanding and unpaid and the Credit Party Obligations under the Credit Documents, together with interest, Commitment Fees and all other amounts owing to the Agent or any Lender hereunder, are paid in full:

     Section 5.1. Financial Statements.

     Initial Borrower shall furnish to the Administrative Agent and each of the Lenders:

     (a) Annual Financial Statements. As soon as available, but in any event within ten (10) days of the date the Initial Borrower is required to file its Form 10-K with the SEC (without giving effect to any extension of such due date, whether obtained by filing the notification permitted by Rule 12b-25 or any successor provision thereto or otherwise), a copy of the consolidated and consolidating balance sheet of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries to the extent such Unrestricted Subsidiaries are consolidated with the Initial Borrower in accordance with GAAP) as at the end of such Fiscal Year and the related consolidated

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and consolidating statements of income, cash flows and retained earnings of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries to the extent such Unrestricted Subsidiaries are consolidated with the Initial Borrower in accordance with GAAP) for such year, audited by a Big 4 Accounting Firm, setting forth in each case in comparative form the figures for the preceding Fiscal Year, reported on without a “going concern” or like qualification, exception or assumption, or qualification or assumption indicating that the scope of the audit was inadequate to permit such independent certified public accountants to certify such financial statements without such qualification; provided, however, that, notwithstanding the foregoing, in no event shall such consolidating balance sheet or consolidating statements of income, cash flows and retained earnings be required to be delivered prior to March 31^st of the applicable calendar year;

     (b) Quarterly Financial Statements. As soon as available and in any event within ten (10) days of the date the Initial Borrower is required to file its Form 10-Q with the SEC (without giving effect to any extension of such due date, whether obtained by filing the notification permitted by Rule 12b-25 or any successor provision thereto or otherwise), a company-prepared consolidated and consolidating balance sheet of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries to the extent such Unrestricted Subsidiaries are consolidated with the Initial Borrower in accordance with GAAP) as at the end of such period and related company-prepared consolidated and consolidating statements of income, cash flows and retained earnings for the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries to the extent such Unrestricted Subsidiaries are consolidated with the Initial Borrower in accordance with GAAP) for such quarterly period and for the portion of the Fiscal Year ending with such period, in each case setting forth in comparative form the figures for the corresponding period or periods of the preceding Fiscal Year (subject to normal recurring year-end audit adjustments) certified as to fairness of presentation, GAAP and consistency by the Chief Financial Officer of the Initial Borrower; and

all such financial statements to fairly present in all material respects the financial condition and results from operations of the entities and for the periods specified and to be prepared in reasonable detail and in accordance with GAAP (subject, in the case of interim statements, to normal year-end audit adjustments) applied consistently throughout the periods reflected therein and, if applicable, accompanied by a description of, and an estimation of the effect on the financial statements on account of, a change in the application of accounting principles as provided in Section 1.3.

     Section 5.2. Certificates; Other Information.

     Initial Borrower shall furnish to the Administrative Agent and each of the Lenders:

     (a) concurrently with the delivery of the financial statements referred to in Sections 5.1(a) and 5.1(b) above, a certificate of a Responsible Officer substantially in the form of Exhibit H (“Compliance Certificate”) stating that (i) such financial

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statements present fairly the financial position of the Initial Borrower and its Consolidated Subsidiaries (including Unrestricted Subsidiaries to the extent such Unrestricted Subsidiaries are consolidated with the Initial Borrower in accordance with GAAP) for the periods indicated in conformity with GAAP applied on a consistent basis, (ii) each Credit Party during such period observed or performed in all material respects all of its covenants and other agreements, and satisfied in all material respects every condition, contained in this Credit Agreement to be observed, performed or satisfied by it, and (iii) such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and if any Default then exists, setting forth the details thereof and the action which the Initial Borrower is taking or proposes to take with respect thereto, and including calculations in reasonable detail required to indicate compliance with Sections 5.8, 5.28 and 5.32 as of the last day of such period;

     (b) within fifteen (15) Business Days after the end of each calendar month, a monthly report (the “Monthly Report”) signed by a Responsible Officer of the Initial Borrower and substantially in the form of Exhibit I; and

     (c) promptly, such additional financial and other information as the Administrative Agent, on behalf of any Lender, may from time to time reasonably request.

     Section 5.3. Payment of Taxes and Other Obligations.

     The Credit Parties will, and will cause each of their Subsidiaries (including Unrestricted Subsidiaries, other than the Healthcare REIT and its Subsidiaries to the extent that any related non-payment or non-discharge or non-satisfaction by such Healthcare REIT and its Subsidiaries would not reasonably be expected to result in or have a Material Adverse Effect) to pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, (subject, where applicable, to specified grace periods) all (a) Federal taxes, and (b) promptly upon obtaining knowledge thereof, all state and local taxes, assessments and governmental charges the nonpayment of which could reasonably be expected to result in a material liability or asset impairment, and any additional costs that are imposed as a result of any failure to so pay, discharge or otherwise satisfy such taxes, obligations and liabilities, except when the amount or validity of any such taxes, obligations and liabilities is currently being contested in good faith by appropriate proceedings and reserves, if applicable, in conformity with GAAP with respect thereto have been provided on the books of the Credit Parties.

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     Section 5.4. Notices.

     Immediately after any Credit Party becomes aware thereof give written notice to the Administrative Agent (which shall promptly transmit such notice to each Lender) of the occurrence of any Default or Event of Default, and promptly (but in no event later than three (3) Business Days after a Responsible Officer of any Credit Party obtains actual knowledge thereof) give written notice of the following to the Administrative Agent (which shall promptly transmit such notice to each Lender):

     (a) the occurrence of any default or event of default under any Contractual Obligation of any of the Credit Parties or any Subsidiary which could reasonably be expected to have a Material Adverse Effect or result in monetary liability in excess of $10,000,000;

     (b) any litigation, or any investigation or proceeding affecting any of the Credit Parties which, could reasonably be expected to have a Material Adverse Effect;

     (c) any order, judgment or decree exceeding $10,000,000 having been entered against any of the Credit Parties or any Subsidiary;

     (d) (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC (other than a Permitted Lien) or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan, or (ii) the institution of proceedings or the taking of any other action by the PBGC or any Credit Party or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan;

     (e) any notice of any material violation received by any Credit Party from any Governmental Authority;

     (f) any other development or event which could reasonably be expected to have a Material Adverse Effect; and

     (g) any attachment, Lien or levy exceeding $2,000,000 that could reasonably be expected to be assessed against any Credit Party (other than Permitted Liens).

Each notice pursuant to this Section 5.4 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Credit Party proposes to take with respect thereto. In the case of any notice of a Default or Event of Default, such Credit Party shall specify that such notice is a Default or Event of Default notice on the face thereof.

     Section 5.5. Inspection of Property, Books and Records.

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     Each Credit Party will: (a) keep, and will cause each Subsidiary (including Unrestricted Subsidiaries, other than the Healthcare REIT to the extent such matters would not reasonably be expected to result in or have a Material Adverse Effect) to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities; (b) to the extent permitted by law or regulation (but excluding for such purpose any law or regulation with respect to the enforcement of a contractual obligation), permit, and will cause each Subsidiary (including Unrestricted Subsidiaries) of the Credit Parties to permit, during regular business hours, upon not less than five (5) days prior notice which notice shall not be required in the case of a Default or an Event of Default having occurred, the Administrative Agent or its designee, at the expense of the Borrower, to perform periodic field audits and investigations of the Borrower and the Qualified Available Assets, from time to time, provided that the field audits and investigations at the Borrower’s headquarters in Chevy Chase, Maryland shall be no more frequent than twice each Fiscal Year (in the absence of an Event of Default); and (c) to the extent permitted by law or regulation (but excluding for such purpose any law or regulation with respect to the enforcement of a contractual obligation), permit and will cause each Subsidiary (including Unrestricted Subsidiaries) to permit, representatives of the Administrative Agent and any Lender at the expense of the Administrative Agent or such Lender, as applicable, prior to the occurrence of an Event of Default and at the Borrower’s expense after the occurrence of an Event of Default to visit and inspect, during regular business hours, any of their respective properties, to examine and make abstracts from any of their respective books and records (including computer tapes and disks) and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. Each Credit Party agrees to cooperate and assist in such visits and inspections; provided that such visits and inspections shall be no more frequent than twice each Fiscal Year so long as no Event of Default shall have occurred and be continuing, and as often as may reasonably be desired in the event that an Event of Default shall have occurred and be continuing. Notwithstanding anything to the contrary contained herein, all Customer Information reviewed pursuant to this Section 5.5 shall be subject to Section 9.15.

     Section 5.6. Acquisitions.

     Neither the Borrower nor any Subsidiary of the Borrower shall consummate any Acquisition, unless (a) the line or lines of business of the Person to be acquired are substantially the same as or related to one or more Permitted Lines of Business, (b) no Default or Event of Default shall have occurred and be continuing either immediately prior to or immediately after giving effect to such Acquisition and no less than three (3) Business Days after the date such Acquisition is effective the Initial Borrower provides to the Administrative Agent and Lenders pro forma financial statements confirming the Initial Borrower will be in pro forma compliance with Section 5.32, and (c) the Person acquired shall be (i) a Subsidiary or merged into a Subsidiary, (ii) any CapitalSource Bank Entity as contemplated by the CapitalSource Bank Acquisition Agreement or (iii) be merged into the Borrower immediately upon consummation of the Acquisition (or if assets are being acquired, the acquiror shall be the Borrower or a Subsidiary of the Borrower).

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     Section 5.7. Restricted Payments.

     The Credit Parties shall not make any Restricted Payment if on or after the REIT Revocation Date, a Default or an Event of Default shall have occurred and be continuing or would result from (or occur immediately after) the making of such Restricted Payment. Notwithstanding the foregoing, in no event shall the aggregate amount of all payments on account of the purchase, redemption, retirement or acquisition of (i) any shares of the Initial Borrower’s Capital Stock (except shares acquired upon the conversion thereof into other shares of its capital stock) or (ii) any option, warrant or other right to acquire shares of the Initial Borrower’s Capital Stock exceed $10,000,000 from and after July 10, 2009.

     Section 5.8. Capital Expenditures.

     Capital Expenditures will not exceed in the aggregate in any Fiscal Year the sum of $25,000,000.

     Section 5.9. Additional Guarantors.

     (a) Initial Borrower will cause each of its First Tier Domestic Subsidiaries and each of its First Tier Foreign Subsidiaries, whether newly formed, after acquired or otherwise existing, to promptly (and in any event within thirty (30) days after such Subsidiary is formed or acquired (or such longer period of time as agreed to by the Administrative Agent in its reasonable discretion)) become a Guarantor hereunder by way of execution of a Joinder Agreement; provided that, First Tier Foreign Subsidiaries shall not be required to become a Guarantor if it would be unlawful or would cause any material adverse tax consequences to the Initial Borrower or such First Tier Foreign Subsidiary. The Initial Borrower may also at any time voluntarily cause any of its Wholly Owned Subsidiaries (other than First Tier Domestic Subsidiaries or First Tier Foreign Subsidiaries) to become a Guarantor hereunder by way of execution of a Joinder Agreement. In addition, Initial Borrower shall, and shall cause CSI to, enter into the Guaranty Agreement prior to or simultaneous with CSF becoming a Borrower hereunder and shall maintain, and shall cause CSI to maintain, the Guaranty Agreement in full force and effect and shall perform and observe all of the terms and provisions of the Guaranty Agreement to be performed or observed by it, and cause CSI to do the same, until such time as the Release Condition has been satisfied. Upon satisfaction of the Release Condition, the Guaranty Agreement shall be terminated and the Administrative Agent shall promptly (and in any event within five (5) Business Days after the written request of the Initial Borrower) execute such documents as may reasonably be requested by the Initial Borrower to evidence such termination.

     (b) At the time that any Person becomes a Guarantor, such Guarantor shall provide the Agent with (i) a joinder to the Security Agreement, together with such other security documents, as well as appropriate financing statements, all in form and substance reasonably satisfactory to the Agent, (including being sufficient to grant Agent a first priority Lien (subject to Permitted Liens which by operation of law or contract have

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priority over the Liens securing the Credit Party Obligations) in and to the Collateral of such Guarantor covered thereby in a manner consistent with the requirements of the Security Agreement), (ii) a joinder to the Pledge Agreement and appropriate certificates and powers or financing statements, as applicable, hypothecating the Collateral of such Guarantor covered by the Pledge Agreement and all of the direct or beneficial ownership interest in such new Guarantor, all in form and substance reasonably satisfactory to the Agent, (including being sufficient to grant Agent a first priority Lien (subject to Permitted Liens which by operation of law or contract have priority over the Liens securing the Credit Party Obligations) in and to the Collateral of such Guarantor and such interest in such Guarantor covered thereby in a manner consistent with the requirements of the Pledge Agreement), and (iii) if requested by the Agent, opinions of counsel reasonably satisfactory to Agent with respect to, among other things, the execution and delivery of the applicable documentation referred to in Section 5.9(a) above and this Section 5.9(b). Any document, agreement, or instrument executed or issued pursuant to this Section 5.9 shall be a Credit Document.

     (c) With respect to any Subsidiary of the Borrower that becomes a Guarantor on or after December 23, 2008, if requested by the Initial Borrower, the obligations of such Guarantor under the Guaranty may be terminated and the Administrative Agent shall execute such documents as may reasonably be requested by the Initial Borrower to evidence such termination; provided, however, that such termination shall include a release of all Collateral owned by such Guarantor and such termination and release shall be permitted only if (i) such release of Collateral would otherwise be permitted pursuant to clauses (i) or (ii) of Section 8.11(a); (ii) no Default or Event of Default shall have occurred and be continuing either immediately prior to or immediately after giving effect to such termination and release; (iii) the Credit Parties are in pro forma compliance with Section 5.32, both before and after giving effect to such termination and release; and (iv) all costs and expenses of such release notified to any Credit Party are paid for by the Credit Parties.

     Section 5.10. Payments on 2009-2012 Debt Issuance or the HY Intercompany Notes. Other than with the consent of the Majority Extending Lenders, no Credit Party nor any of its Subsidiaries (including Unrestricted Subsidiaries) shall make any payment on account of any HY Intercompany Notes or any Debt or other obligations following the incurrence thereof with respect to any 2009-2012 Debt Issuance (other than (i) scheduled payments of interest and (ii) payments required under the 2009-2012 Debt Documentation but solely with the Collateral Proceeds).

     Section 5.11. Ownership of Credit Parties; Restrictions.

     No Credit Party shall (i) sell, transfer, pledge or otherwise dispose of any Capital Stock or other equity interest in any other Credit Party that is a Subsidiary of the Initial Borrower and (ii) no Credit Party that is a Subsidiary of the Initial Borrower may issue or sell its Capital Stock,

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except that in the case of clause (i) or (ii) such Capital Stock or other equity interest of such Subsidiary may be transferred or issued directly to another Credit Party subject to Section 5.22.

     Section 5.12. Maintenance of Existence.

     Each Credit Party will and will cause each Subsidiary of a Credit Party, except as otherwise permitted by Section 5.13 and 5.14, to continue to engage in business of the same general type as any of the Permitted Lines of Business, preserve and maintain its existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing in each jurisdiction where the failure to maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a Material Adverse Effect (it being the understanding that the Initial Borrower may become a Bank Holding Company if and to the extent that the Board of Governors of the Federal Reserve System approves Initial Borrower’s application to become a Bank Holding Company).

     Section 5.13. Dissolution.

     None of the Credit Parties or any Subsidiary of a Credit Party shall suffer or permit dissolution or liquidation, except (a) through corporate reorganization, merger, asset sale or similar transaction to the extent permitted by Section 5.14; (b) the dissolution or liquidation of Subsidiaries which are not Credit Parties, provided that: (i) if such Subsidiary is a Wholly Owned Subsidiary, it transfers all of its assets to a Credit Party or a Wholly Owned Subsidiary prior to such liquidation or dissolution; (ii) such Subsidiary has no assets at the time of such liquidation or dissolution; and (iii) immediately after giving effect thereto no Default or Event of Default would exist.

     Section 5.14. Consolidations, Mergers and Sales of Assets. (a) None of the Credit Parties will, nor will they permit any Subsidiary of a Credit Party to, consolidate or merge with or into any other Person; provided that (i) any Credit Party may merge with another Person if (A) in the case of any Credit Party that is organized under the laws of the United States of America or one of its states, such Person is organized under the laws of the United States of America or one of its states, (B) a Credit Party is the entity surviving such merger or the surviving entity becomes a Credit Party hereunder upon the effectiveness of such merger, and in any consolidation or merger involving the Borrower, the Borrower shall be the surviving entity, and (C) immediately after giving effect to such merger, no Default or Event of Default shall have occurred and be continuing, and (ii) Subsidiaries of the Initial Borrower (which are not Credit Parties) may merge with (1) one another or into the Initial Borrower or any Credit Party, or (2) another Person in connection with a transaction permitted by, and subject to the satisfaction of the conditions set forth in, Section 5.6.

     (b) None of the Credit Parties will sell or otherwise dispose of assets except (i) any Credit Party may sell Portfolio Investments (including, but not limited to, Investment Loans and Investments in Equity Instruments) in the ordinary course of business, or (ii) any Credit Party may make any other disposition on arm’s length terms (provided that such arm’s length requirement shall not apply to (A) dispositions to another Credit Party, (B) to the extent

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constituting a disposition of assets of a Credit Party, transactions expressly permitted pursuant to clauses (a) — (f) of Section 5.24, provided that, in the case of any transaction covered by clauses (a) and (b) of Section 5.24, the cash proceeds received in connection with such transaction are promptly transferred to a Credit Party, (C) dispositions of cash and Cash Equivalents in the ordinary course of business consistent with past practice, so long as the Credit Parties continue to be in compliance with the requirements of Section 5.37 and (D) dispositions of an Investment Loan to an Investment Loan Subsidiary in connection with the exercise of remedies under any Investment Loan; provided that the cash proceeds of such exercise of remedies are promptly transferred to a Credit Party) so long as prior to such sale no Default or Event of Default exists and immediately after giving effect to such sale, no Default or Event of Default shall exist; provided, in each case, that the Credit Parties shall at all times be in pro forma compliance with Section 5.32.

     Section 5.15. Use of Proceeds.

     (i) No Letter of Credit nor any portion of the proceeds of any Revolving Loan or any Swingline Loan will be used by any Borrower or any Subsidiary (as applicable) (a) directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, or (b) for any purpose in violation of any Applicable Law or regulation.

     (ii) The proceeds of the Revolving Loans shall be used to fund Portfolio Investments made in the ordinary course of business of any Borrower or any Subsidiary and for general corporate purposes.

     (iii) The proceeds of the Swingline Loans shall be used to fund Portfolio Investments made in the ordinary course of business of any Borrower or any Subsidiary and for general corporate purposes.

     (iv) Each Letter of Credit will be used by any Borrower or any Subsidiary for the benefit of Obligors under Investment Loans and for general corporate purposes in the ordinary course of business of the Borrower and its Subsidiaries.

     (v) The proceeds of the Revolving Loans in any Alternative Currency shall be used by any Borrower or any Subsidiary (as applicable) solely to: (a) satisfy obligations denominated in such Alternative Currency, in the ordinary course of such Person’s business; or (b) acquire Portfolio Investments; provided, that (i) such Portfolio Investments are in the same Alternative Currency and (ii) the issuer, in the case of equity interests, or the obligor, in the case of debt interests, is organized or incorporated under the laws of a jurisdiction of a Permitted Country.

     Section 5.16. Compliance with Laws.

     (a) Compliance with Laws. Each Credit Party will, and will cause each Subsidiary (including Unrestricted Subsidiaries) and each member of the Controlled Group to, comply with all Applicable Laws (including but not limited to those with respect to the Investment Loans and any Related Property), regulations and similar

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requirements of governmental authorities (including but not limited to PBGC), except where the necessity of such compliance is being contested in good faith through appropriate proceedings diligently pursued or where failure to comply could not be expected to cause a Material Adverse Effect.

     (b) ERISA Exemptions. No Credit Party shall permit any of its respective assets to become or be deemed to be “plan assets” within the meaning of ERISA, the Code and the respective regulations promulgated thereunder.

     (c) Minimum Capital Ratios and Guidelines. Each Credit Party and Subsidiary (including, without limitation, each Bank Subsidiary) shall: (i) comply with all minimum capital ratios and guidelines, including, without limitation, risk-based capital guidelines and capital leverage regulations applicable to it or its Subsidiaries (including, without limitation, each Bank Subsidiary), as may from time to time be prescribed, by regulation or enforceable order of (including, without limitation, that certain order dated June 17, 2008), or agreement or arrangement with, the Federal Deposit Insurance Corporation or other federal or state regulatory authorities having jurisdiction over such Credit Party and/or Subsidiary; and (ii), within such ratios and guidelines, to the extent the same may be applicable to it, be “adequately capitalized.”

     (d) Initial Borrower’s Compliance with Bank Holding Company Act and Regulations. If and to the extent that the Board of Governors of the Federal Reserve System approves Initial Borrower’s application to become a Bank Holding Company, Initial Borrower shall comply, in all material respects, with all conditions and requirements set forth within the Board of Governors of the Federal Reserve System’s approval, and shall comply, in all material respects, with all laws, regulations, requirements and interpretations applicable to Initial Borrower in its capacity as a Bank Holding Company, including, but not limited to: (i) the Bank Holding Company Act of 1956, as amended, and the regulations promulgated thereunder (including Regulation Y of the Board of Governors of the Federal Reserve System (12 CFR Part 225)); (ii) the requirements to manage, to serve as a “source of strength” and to adequately fund its subsidiary banks (as required by the Board of Governors of the Federal Reserve System); (iii) Sections 23A and 23B of the Federal Reserve Act and other applicable laws, regulations, and requirements regarding transactions with and between affiliates; and (iv) restrictions on extensions of credit and other transactions by and between subsidiary banks and certain bank and bank holding company officials contained in Regulation O of the Board of Governors of the Federal Reserve System.

     Section 5.17. Insurance.

     (a) Each Credit Party will maintain, and will cause each Subsidiary of a Credit Party to maintain (either in the name of such Credit Party or in such Subsidiary’s own name), insurance with financially sound and reputable insurance companies, in such amounts and against such risks as are customarily maintained by companies of established repute engaged in the same or similar business; and furnish to the

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Administrative Agent, upon written request, full information as to the insurance carried. The Administrative Agent shall be named as loss payee or mortgagee, as its interest may appear, and the Administrative Agent shall be named as an additional insured with respect to any such insurance providing coverage in respect of any Collateral, and each provider of any such insurance shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to the Administrative Agent, that it will give the Administrative Agent thirty (30) days prior written notice before any such policy or policies shall be altered or canceled, and that no act or default of any Credit Party or any other Person shall affect the rights of the Administrative Agent or the Lenders under such policy or policies. The present insurance coverage of the Credit Parties as of July 10, 2009 is outlined as to carrier, policy number, expiration date, type and amount on Schedule 5.17(a).

     (b) In case of any material casualty loss, damage to or destruction of Collateral with a value in excess of $2,000,000, such Credit Party shall promptly (and, in any event, within ten Business Days) give written notice thereof to the Administrative Agent generally describing the nature and extent of such damage or destruction. In case of any loss, damage to or destruction of any Collateral that is material to the operations of the business of any of the Credit Parties, the Initial Borrower will promptly repair or replace the Collateral so lost, damaged or destroyed unless such Credit Party shall have reasonably determined that such repair or replacement of the affected Collateral is not economically feasible or is not deemed in the best business interest of such Credit Party.

     Section 5.18. Change in Fiscal Year.

     The Borrower will not change its Fiscal Year without the consent of the Administrative Agent.

     Section 5.19. Maintenance of Property.

     Each Credit Party shall, and shall cause each Subsidiary of a Credit Party to, maintain all of its Properties and assets necessary for the conduct of its business in good condition, repair and working order, ordinary wear and tear excepted and subject to damage and destruction due to casualty events. Each Credit Party shall keep all of its assets free and clear of all Liens (other than Permitted Liens).

     Section 5.20. Environmental Laws.

     Each Credit Party shall, and shall cause each Subsidiary (including Unrestricted Subsidiaries) to:

     (a) Comply in all material respects with all applicable Environmental Laws and obtain and comply in all material respects with and maintain any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental

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Laws except, in each case, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect.

     (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings or could not reasonably be expected to have a Material Adverse Effect.

     Section 5.21. Conditional Obligations to Repurchase Loans. Except as set forth on Schedule 5.21 and in the 2009-2012 Debt Documentation, no Credit Party nor any of their respective Subsidiaries shall be subject to any conditional obligation (other than customary contingent indemnification obligations) to repurchase any loan.

     Section 5.22. Pledged Assets.

     (a) Each of the Credit Parties shall, to the extent required by the Security Documents, cause 100% of the Capital Stock owned by such Credit Party in each of its direct Subsidiaries to be subject at all times on and after January 15, 2009 to a first priority, perfected Lien in favor of the Administrative Agent.

     (b) To the extent required by the Security Documents, each Credit Party shall take such action at its own expense as requested by the Administrative Agent to ensure that the Administrative Agent has at all times on and after January 15, 2009 (in the case of control agreements described in Section 5.37, after the applicable date set forth in the Security Documents) a first priority perfected Lien to secure the Credit Party Obligations in all of the Collateral.

     Section 5.23. Compliance with Material Contracts.

     Each Credit Party will, and will cause each Subsidiary to comply with all Material Contracts except, in each case, to the extent failure to do so could not reasonably be expected to have a Material Adverse Effect.

     Section 5.24. Transactions with Affiliates.

     None of the Credit Parties nor any Subsidiary of the Credit Parties shall enter into, or be a party to, any transaction with any Affiliate of any Credit Party or such Subsidiary (which Affiliate is not a Credit Party, or a Subsidiary of a Credit Party) or any Healthcare REIT Entity (so long as such Healthcare REIT Entity is an Affiliate), except as permitted by law and in the ordinary course of business and pursuant to terms which are not materially less favorable to such Credit Party or such Subsidiary than would be obtained in a comparable arm’s length transaction with a Person which is not an Affiliate; provided that this Section 5.24 shall not apply to: (a) the origination, administration or modification of an Investment Loan (other than an Investment

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Loan to any Healthcare REIT Entity) or an Investment in Equity Instruments (other than any Investment in Equity Instruments in any Healthcare REIT Entity); (b) the exercise of any right or remedy in connection with an Investment Loan (other than an Investment Loan to any Healthcare REIT Entity) or an Investment in Equity Instruments (other than any Investment in Equity Instruments in any Healthcare REIT Entity); (c) the making of any Restricted Payment permitted pursuant to Section 5.7; (d) transactions with any CapitalSource Bank Entity entered into solely for the purpose of complying with Section 5.16(c) and the CapitalSource Bank Acquisition Agreement; (e) any transaction with any CapitalSource Bank Entity solely to the extent that the Credit Party or Subsidiary of a Credit Party that participates in such transaction (x) is required or mandated by the Federal Deposit Insurance Corporation or any other bank regulatory authority having jurisdiction over the Credit Party or Subsidiary under applicable bank regulatory law, regulation or guideline to participate in such transaction in order for such Credit Party or Subsidiary to comply with its obligations under applicable bank regulatory law, regulation or guideline and (y) cannot otherwise consummate such transaction in compliance with such requirements or mandates on arm’s length terms; (f) any transaction with the Healthcare REIT that is not material and does not involve, together with all other transactions involving any Credit Party or any of its Subsidiaries (including Unrestricted Subsidiaries) and any Healthcare REIT Entity that were on terms materially less favorable to such Credit Party or such Subsidiary than would be obtained in a comparable arm’s length transaction with a Person which is not an Affiliate, amounts, consideration and/or value in excess of $15,000,000 per calendar year; and (g) the HY Intercompany Notes.

     Section 5.25. [Intentionally Omitted]

     Section 5.26. No Restrictive Agreement.

     Except as provided in the 2009-2012 Debt Documentation, none of the Credit Parties will, and will not permit or cause any of their Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on (a) the ability of any Credit Party and its Subsidiaries to perform and comply with their respective obligations under the Credit Documents (or prepay the Credit Party Obligations), (b) the ability of any Subsidiary of the Initial Borrower that is not a Credit Party (other than the SPE Subsidiaries) or any of the CapitalSource Bank Entities (except as required by bank regulatory authorities or laws, regulations or guidelines applicable to the CapitalSource Bank Entities) to make any dividend payments or other distributions in respect of its Capital Stock, to repay Debt owed to any Credit Party or any other Subsidiary or to repay the Credit Party Obligations, except with respect to transactions described in Schedule 5.26; or (c) the ability of any Subsidiary of the Initial Borrower that is not a Credit Party (other than SPE Subsidiaries) to transfer any of its unencumbered assets or properties to any Credit Party or any other Subsidiary; provided, however, that the restriction in clause (c) above shall be limited to unencumbered assets or properties in an amount sufficient to satisfy the Available Asset Coverage Ratio set forth in Section 5.32(e).

     Section 5.27. Costs and Expenses.

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     The Borrower shall satisfy all payment obligations under Section 9.5.

     Section 5.28. Additional Debt.

     The Borrower shall not issue, assume, create, incur or suffer to exist any Debt, except for: (a) the Debt owed to the Lenders, the Issuing Lender and Swingline Lender under this Credit Agreement and the Credit Documents; (b) the Debt existing and outstanding on the Closing Date described on Schedule 5.28; (c) Debt from any 2009-2012 Debt Issuance(s); provided that (i) the aggregate principal amount of such Debt, together with the outstanding principal amount of all other Debt from all of the other 2009-2012 Debt Issuance(s), does not exceed $550,000,000; (ii) such Debt does not have a final maturity date occurring on or prior to March 31, 2013, (iii) such Debt does not provide for any amortization payments, (iv) such Debt does not have any financial maintenance covenants, (v) such Debt does not contain any cross default provision to any of the Credit Documents (for the avoidance of doubt, cross acceleration provisions and defaults for failure of the Credit Parties to make payments under other Debt are not considered cross default provisions for purposes of this clause (v)), and (vi) the terms and conditions of such Debt are set forth in the 2009-2012 Debt Documentation and are otherwise identical to the terms and conditions set forth in that certain Indenture, dated as of July 27, 2009 (and as in effect on such date), between the Borrower and the HY Trustee or on terms and conditions that are satisfactory to the Agent; (d) any additional Debt not permitted in clauses (a)-(c) of this Section 5.28 (other than Debt of a Credit Party with respect to Capital Leases, purchase money Debt and Cash Collateralized Letters of Credit); provided that (i) such Debt does not have a final maturity date occurring on or prior to March 31, 2013 and (ii) after giving effect to the incurrence of any such Debt, the Initial Borrower will be in compliance with the provisions of Section 5.32. No Credit Party shall have any Debt with respect to Capital Leases or purchase money Debt, except for Permitted Purchase Money Indebtedness. Notwithstanding anything to the contrary herein, the Borrower shall not refinance, exchange or issue any Debt or equity in exchange for the Loans held by, and/or the Credit Party Obligations of, the Non-Extending Lenders without the consent of the Majority Extending Lenders.

     Section 5.29. Lien Waivers. Each Credit Party shall use commercially reasonable efforts in obtaining executed lien waivers, on terms reasonably satisfactory to the Administrative Agent, from: (a) the landlord from whom the Initial Borrower leases its corporate headquarters and (b) such other landlords from whom any Credit Party leases real estate as the Administrative Agent shall reasonably request.

     Section 5.30. Credit and Collection Policy.

     The Borrower will and will cause each Subsidiary of the Borrower to (a) comply in all material respects with the Credit and Collection Policy in regard to each Investment Loan and each Investment in Equity Instruments and (b) furnish to the Administrative Agent and the Lenders, at least 30 days prior to the proposed effective date, notice of any changes in the Credit and Collection Policy, which notice shall include a description in reasonable detail of any material adverse effect of such changes on the Lenders, including, but not limited to any effect on the calculation of Available Assets. Notwithstanding anything to the contrary herein, if the

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Administrative Agent, in its discretion, determines that such changes may have a material adverse effect on the Lenders, the Administrative Agent may, at the Borrower’s sole cost and expense, engage a consultant or other third party to analyze the effect of any such change on the Lenders. Prior to the proposed effective date of the proposed changes to the Credit and Collection Policy, the Administrative Agent shall advise the Borrower whether the Administrative Agent consents to the proposed changes or, in the event that the Administrative Agent has retained a consultant or third party as provided in the previous sentence, if such consultant or third party requires additional time to complete its analysis. In no event shall any change to the Credit and Collection Policy become effective unless that Administrative Agent has consented in writing to such change.

     Section 5.31. REIT Status and Notice of REIT Termination.

     (a) Until the REIT Revocation Date, the Initial Borrower will satisfy all requirements necessary to qualify as a REIT.

     (b) In the event that the Initial Borrower’s Board of Directors or any Committee thereof (or any Person designated by the Board of Directors or any Committee thereof) determines to revoke the Initial Borrower’s REIT status, then within five Business Days of such event the Initial Borrower shall provide written notice of such event to the Administrative Agent (it being the understanding that a copy of any press release or any report that the Initial Borrower files with the SEC in connection with such event shall constitute notice pursuant to this Section 5.31(b)).

     Section 5.32. Financial Covenants.

     For so long as this Credit Agreement is in effect and thereafter until the payment in full of the Credit Party Obligations, Initial Borrower shall not, directly or indirectly permit:

     (a) Reserved.

     (b) Consolidated Debt to Stockholders Equity. The ratio of the Consolidated Debt to Stockholders Equity, determined as of the last day of each Fiscal Quarter, to exceed 3.5 to 1.0 for each Fiscal Quarter.

     (c) Minimum Consolidated Tangible Net Worth. Consolidated Tangible Net Worth to be less than (i) $1,725,000,000, plus (ii) 70% of the cumulative Net Proceeds of Capital Stock/Conversion of Debt received at any time after February 24, 2010.

     (d) Intentionally Omitted.

     (e) Available Asset Coverage Ratio. The Available Asset Coverage Ratio to be less than 1.00 to 1.0 on the last day of any calendar month.

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     (f) Consolidated Interest Expense. As determined on the last day of each Fiscal Quarter beginning on June 30, 2009 for the Initial Borrower, its Consolidated Subsidiaries and the CapitalSource Bank Entities determined on a consolidated basis in accordance with GAAP, for the trailing four quarter period, the ratio of (i) (1) total investment income minus (2) total operating expenses minus (3) deferred fees, discount amortization, and non-cash lease income plus (4) depreciation expense with respect Real Property Owned and any real property owned by any of the CapitalSource Bank Entities plus (5) non-cash equity compensation expense to (ii) (1) total interest expense minus (2) non-cash interest expense (including deferred financing fees and discounts) shall not be less than:

Ratio	Period
1.3:1.0	for the Fiscal Quarters ending on or before December 31, 2009
1.4:1.0	for the Fiscal Quarters ending after December 31, 2009 and on or before December 31, 2010
1.5:1.0	for the Fiscal Quarters ending after December 31, 2010.

     Section 5.33. Other.

     Each Credit Party will furnish to the Administrative Agent such other information, documents, records or reports respecting the Portfolio Investments or the portfolio investments of any Unrestricted Subsidiary (other than the Healthcare REIT) or the condition or operations, financial or otherwise, of the Credit Parties as the Administrative Agent, at the request of any Lender, may from time to time reasonably request in order to protect the interests of the Administrative Agent or the Lender under or as contemplated by this Credit Agreement.

     Section 5.34. Liens. No Credit Party shall contract, create, incur, assume, permit or suffer to exist any Lien with respect to any of their respective property or assets of any kind (whether real or personal, tangible or intangible), whether now owned or hereafter acquired, except for Permitted Liens. Notwithstanding the foregoing, if a Credit Party shall grant a Lien on any of its assets in violation of this Section 5.34, then it shall be deemed to have simultaneously granted an equal and ratable Lien on any such assets in favor of the Administrative Agent for the benefit of the Lenders.

     Section 5.35. Adverse Amendments to Debt. Except in respect of Debt set forth on Schedule 5.35 or the conversion of convertible Debt to Capital Stock that is not Prohibited Stock,

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no Credit Party shall amend or modify (or permit the amendment or modification of) any of the terms of any Debt of such Credit Party if such amendment or modification would add or change any terms in a manner materially adverse to any of the Lenders, or shorten the final maturity or average life to maturity or require any payment to be made sooner than originally scheduled.

     Section 5.36. No Further Negative Pledges.

     Following December 23, 2008, the Credit Parties shall not enter into, assume or become subject to any new agreement that prohibits or restricts (or amend, restate, supplement or modify any agreement in effect on December 23, 2008 if one of the purposes of such amendment, restatement, supplement or modification is to prohibit or otherwise restrict) the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, or requiring the grant of any security for such obligation; provided that the foregoing shall not apply to (i) restrictions or conditions imposed by any agreement relating to Permitted Purchase Money Indebtedness and Cash Collateralized Letters of Credit if such restrictions or conditions apply only to the property or assets securing such Debt, (ii) restrictions by reason of customary provisions restricting assignments, subletting or other transfers contained in leases, licenses and similar agreements entered into in the ordinary course of business (provided that such restrictions are limited to the property or assets secured by such Liens or the property or assets subject to such leases, licenses or similar agreements, as the case may be), (iii) this Agreement and the other Credit Documents, (iv) restrictions imposed by any sale agreement on the creation of Liens in any Securitization Transaction, so long as such restrictions are (A) in the case of Securitization Transactions originated by Initial Borrower or its Subsidiaries, substantially similar to those contained in the documentation for any Securitization Transaction entered into prior to December 23, 2008 and (B) in the case of any interest in Securitization Transactions originated by Persons other than the Initial Borrower or its Subsidiaries, not entered into in contemplation of the acquisition of such interest by the Initial Borrower or its Subsidiaries and are ordinarily of the type included in Securitization Transactions, and (v) restrictions or conditions set forth in the 2009-2012 Debt Documentation, and restrictions or conditions set forth in the documentation relating to any unsecured Debt Issuance that are no more burdensome to the Credit Parties than those set forth in the 2009-2012 Debt Documentation.

     Section 5.37. Bank Accounts.

     (a) No Credit Party will maintain any deposit account unless Administrative Agent, such Credit Party and the bank at which the account is (or is to be) opened enter into a “springing control” control agreement, in form and substance reasonably acceptable to the Administrative Agent, regarding such deposit account pursuant to which such bank acknowledges the security interest of Administrative Agent in such deposit account, agrees to comply with instructions originated by Administrative Agent directing disposition of the funds in the deposit account without further consent from such Credit Party.

     (b) The foregoing provisions of this Section 5.37(a) shall not apply to (i) deposit accounts specifically and exclusively used for payroll, payroll taxes and other

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employee wage and benefit payments to or for the benefit of employees and, to the extent consistent with past practice and in the ordinary course of business, contractors of the Initial Borrower and its Subsidiaries, (ii) the extent that the proceeds in any deposit account have been pledged to a Financing Agent (as defined in the Lockbox Agreement) pursuant to the Lockbox Agreement, (iii) immaterial deposit accounts; provided that the aggregate balance in all such immaterial deposit accounts of the Credit Parties not subject to a control agreement in form and substance reasonably satisfactory to the Agent (plus the balance in the deposit accounts of each of the subsidiaries of such Credit Parties) shall at all times be less than $10,000,000 plus any amounts that are inadvertently or mistakenly deposited or transferred in any such account by a third Person and which are promptly (and, in any event, within three Business Days) deposited or transferred by any Credit Party to an account subject to the control of the Agent (pursuant to a control agreement in form and substance satisfactory to the Agent), or (iv) any accounts prior to the date on which control agreements are required pursuant to the Security Documents.

     (c) The Initial Borrower and CSF shall take all action necessary to cause the Agent to be, at all times, a Financing Agent under the Lockbox Agreement with respect to the Credit Party Obligations on terms reasonably satisfactory to the Agent.

     Section 5.38. Form U-1. The Borrower will promptly upon request of the Administrative Agent complete and deliver to the Administrative Agent a duly executed Purpose Statement on Federal Reserve Form FR U-1.

     Section 5.39. Prohibited Stock. Except as set forth on Schedule 5.39, no Credit Party nor any of its Subsidiaries shall issue any Prohibited Stock.

     Section 5.40. Amendments to Security Documents. If any Security Document is amended in connection with any 2009-2012 Debt Issuance, the Credit Parties shall reimburse the Administrative Agent for its out-of-pocket expenses in connection with any such amendment (including reasonable fees and charges of counsel) and, if requested by the Agent, deliver a favorable written opinion with respect to the amended Security Documents (addressed to the Administrative Agent and the Lenders) of Hogan and Hartson LLP, in form and substance reasonably satisfactory to the Administrative Agent.

ARTICLE VI

[RESERVED]

ARTICLE VII

EVENTS OF DEFAULT

     Section 7.1. Events of Default.

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     An Event of Default shall exist upon the occurrence of any of the following specified events (each an “Event of Default”):

     (a) Payment Default. The Borrower shall fail to pay any principal on any Loan or Note when due (whether at maturity, by reason of acceleration or otherwise) in accordance with the terms thereof or hereof; or the Borrower shall fail to reimburse the Issuing Lender for any LOC Obligations when due (whether at maturity, by reason of acceleration or otherwise) in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan or Note or any fee or other amount payable hereunder when due (whether at maturity, by reason of acceleration or otherwise) in accordance with the terms thereof or hereof and such failure to pay any interest or any fee shall continue unremedied for three (3) Business Days (or any Guarantor shall fail to pay on the Guaranty Agreement in respect of any of the foregoing or in respect of any other guaranteed obligations).

     (b) Representations and Warranties. Any representation or warranty made or deemed made herein, or in any of the other Credit Documents (including, without limitation, the Security Documents) or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Credit Agreement shall prove to have been incorrect, false or misleading in any material respect on or as of the date made or deemed made.

     (c) Covenant Default. (i) Any Credit Party shall fail to perform, comply with or observe any term, covenant or agreement applicable to it contained in Sections 5.1, 5.2, 5.4, 5.6, 5.7 through 5.15, 5.16(c), 5.16(d), 5.22, 5.24, 5.28, 5.31, 5.32, 5.34, 5.35, 5.36, 5.37 or 5.38 hereof; (ii) any Credit Party shall fail to comply with any covenant contained in the Security Agreement or the Pledge Agreement and such breach or failure to comply remains uncured for ten (10) calendar days after the earlier of (A) receipt by such Credit Party of written notice of such violation, breach, or failure to comply, and (B) the time at which such Credit Party knew or became aware, or should reasonably have known or been aware, of such violation, breach, or failure to comply; or (iii) any Credit Party shall fail to comply with any other covenant contained in this Credit Agreement or the other Credit Documents (other than as described in Sections 7.1(a) or 7.1(c)(i) or 7.1(c)(ii) above), and such breach or failure to comply remains uncured for thirty (30) calendar days after the earlier of (A) receipt by such Credit Party of written notice of such violation, breach, or failure to comply, and (B) the time at which such Credit Party knew or became aware, or should reasonably have known or been aware, of such violation, breach, or failure to comply.

     (d) Debt Payment Default. Any Credit Party or any Subsidiary of a Credit Party (including a Bank Subsidiary) shall default in any payment of principal of or interest on any Debt (other than the Loans and Reimbursement Obligations) in an aggregate principal amount equal to or greater than $17,500,000 for Borrower and any of its Subsidiaries (including the Bank Subsidiaries) in the aggregate beyond any applicable

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grace period or cure period (not to exceed thirty (30) days), if any, provided in the instrument or agreement under which such Debt was created.

     (e) Debt Acceleration. Any event or condition shall occur which results in the acceleration of the maturity of Debt outstanding in an aggregate principal amount equal to or greater than $17,500,000 of the Borrower and its Subsidiaries (including the Bank Subsidiaries) or the mandatory prepayment (other than a mandatory prepayment required under the applicable Debt instrument or agreement as a result of an equity or debt issuance, disposition of assets, or casualty or condemnation event) or purchase of such Debt by the Borrower (or its designee) or such Subsidiary (including a Bank Subsidiary) of the Borrower (or its designee) prior to the scheduled maturity thereof.

     (f) Bankruptcy Default. (i) Any Credit Party or any of their Subsidiaries (including the Bank Subsidiaries) shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to have it judged bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any Credit Party or any of its Subsidiaries (including the Bank Subsidiaries) shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Credit Party or any of its Subsidiaries (including the Bank Subsidiaries) any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment, or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (iii) there shall be commenced against any Credit Party or any of its Subsidiaries (including the Bank Subsidiaries) any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; or (iv) any Credit Party or any of its Subsidiaries (including the Bank Subsidiaries) shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) or (iii) above; or (v) any Credit Party or any of its Subsidiaries (including the Bank Subsidiaries) shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; provided, however, that the provisions of this clause (f) shall not apply to any special purpose entity established solely to finance real estate assets that has an aggregate fair market value of less than $15,000,000 at the time of any such bankruptcy, insolvency or reorganization, and there is no Material Adverse Effect as a result of any such bankruptcy, insolvency or reorganization.

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     (g) Judgment Default. One or more judgments, orders, decrees or arbitration awards shall be entered against a Credit Party or any of its Subsidiaries (including the Bank Subsidiaries) involving in the aggregate a liability (to the extent not paid when due or covered by insurance) of $17,500,000 or more and all such judgments, orders, decrees or arbitration awards shall not have been paid and satisfied, vacated, discharged, stayed or bonded pending appeal within thirty (30) days from the entry thereof.

     (h) ERISA Default. The Borrower or any member of the Controlled Group shall fail to pay when due any material amount which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by the Borrower, any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within thirty (30) days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated.

     (i) Tax Lien. A federal tax lien shall be filed against the Borrower or any Subsidiary (including a Bank Subsidiary) of the Borrower under Section 6323 of the Code or a lien of the PBGC shall be filed against the Borrower or any Subsidiary (including a Bank Subsidiary) of the Borrower under Section 4068 of ERISA and in either case such lien shall remain undischarged for a period of twenty-five (25) days after the date of filing except when the amount or validity of such lien is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower.

     (j) Change of Control. A Change of Control shall have occurred.

     (k) Pro Forma Compliance. If any Credit Party or any Subsidiary of any Credit Party (a) takes any action to cause it to comply with Section 5.16(c), or (b) enters into any transaction requiring reliance on the provisions of Section 5.24(d) or Section 5.24(e), and, in any such case, the Credit Parties are not in pro forma compliance with Section 5.32 both before and after giving effect to such action or transaction.

     (l) REIT Termination. If the income taxes, withholding taxes, estimated taxes and other taxes (as well as any associated interest and penalties) attributable to the termination of the Initial Borrower’s REIT status (and payable in respect of the tax year with respect to which such termination occurs) would result in the Credit Parties not being in pro forma compliance with Section 5.32.

     (m) Failure of Credit Documents. This Credit Agreement or any other Credit Document shall for any reason cease to be valid and binding obligations of the Borrower and each Credit Party thereto or any Person acting by or on behalf of any Credit Party

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shall deny or disaffirm such Person’s obligations under this Credit Agreement or any other Credit Document.

     (n) Default under 2009-2012 Debt Issuance Documents. An event of default under any of the documentation relating to any 2009-2012 Debt Issuance has occurred (after giving effect to all applicable grace and cure periods), including, without limitation, to the extent applicable, under any HY Debt Document).

     (o) Failure to have a Lien. Except to the extent permitted by the terms hereof or thereof (including in connection with a disposition of the applicable Collateral in a transaction permitted under this Agreement), if (i) the Security Agreement or any other Credit Document (including, without limitation, the Pledge Agreement) that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected, first priority Lien on the Collateral covered thereby (subject to Permitted Liens which by operation of law or contract have priority over the Liens securing the Credit Party Obligations) or (ii) any Credit Party shall deny or disaffirm the validity or perfection of any such Lien.

     (p) HY Intercreditor Agreement. After the consummation of a secured 2009-2012 Debt Issuance, the HY Intercreditor Agreement ceases to be in full force and effect, is declared to be null and void or unenforceable or is found to be invalid.

     Section 7.2. Acceleration; Remedies.

     Upon the occurrence and during the continuation of an Event of Default, then, and in any such event, (a) if such event is an Event of Default specified in Section 7.1(f) above with respect to any Credit Party, automatically the Commitments shall immediately terminate and the Loans (with accrued interest thereon), and all other amounts under the Credit Documents (including without limitation the maximum amount of all contingent liabilities under Letters of Credit) shall immediately become due and payable, and the Borrower shall immediately pay to the Administrative Agent cash collateral as security for the LOC Obligations for subsequent drawings under then outstanding Letters of Credit in an amount equal to the maximum amount which may be drawn under Letters of Credit then outstanding, and (b) if such event is any other Event of Default, subject to the terms of Section 8.5, with the written consent of the Required Lenders, the Administrative Agent may, or upon the written request of the Required Lenders, the Administrative Agent shall, take any or all of the following actions: (i) by notice to the Initial Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; (ii) by notice of default to the Initial Borrower declare the Loans (with accrued interest thereon) and all other amounts owing under this Credit Agreement and the Notes to be due and payable forthwith and direct the Borrower to pay to the Administrative Agent cash collateral as security for the LOC Obligations for subsequent drawings under then outstanding Letters of Credit in an amount equal to the maximum amount of which may be drawn under Letters of Credit then outstanding, to be paid in the Alternative Currency in which such Letters of Credit were issued, whereupon the same shall immediately become due and payable; and/or (iii) exercise on behalf of the Lenders all of its other rights and remedies under

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this Credit Agreement, the other Credit Documents and Applicable Law. Except as expressly provided above in this Section 7.2, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Credit Parties.

ARTICLE VIII
THE ADMINISTRATIVE AGENT

     Section 8.1. Appointment.

     Each Lender hereby irrevocably designates and appoints Wachovia as the Administrative Agent of such Lender under this Credit Agreement, and each such Lender irrevocably authorizes Wachovia, as the Administrative Agent for such Lender, to take such action on its behalf under the provisions of this Credit Agreement and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Credit Agreement, together with such other powers as are reasonably incidental thereto. Each Lender acknowledges that the Credit Parties may rely upon action taken by the Administrative Agent on behalf of the Lenders hereunder. Notwithstanding any provision to the contrary elsewhere in this Credit Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Credit Agreement or otherwise exist against the Administrative Agent.

     Section 8.2. Delegation of Duties.

     The Administrative Agent may execute any of its duties under this Credit Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. Without limiting the foregoing, the Administrative Agent may appoint one of its affiliates as its agent to perform the functions of the Administrative Agent hereunder relating to the advancing of funds to the Borrower and distribution of funds to the Lenders and to perform such other related functions of the Administrative Agent hereunder as are reasonably incidental to such functions.

     Section 8.3. Exculpatory Provisions.

     Neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact, Subsidiaries or Affiliates shall be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Credit Agreement (except for its or such Person’s own gross negligence, fraud or willful misconduct), or (b) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Credit Party or any officer thereof contained in this Credit Agreement or in any certificate, report, statement or other document referred to or provided for in, or received

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by the Administrative Agent under or in connection with, this Credit Agreement or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any of the Credit Documents or for any failure of any Credit Party to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance by any Credit Party of any of the agreements contained in, or conditions of, this Credit Agreement, or to inspect the properties, books or records of the any Credit Party.

     Section 8.4. Reliance by Administrative Agent.

     (a) The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, statement, order or other document or conversation believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless an executed Commitment Transfer Supplement has been filed with the Administrative Agent pursuant to Section 9.6(c) with respect to the Loans evidenced by such Note. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Credit Agreement unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under any of the Credit Documents in accordance with a request of the Required Lenders or all of the Lenders, as may be required under this Credit Agreement, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes.

     (b) For purposes of determining compliance with the conditions specified in Section 3.1, each Lender that has signed this Credit Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender.

     Section 8.5. Notice of Default.

     The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Credit Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall take such action with respect to

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such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided, however, that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders except to the extent that this Credit Agreement expressly requires that such action be taken, or not taken, only with the consent or upon the authorization of the Required Lenders, or all of the Lenders, as the case may be.

     Section 8.6. Non-Reliance on Administrative Agent and Other Lenders.

     Each Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representation or warranty to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of any Credit Party, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower or any other Credit Party and made its own decision to make its Loans hereunder and enter into this Credit Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Credit Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower or any other Credit Party which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates.

     Section 8.7. Indemnification.

     The Lenders agree to indemnify the Administrative Agent in its capacity as such, the Issuing Lender in its capacity as such and the Swingline Lender in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitment Percentages in effect on the date on which indemnification is sought under this Section 8.7, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes or any Reimbursement Obligation) be imposed on, incurred by or asserted against the Administrative Agent, the Issuing Lender or the Swingline

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Lender in any way relating to or arising out of any Credit Document or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent, the Issuing Lender or the Swingline Lender under or in connection with any of the foregoing; provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the gross negligence or willful misconduct of the Administrative Agent, the Issuing Lender or the Swingline Lender, as applicable, as determined by a court of competent jurisdiction. The agreements in this Section 8.7 shall survive the termination of this Credit Agreement and payment of the Notes, any Reimbursement Obligation and all other amounts payable hereunder.

     Section 8.8. The Administrative Agent in Its Individual Capacity.

     The Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the Administrative Agent were not the Administrative Agent hereunder. With respect to the Loans made or renewed by it and any Note issued to it, the Administrative Agent shall have the same rights and powers under this Credit Agreement as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms “Lender” and “Lenders” shall include the Administrative Agent in its individual capacity.

     Section 8.9. Successor Administrative Agent.

     The Administrative Agent may resign as Administrative Agent upon thirty (30) days’ prior written notice to the Initial Borrower and the Lenders. If the Administrative Agent shall resign as Administrative Agent under this Credit Agreement and the other Credit Documents or if the Administrative Agent enters or becomes subject to receivership, then the Required Lenders shall appoint from among the Lenders a successor administrative agent for the Lenders, which successor agent shall be approved by the Initial Borrower (such approval not to be unreasonably withheld) so long as no Default or Event of Default has occurred and is continuing, whereupon such successor administrative agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term “Administrative Agent” shall mean such successor administrative agent effective upon such appointment and approval, and the former Administrative Agent’s rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Credit Agreement or any holders of the Notes. If no successor Administrative Agent has accepted appointment as Administrative Agent within thirty (30) days after the retiring Administrative Agent’s giving notice of resignation, the retiring Administrative Agent shall have the right, on behalf of the Lenders, to appoint a successor administrative agent, which successor shall be approved by the Initial Borrower (such approval not to be unreasonably withheld) so long as no Default or Event of Default has occurred and is continuing; provided, that, such successor administrative agent has minimum capital and surplus of at least $500,000,000. If no successor administrative agent has accepted appointment as Administrative

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Agent within sixty (60) days after the retiring Administrative Agent’s giving notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless become effective and the Lenders shall perform all duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor administrative agent as provided for above. After any retiring Administrative Agent’s resignation as Administrative Agent, the indemnification provisions of this Credit Agreement and the other Credit Documents and the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Credit Agreement.

     Section 8.10. Other Agents.

     None of the Lenders or other Persons identified on the facing page or signature pages of this Credit Agreement as a “syndication agent,” “documentation agent,” “co-agent,” “book manager,” “book runner,” “lead manager,” “arranger,” “lead arranger” or “co-arranger” shall have any right (except as expressly set forth herein), power, obligation, liability, responsibility or duty under this Credit Agreement other than, in the case of such Lenders, those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders or other Persons so identified shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders or other Persons so identified in deciding to enter into this Credit Agreement or in taking or not taking action hereunder.

     Section 8.11. Collateral Matters.

     (a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Collateral or any Lien on any Collateral (i) upon the termination of all of the Commitments and payment and satisfaction in full by Borrower of all Credit Party Obligations (other than unasserted contingent indemnification obligations), (ii) that is permitted to be sold, transferred or otherwise disposed of under this Agreement or any other Credit Document, (iii) that is owned by a Guarantor that is permitted to be released under this Agreement or any other Credit Documents, or (iv) constituting property in which the Loan Parties and their respective Subsidiaries owned no interest at the time the Agent’s Lien was granted nor at any time thereafter. Upon request by Agent or Borrower at any time, the Lenders will confirm in writing Agent’s authority to release any such Liens on particular types or items of Collateral pursuant to this Section 8.11; provided, however, that (1) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent’s reasonable opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Credit Party Obligations or any Liens (other than those expressly being released) upon (or obligations of any Credit Party in respect of) all interests retained by any Credit Party, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. Subject to the foregoing proviso, Agent further agrees that, in connection with

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any transaction described in the foregoing clauses (i) — (iv) and as soon as is reasonably practicable after its receipt of a written request from the Initial Borrower specifying in reasonable detail the Collateral proposed to be released in connection with such transaction and the basis for such release, it will execute and deliver to the Initial Borrower (at the Initial Borrower’s sole cost and expense) such collateral release documentation as the Initial Borrower shall reasonably request to evidence such release; provided that prior to, and immediately after giving effect to, such release no Default or Event of Default is in existence.

     (b) The Agent shall not have any obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by the Credit Parties or is cared for, protected, or insured or has been encumbered, or that the Agent’s Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Credit Documents, it being understood and agreed that in respect of the Collateral, or any act, omission, or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent’s own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein.

     (c) Anything contained in any of the Credit Documents to the contrary notwithstanding, the Initial Borrower, the Agent and each Lender hereby agree that no Lender shall have any right individually to realize upon any of the Collateral or to enforce any of the Security Documents, it being understood and agreed that all powers, rights and remedies thereunder may be exercised solely by the Agent, on behalf of the Lenders in accordance with the terms hereof and thereof. Each Lender hereby, on and after the effective date of the HY Intercreditor Agreement, (i) agrees to be bound by the terms thereof and (ii) authorizes the Agent and the collateral agent thereunder to take any and all action required to be taken by such Person (or from refraining from taking any action) pursuant to the terms of the HY Intercreditor Agreement.

     Section 8.12. Agency for Perfection. Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Agent’s Liens in assets which, in accordance with Article 8 or Article 9 of the applicable Uniform Commercial Code can be perfected by possession or control. Should any Lender obtain possession or control of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent’s request therefor shall deliver possession or control of such Collateral to Agent or in accordance with Agent’s instructions.

     Section 8.13. Concerning the Collateral and Related Credit Documents. Each Lender authorizes and directs Agent to enter into this Agreement and the other Credit Documents. Each

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Lender agrees that any action taken by Agent in accordance with the terms of this Agreement or the other Credit Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders.

ARTICLE IX

MISCELLANEOUS

     Section 9.1. Amendments, Waivers and Release of Collateral.

     Neither this Credit Agreement, nor any of the Notes, nor any of the other Credit Documents, nor any terms hereof or thereof may be amended, supplemented, waived or modified except in accordance with the provisions of this Section 9.1 nor may the Borrower or any Guarantor be released except in accordance with the provisions of this Section 9.1. The Required Lenders may, or, with the written consent of the Required Lenders, the Administrative Agent may, from time to time, (a) enter into with the Initial Borrower or any other Credit Party written amendments, supplements or modifications hereto and to the other Credit Documents for the purpose of adding any provisions to this Credit Agreement or the other Credit Documents or changing in any manner the rights of the Lenders or of the Borrower or any other Credit Party hereunder or thereunder, or (b) waive, on such terms and conditions as the Required Lenders may specify in such instrument, any of the requirements of this Credit Agreement or the other Credit Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, waiver, supplement, modification or release shall:

          (i) reduce the amount or extend the scheduled date of maturity of any Loan or Note or any installment thereon, or reduce the stated rate of any interest or fee payable hereunder (except in connection with a waiver of interest at the increased post-default rate set forth in Section 2.9(b) which shall be determined by a vote of the Required Lenders) or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender’s Commitment (except for the extension of the Commitment Termination Date pursuant to Section 2.20), in each case without the written consent of each Lender directly affected thereby; or

          (ii) amend, modify or waive any provision of this Section 9.1 or reduce the percentage specified in the definition of Required Lenders, without the written consent of all the Lenders; or

          (iii) amend, modify or waive any provision of Article VIII, without the written consent of the Administrative Agent; or

          (iv) release any Guarantor from the Guaranty hereunder or any guarantor under the Guaranty Agreement (except as otherwise permitted by Sections 5.9, 5.13 or 5.14), without the written consent of all the Lenders; or

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          (v) cancel or forgive any amounts owing hereunder, without the written consent of all of the Lenders affected thereby; or

          (vi) subordinate the Loans to any other Debt without the written consent of all of the Lenders; or

          (vii) permit the Borrower to assign or transfer any of its rights or obligations under this Credit Agreement or other Credit Documents without the written consent of all of the Lenders; or

          (viii) amend, modify or waive any provision of the Credit Documents requiring consent, approval or request of the Required Lenders or all Lenders without the written consent of all of the Required Lenders or Lenders as appropriate; or

          (ix) amend, modify or waive the order in which Credit Party Obligations are paid in Section 2.12(b) without the written consent of each Lender directly affected thereby; or

          (x) amend or modify the provisions to the Credit Documents to permit the Borrower to obtain borrowings in currencies other than Dollars, Pounds Sterling or Euro, without the written consent of all the Lenders affected thereby; or

          (xi) amend or modify the definition of Credit Party Obligations to delete or exclude any obligation or liability described therein without the written consent of each Lender directly affected thereby; or

          (xii) release all or substantially all of the Collateral without the prior written consent of all of the Lenders (except the release of substantially all of the Collateral in connection with the sale of assets permitted hereunder to the extent that the Committed Amount is reduced pursuant to Section 2.6(b)(i) as a result of the sale of such Collateral and the Credit Party Obligations are prepaid as required under Section 2.6(b)(iii)).

provided, further, that no amendment, waiver or consent affecting the rights or duties of the Administrative Agent, or the Issuing Lender or the Swingline Lender under any Credit Document shall in any event be effective, unless in writing and signed by the Administrative Agent, or the Issuing Lender and/or the Swingline Lender, as applicable, in addition to the Lenders required hereinabove to take such action.

     Any such waiver, any such amendment, supplement or modification and any such release shall apply equally to each of the Lenders and shall be binding upon the Borrower, the Lenders, the Administrative Agent and all future holders of the Notes. In the case of any waiver, the Borrower, the other Credit Parties, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under the outstanding Loans and Notes and other Credit Documents, and any Default or Event of Default waived shall be deemed to be cured and

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not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon.

     Notwithstanding any of the foregoing to the contrary, the consent of the Borrower shall not be required for any amendment, modification or waiver of the provisions of Article VIII (other than the provisions of Section 8.9); provided, however, that the Administrative Agent will provide written notice to the Initial Borrower of any such amendment, modification or waiver. In addition, the Borrower and the Lenders hereby authorize the Administrative Agent to modify this Credit Agreement by unilaterally amending or supplementing Schedule 2.1(a) from time to time in the manner requested by the Initial Borrower, the Administrative Agent or any Lender in order to reflect any assignments or transfers of the Loans as provided for hereunder; provided, however, that the Administrative Agent shall promptly deliver a copy of any such modification to the Initial Borrower and each Lender.

     Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, (A) each Lender is entitled to vote as such Lender sees fit on any bankruptcy reorganization plan that affects the Loans, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersede the unanimous consent provisions set forth herein, and (B) the Required Lenders may consent to allow a Credit Party to use cash collateral (excluding cash collateral securing LOC Obligations) in the context of a bankruptcy or insolvency proceeding.

     If, in connection with any proposed amendment, modification, supplement, waiver or release (a “Proposed Change”) requiring the consent of all Lenders or all affected Lenders, the consent of Required Lenders is obtained, but the consent of other Lenders whose consent is required is not obtained (any such Lender whose consent is not obtained being referred to as a “Non-Consenting Lender”), then, so long as Agent is not a Non-Consenting Lender, at Initial Borrower’s request, Agent may within sixty (60) days thereafter designate another bank or financial institution which is acceptable to Agent in its reasonable discretion (such other bank or financial institution being called a “Replacement Lender”) to purchase the Loans of such Non-Consenting Lender and such Non-Consenting Lender’s rights hereunder, without recourse to or warranty by, or expense to, such Non-Consenting Lender, for a purchase price equal to the outstanding principal amount of the Loans payable to such Non-Consenting Lender plus any accrued but unpaid interest on such Loans and all accrued but unpaid fees owed to such Non-Consenting Lender and any other amounts payable to such Non-Consenting Lender under this Credit Agreement, and to assume all the obligations of such Non-Consenting Lender hereunder, and, upon such purchase and assumption (pursuant to a Commitment Transfer Supplement), such Non-Consenting Lender shall no longer be a party hereto or have any rights hereunder (other than rights with respect to indemnities and similar rights applicable to such Non-Consenting Lender prior to the date of such purchase and assumption) and shall be relieved from all obligations to Borrower hereunder, and the Replacement Lender shall succeed to the rights and obligations of such Non-Consenting Lender hereunder.

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     Section 9.2. Notices.

     (a) Except as otherwise provided in Article II, all notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy or other electronic communications as provided below), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (i) when delivered by hand, (ii) when transmitted via telecopy (or other facsimile device) to the number set out herein, (iii) the day following the day on which the same has been delivered prepaid to a reputable national overnight air courier service, or (iv) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid and return receipt requested, in each case, addressed as follows in the case of the Borrower, the other Credit Parties and the Administrative Agent, the Domestic Lending Offices set forth on Schedule 9.2 in the case of the Lenders, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Notes:

The Borrower:	CapitalSource Inc.
	4445 Willard Avenue
	Chevy Chase, MD 20815
	Attention: Chief Financial Officer
	Telecopier: (301) 841-2307
with a copy to:	CapitalSource Inc.
	4445 Willard Avenue
	Chevy Chase, MD 20815
	Attention: Chief Legal Officer
	Telecopier: (301) 841-2380
The Guarantors:	c/o CapitalSource Inc.
	4445 Willard Avenue
	Chevy Chase, MD 20815
	Attention: Chief Financial Officer
	Telecopier: (301) 841-2307
with a copy to:	c/o CapitalSource Inc.
	4445 Willard Avenue
	Chevy Chase, MD 20815
	Attention: Chief Legal Officer
	Telecopier: (301) 841-2380

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The Administrative Agent:	Wachovia Bank, National Association
	201 South College Street
	NC0680/CP8
	Charlotte, North Carolina 28288-0608
	Attention: Syndication Agency Services
	Telecopier: (704) 383-0288
	Telephone: (704) 374-2698
with a copy to:	Wachovia Bank, National Association
	One Wachovia Center, Mail Code: NC0600
	Charlotte, North Carolina 28288-0608
	Attention: Raj Shah
	Telecopier: (704) 715-0067

provided, that, notices given by the Borrower pursuant to Section 2.1 or Section 2.10 hereof shall be effective only upon receipt thereof by the Administrative Agent.

     (b) Notices and other communications to the Lenders or the Administrative Agent hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent; provided, that, the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Section by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided further, that, approval of such procedures may be limited to particular notices or communications.

     Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement); provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

     Section 9.3. No Waiver; Cumulative Remedies.

     No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or

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privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

     Section 9.4. [Reserved].

     Section 9.5. Payment of Expenses and Taxes; Indemnification.

          The Borrower agrees (a) to pay or reimburse the Administrative Agent and WCM for all reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation, negotiation, printing and execution of, and any amendment, supplement or modification to, this Credit Agreement and the other Credit Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, together with the reasonable fees and disbursements of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Credit Agreement, the Notes and any other Credit Document, including, without limitation, the fees and disbursements of counsel to the Administrative Agent and to the Lenders (including reasonable allocated costs of in-house legal counsel of Administrative Agent), (c) on demand, to pay, indemnify, and hold each Lender, the Administrative Agent and WCM harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying stamp, excise and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, the Credit Documents and any such other documents, (d) defend, indemnify and hold harmless the Administrative Agent and the Lenders, and their respective Affiliates and their respective employees, agents, officers and directors, from and against any and all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Credit Parties, any Investment Loan Subsidiary or the Properties, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorney’s and consultant’s fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor, and (e) to pay, indemnify, and hold each Lender, the Administrative Agent and WCM and their Affiliates, employees, officers and directors harmless from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the use, or proposed use, of proceeds of the Loans or Letters of Credit, (f) to pay, indemnify, and hold each Lender, the Administrative Agent and WCM and their Affiliates, employees, officers and directors harmless from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever to the extent arising from third party claims with respect to the execution, delivery,

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enforcement, performance and administration of the Credit Documents and any such other documents; and (g) to pay, indemnify, and hold each Lender, the Administrative Agent and WCM and their Affiliates, employees, officers and directors harmless from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever to the extent arising from or related to any Investment Loan Subsidiary (all of the foregoing, collectively, the “indemnified liabilities”); provided, however, that the Borrower shall not have any obligation hereunder to the Administrative Agent, WCM or any Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Administrative Agent, WCM or such Lender, as determined by a court of competent jurisdiction. The agreements in this Section 9.5 shall survive repayment of the Loans, Notes, LOC Obligations and all other amounts payable hereunder.

     Section 9.6. Successors and Assigns; Participations; Purchasing Lenders.

     (a) This Credit Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Administrative Agent, all future holders of the Notes and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Credit Agreement or the other Credit Documents without the prior written consent of each Lender.

     (b) Any Lender may, in the ordinary course of its business and in accordance with Applicable Law, at any time sell to one or more banks or other entities (each, a “Participant”) participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender, or any other interest of such Lender hereunder, in each case in minimum amounts of $10,000,000 (or, if less, the entire amount of such Lender’s obligations, Commitments or other interests). In the event of any such sale by a Lender of participating interests to a Participant, such Lender’s obligations under this Credit Agreement to the other parties to this Credit Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Note for all purposes under this Credit Agreement, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Credit Agreement. No Lender shall transfer or grant any participation under which the Participant shall have rights to approve any amendment to or waiver of this Credit Agreement or any other Credit Document except to the extent such amendment or waiver would (i) extend the scheduled maturity of any Loan or Note or any installment thereon in which such Participant is participating (except in connection with the extension of the Commitment Termination Date pursuant to Section 2.20), or reduce the stated rate or extend the time of payment of interest or fees thereon (except in connection with a waiver of interest at the increased post-default rate) or reduce the principal amount thereof, or increase the amount of the Participant’s participation over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default shall not constitute a change in the terms of such participation, and that

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an increase in any Commitment or Loan shall be permitted without consent of a Participant if such Participant’s participation is not increased as a result thereof), (ii) release any material Guarantor from its obligations under the Guaranty or the Guaranty Agreement (except as otherwise expressly permitted by Sections 5.9, 5.13 or 5.14), (iii) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Credit Agreement or (iv) release all or substantially all of the Collateral. In the case of any such participation, the Participant shall not have any rights under this Credit Agreement or any of the other Credit Documents (the Participant’s rights against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the Participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not sold such participation; provided, that, each Participant shall be entitled to the benefits of Sections 2.16, 2.17, 2.18, 2.19 and 9.5 with respect to its participation in the Commitments and the Loans outstanding from time to time; provided, further, that, no Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred.

     (c) Any Lender may, in the ordinary course of its business and in accordance with Applicable Law, at any time, sell or assign with the consent of the Administrative Agent and the Issuing Lender and, so long as no Default or Event of Default has occurred and is continuing, the Initial Borrower (in each case, which consent shall not be unreasonably withheld), to one or more additional banks, insurance companies or other financial institutions or any funds investing in bank loans (each, a “Purchasing Lender”), all or any part of its rights and obligations under this Credit Agreement and the Notes in minimum amounts of $10,000,000 (or, if less, the entire amount of such Lender’s Commitment), pursuant to a Commitment Transfer Supplement, executed by such Purchasing Lender, such transferor Lender, the Administrative Agent and, so long as no Default or Event of Default has occurred and is continuing, the Initial Borrower, and delivered to the Administrative Agent for its acceptance and recording in the Register; provided, however, that consent from the Issuing Lender shall not be required if the Purchasing Lender has a senior unsecured debt rating from any two of S&P, Moody’s and Fitch equal to or higher than A- (or A3 with respect to Moody’s); provided, further, that any sale or assignment to another Lender or to an Affiliate of an existing Lender shall not require the consent of the Administrative Agent, the Issuing Lender or the Borrower. Upon such execution, delivery, acceptance and recording, from and after the Transfer Effective Date specified in such Commitment Transfer Supplement, (i) the Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Commitment Transfer Supplement, have the rights and obligations of a Lender hereunder with a Commitment as set forth therein, and (ii) the transferor Lender thereunder shall, to the extent provided in such Commitment Transfer Supplement, be released from its obligations under this Credit Agreement (and, in the case of a Commitment Transfer Supplement covering all or the remaining portion of a transferor Lender’s rights and obligations under this Credit Agreement, such transferor Lender shall cease to be a party

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hereto). Such Commitment Transfer Supplement shall be deemed to amend this Credit Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of Commitment Percentages arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under this Credit Agreement and the Notes. On or prior to the Transfer Effective Date specified in such Commitment Transfer Supplement, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the Notes delivered to the Administrative Agent pursuant to such Commitment Transfer Supplement new Notes to the order of such Purchasing Lender in an amount equal to the Commitment assumed by it pursuant to such Commitment Transfer Supplement and, unless the transferor Lender has not retained a Commitment hereunder, new Notes to the order of the transferor Lender in an amount equal to the Commitment retained by it hereunder. Such new Notes shall be dated the Closing Date and shall otherwise be in the form of the Notes replaced thereby. The Notes surrendered by the transferor Lender shall be returned by the Administrative Agent to the Initial Borrower marked “cancelled”.

     (d) The Administrative Agent shall maintain at its address referred to in Section 9.2 a copy of each Commitment Transfer Supplement delivered to it and a register (the “Register”) for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as the owner of the Loan recorded therein for all purposes of this Credit Agreement. The Register shall be available for inspection by the Initial Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice.

     (e) Upon its receipt of a duly executed Commitment Transfer Supplement, together with payment to the Administrative Agent by the transferor Lender or the Purchasing Lender (except for any assignment by a Lender to an Affiliate of such Lender), as agreed between them, of a registration and processing fee of $3,500 for each Purchasing Lender listed in such Commitment Transfer Supplement and the Notes, if any, subject to such Commitment Transfer Supplement, the Administrative Agent shall (i) accept such Commitment Transfer Supplement, (ii) record the information contained therein in the Register, and (iii) unless Initial Borrower’s consent to such assignment is not required give prompt notice of such acceptance and recordation to the Initial Borrower.

     (f) Each Credit Party authorizes each Lender to disclose to any Participant or Purchasing Lender (each, a “Transferee”) and any prospective Transferee any and all financial information in such Lender’s possession concerning the Borrower and its affiliates which has been delivered to such Lender by or on behalf of a Credit Party pursuant to this Credit Agreement or which has been delivered to such Lender by or on

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behalf of a Credit Party in connection with such Lender’s credit evaluation of the Borrower and its affiliates prior to becoming a party to this Credit Agreement, in each case subject to Section 9.15.

     (g) At the time of each assignment pursuant to this Section 9.6 to a Person which is not already a Lender hereunder and which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for federal income tax purposes, the respective assignee Lender shall provide to the Initial Borrower and the Administrative Agent the appropriate Internal Revenue Service Forms (and, if applicable, a 2.18 Certificate) described in Section 2.18.

     (h) Nothing herein shall prohibit any Lender from pledging or assigning any of its rights under this Credit Agreement (including, without limitation, any right to payment of principal and interest under any Note) to any Federal Reserve Bank in accordance with Applicable Laws.

     Section 9.7. Set-off.

     (a) Each Lender agrees that if any Lender (a “benefited Lender”) shall at any time receive any payment of all or part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to an Insolvency Event or otherwise) in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender’s Loans, or interest thereon, such benefited Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender’s Loan, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefited Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Borrowers and each other Credit Party agrees that each Lender so purchasing a portion of another Lender’s Loans may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion.

     (b) In addition to any rights and remedies of the Lenders provided by law (including, without limitation, other rights of set-off), each Lender and its Affiliates shall have the right, without prior notice to the Borrower or the applicable Credit Party, any such notice being expressly waived by the Credit Parties to the extent permitted by Applicable Law, upon the occurrence of any Event of Default, to setoff and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held by or owing to such Lender or any branch or agency thereof to or for the credit or

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the account of the Borrower or any other Credit Party, or any part thereof in such amounts as such Lender may elect, against and on account of the Loans and other Credit Party Obligations of the Borrower and the other Credit Parties to such Lender hereunder and claims of every nature and description of such Lender against the Borrower and the other Credit Parties, in any Currency, whether arising hereunder or, under any other Credit Document provided by such Lender pursuant to the terms of this Credit Agreement, as such Lender may elect, whether or not such Lender has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The aforesaid right of set-off may be exercised by such Lender against the Borrower, any other Credit Party or against any trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver or execution, judgment or attachment creditor of the Borrower or any other Credit Party, or against anyone else claiming through or against the Borrower or any other Credit Party, or any such trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by such Lender prior to the occurrence of any Default or Event of Default. Each Lender agrees promptly to notify the Initial Borrower and the Administrative Agent after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application.

     Section 9.8. Table of Contents and Section Headings.

     The table of contents and the Section and subsection headings herein are intended for convenience only and shall be ignored in construing this Credit Agreement.

     Section 9.9. Counterparts.

     This Credit Agreement may be executed by one or more of the parties to this Credit Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Credit Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent.

     Section 9.10. Effectiveness.

     This Credit Agreement shall become effective on the date on which all of the parties have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Administrative Agent or, in the case of the Lenders, shall have given to the Administrative Agent written, telecopied or telex notice (actually received) at such office that the same has been signed and mailed to it.

     Section 9.11. Severability.

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     Any provision of this Credit Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

     Section 9.12. Integration.

     This Credit Agreement and the Notes, if any, represent the agreement of the Borrower, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent, the Borrower, or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the Notes, if any.

     Section 9.13. Governing Law.

     This Credit Agreement and the Notes and the rights and obligations of the parties under this Credit Agreement and the Notes shall be governed by, and construed and interpreted in accordance with, the law of the State of New York without regard to conflict of laws principles thereof (other than Sections 5-1401 and 5-1402 of the New York General Obligations Law).

     Section 9.14. Consent to Jurisdiction and Service of Process.

     Any legal action or proceeding with respect to this Credit Agreement or any other Credit Document shall be brought in the courts of the State of New York in New York County or of the United States for the Southern District of New York, and, by execution and delivery of this Credit Agreement, each Credit Party, the Administrative Agent and each Lender accepts, for itself and in connection with its Properties, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and irrevocably agrees to be bound by any final judgment rendered thereby in connection with this Credit Agreement from which no appeal has been taken or is available. Each Credit Party, the Administrative Agent and each Lender irrevocably agrees that all service of process in any such proceedings in any such court may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid and return receipt requested, to it at its address set forth in Section 9.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto, such service being hereby acknowledged by the Borrower and the other Credit Parties to be effective and binding service in every respect. Each Credit Party, the Administrative Agent and the Lenders irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in any such jurisdiction. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Lender to bring proceedings against the Borrower in the court of any other jurisdiction.

     Section 9.15. Confidentiality.

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     Each of the Administrative Agent, the Lenders and the Issuing Lender agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, advisors and other representatives (it being understood that the Persons agents, advisors and other representatives to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Credit Document or any action or proceeding relating to this Credit Agreement or any other Credit Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Credit Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the written consent of the Initial Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender, the Issuing Lender or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower.

     For purposes of this Section, “Information” means all information received from the Borrower or any of its Subsidiaries relating to the Borrower or any of its Subsidiaries or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or the Issuing Lender on a nonconfidential basis prior to disclosure by the Borrower or any of its Subsidiaries. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

     Notwithstanding the foregoing provisions in this Section 9.15, with respect to that Information which constitutes customer or consumer information with the meaning of the Gramm-Leach-Bliley Act (“GLBA”), 15 USC Section 6801 et seq. and which is marked conspicuously “Customer Information” (“Customer Information”), the parties acknowledge each Bank Subsidiary has a responsibility as a financial institution to keep Customer Information strictly confidential. Notwithstanding any provision in this Credit Agreement to the contrary, Customer Information shall be kept confidential during the term of this Credit Agreement and after its termination. Each of the Administrative Agent, the Lenders, and the Issuing Lender agree to use Customer Information only for the purposes for which it was shared to them by Initial Borrower and/or, as applicable, its Subsidiaries (including Unrestricted Subsidiaries), and not to disclose Customer Information or make it available to any Person for any reason whatsoever other than as required by law, subpoena, regulation or by any regulatory authority or as otherwise permitted under the GLBA or the implementing regulations. Any Person required

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to maintain the confidentiality of Customer Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Customer Information as such Person would accord to its own confidential information.

     Section 9.16. Acknowledgments.

     The Borrower hereby acknowledges that:

     (a) it has been advised by counsel in the negotiation, execution and delivery of each Credit Document;

     (b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrower or any other Credit Party arising out of or in connection with this Credit Agreement and the relationship between Administrative Agent and Lenders, on one hand, and the Borrower, on the other hand, in connection herewith is solely that of debtor and creditor; and

     (c) no joint venture exists among the Lenders or among the Borrower and the Lenders.

     Section 9.17. Waivers of Jury Trial; Waiver of Consequential Damages.

     THE BORROWER, THE OTHER CREDIT PARTIES, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS CREDIT AGREEMENT OR ANY OTHER CREDIT DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. The Borrower, the other Credit Parties, the Administrative Agent and the Lenders agree not to assert any claim against any other party to this Credit Agreement or any of their respective directors, officers, employees, attorneys, Affiliates or agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to any of the transactions contemplated herein.

     Section 9.18. PATRIOT Act Notice.

     Each Lender and the Administrative Agent (for itself and not on behalf of any other party) hereby notifies each Credit Party that, pursuant to the requirements of the USA PATRIOT Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the “PATRIOT Act”), it is required to obtain, verify and record information that identifies each Credit Party, which information includes the name and address of each Credit Party and other information that will allow such Lender or the Administrative Agent, as applicable, to identify each Credit Party in accordance with the PATRIOT Act.

     Section 9.19. Judgment Shortfall.

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     (a) If, for the purpose of obtaining judgment in any court, it is necessary to convert a sum owing hereunder in one Currency into another Currency, each party hereto agrees, to the fullest extent that it may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures in the relevant jurisdiction the first Currency could be purchased with such other Currency on the Business Day immediately preceding the day on which final judgment is given.

     (b) The obligations of the Borrower in respect of any sum due to any party hereto or any holder of the obligations owing hereunder (the “Applicable Creditor”) shall, notwithstanding any judgment in a Currency (the “Judgment Currency”) other than the Currency in which such sum is stated to be due hereunder (the “Agreement Currency”), be discharged only to the extent that, on the Business Day following receipt by the Applicable Creditor of any sum adjudged to be so due in the Judgment Currency, the Applicable Creditor may in accordance with normal banking procedures in the relevant jurisdiction purchase the Agreement Currency with the Judgment Currency; if the amount of the Agreement Currency so purchased is less than the sum due in accordance with this Agreement to the Applicable Creditor in the Agreement Currency, the Borrower agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Applicable Creditor against such loss and if the amount of the Agreement Currency so purchased exceeds the sum due in accordance with this Agreement to the Applicable Creditor in the Agreement Currency, the Applicable Creditor agrees to remit such excess to the Borrower. The obligations of the Borrower and Applicable Creditor contained in this Section 9.19 shall survive the termination of this Agreement and the payment of all other amounts owing hereunder.

     Section 9.20. Return of Notes.

     In the event of (i) any termination in full by the Initial Borrower or CSF of all rights with respect to the Commitment in accordance Section 2.6(a)(i) or 2.6(a)(ii), as applicable or (ii) the delivery of any new Note in replacement of a previously issued Note, the applicable Lender shall return to the Borrower any Notes previously issued to it relating to such terminated Commitment or replaced Note, as applicable and such Notes shall be marked “cancelled.” In the event that any Lender does not return its applicable Note or Notes as described in this Section 9.20 within forty-five (45) days after the written request of Borrower, Borrower shall be entitled to receive a lost note affidavit from such Lender including customary indemnifications reasonably satisfactory to Borrower with respect to the applicable unreturned Note or Notes.

     Section 9.21. Most Favored Provisions.

     (a) If at any time any document or agreement with respect to any Debt regarding a 2009-2012 Debt Issuance contains any representation, event of default or informational, financial, affirmative or negative covenant (including any definition used in or related to such representations, covenants or events of default) that is either not provided for in any of the Credit Documents, or is more favorable to the holders or other creditors under such Debt regarding a 2009-2012 Debt Issuance or is more onerous to any Credit Party or any of their respective

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Subsidiaries (each a “Most Favored Provision”) as compared to the representations, Events of Default or covenants (including any definition used in or related to such representations, Events of Default or covenants) binding on the Credit Parties and their respective Subsidiaries that are provided for in the Credit Documents, then, unless otherwise agreed in writing by the Majority Extending Lenders, each such Most Favored Provision shall, subject to clause (b) below, be deemed to be automatically incorporated by reference into this Agreement, mutatis mutandis, as if set forth fully herein and, notwithstanding anything to the contrary herein or therein, without any further action on the part of any of the Credit Parties or any other Person being required; provided, however, that (1) in the case any additional representation incorporated herein pursuant to this Section 9.21, such representation shall be deemed made only at such time as such representation is made under any documents or agreements relating to the 2009-2012 Debt Issuance, (2) in the event that any additional or more burdensome covenant is incorporated herein pursuant to this Section 9.21, the existence of any Default or Event of Default hereunder with respect to such incorporated covenant shall be determined according to the default notice and cure periods applicable thereto under any document or agreement with respect to any Debt regarding a 2009-2012 Debt Issuance (but with the Administrative Agent being entitled to provide any required notices in lieu of the applicable creditor or creditor representative under any document or agreement with respect to any Debt regarding a 2009-2012 Debt Issuance, with (subject to Section 7.1) the effect that no Default or Event of Default shall exist hereunder with respect to such covenant until the applicable cure period, if any, has lapsed under such document or agreement and (3) the provisions of this Section 9.21 shall not apply to (i) any interest, premium, fee or indemnification obligations, registration rights, trustee matters or securities law obligations, (ii) any mandatory prepayment events required under any document or agreement with respect to any Debt regarding a 2009-2012 Debt Issuance relating to Collateral Proceeds or (iii) any requirements relating to collateral that, if incorporated herein, would conflict with the requirements set forth in the HY Intercreditor Agreement.

     (b) In addition, the Initial Borrower shall provide prompt written notice to the Administrative Agent following any 2009-2012 Debt Issuance of any provision that the Initial Borrower reasonably believes to constitute a Most Favored Provision, and each Credit Party agrees promptly to enter into such documentation as the Administrative Agent may reasonably request to evidence the provisions provided for in this Section 9.21. For the avoidance of doubt, if the document or agreement with respect to the applicable 2009-2012 Debt Issuance containing the Most Favored Provision is amended or modified to weaken or loosen such provision, such amendment or modification shall not in any way amend or modify such provision under this Credit Agreement (which provision in this Credit Agreement may only be amended in accordance with Section 9.1 hereof).

     Section 9.22. HY Intercreditor Agreement.

     Notwithstanding anything herein to the contrary, following the issuance of any secured 2009-2012 Debt Issuance, the exercise of any right or remedy by the Administrative Agent hereunder is subject to the provisions of the HY Intercreditor Agreement, as the same may be amended, supplemented, modified or replaced from time to time.

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ARTICLE X

GUARANTY

     Section 10.1. The Guaranty.

     In order to induce the Lenders to enter into this Credit Agreement and to extend credit hereunder and thereunder and in recognition of the direct benefits to be received by the Guarantors from the Extensions of Credit hereunder, each of the Guarantors hereby agrees with the Administrative Agent and the Lenders to unconditionally and irrevocably jointly and severally guarantee the full and prompt payment when due, whether upon maturity, by acceleration or otherwise, of any and all indebtedness of the Borrower to the Administrative Agent and the Lenders. If any or all of the indebtedness becomes due and payable hereunder, each Guarantor unconditionally promises to pay such indebtedness to the Administrative Agent, the Lenders, or their respective order, or demand, together with any and all reasonable expenses which may be incurred by the Administrative Agent or the Lenders in collecting any of the Credit Party Obligations. The word “indebtedness” is used in this Article X in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of the Borrower, including specifically all Credit Party Obligations, arising in connection with this Credit Agreement or the other Credit Documents, in each case, heretofore, now, or hereafter made, incurred or created, whether voluntarily or involuntarily, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether or not such indebtedness is from time to time reduced, or extinguished and thereafter increased or incurred, whether the Borrower may be liable individually or jointly with others, whether or not recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, and whether or not such indebtedness may be or hereafter become otherwise unenforceable. The guaranty set forth in this Article X is continuing guaranty and is a guaranty of payment and is not merely a guaranty of collection.

     Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents, to the extent the obligations of a Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of each such Guarantor hereunder shall be limited to the maximum amount that is permissible under Applicable Law (whether federal or state and including, without limitation, the Bankruptcy Code).

     Section 10.2. Bankruptcy.

     Additionally, each of the Guarantors unconditionally and irrevocably guarantees jointly and severally the payment of any and all Credit Party Obligations of the Borrower to the Lenders whether or not due or payable by the Borrower upon the occurrence of any of the events specified in Section 7.1(f), and unconditionally promises to pay such Credit Party Obligations to the Administrative Agent for the account of the Lenders, or order, on demand, in lawful money

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of the United States. Each of the Guarantors further agrees that to the extent that the Borrower or a Guarantor shall make a payment or a transfer of an interest in any property to the Administrative Agent or any Lender, which payment or transfer or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, or otherwise is avoided, and/or required to be repaid to the Borrower or a Guarantor, the estate of the Borrower or a Guarantor, a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such avoidance or repayment, the obligation or part thereof intended to be satisfied shall be revived and continued in full force and effect as if said payment had not been made.

     Section 10.3. Nature of Liability.

     The liability of each Guarantor hereunder is exclusive and independent of any security for or other guaranty of the Credit Party Obligations of the Borrower whether executed by any such Guarantor, any other guarantor or by any other party, and no Guarantor’s liability hereunder shall be affected or impaired by (a) any direction as to application of payment by the Borrower or by any other party, or (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the Credit Party Obligations of the Borrower, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower, or (e) any payment made to the Administrative Agent or the Lenders on the Credit Party Obligations which the Administrative Agent or such Lenders repay the Borrower pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and each of the Guarantors waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding.

     Section 10.4. Independent Obligation.

     The obligations of each Guarantor hereunder are independent of the obligations of any other Guarantor or the Borrower, and a separate action or actions may be brought and prosecuted against each Guarantor whether or not action is brought against any other Guarantor or the Borrower and whether or not any other Guarantor or the Borrower is joined in any such action or actions. Subject to the provisions of Section 10.2 regarding revival of Credit Party Obligations, the Guarantors’ joint and several liability with respect to the Credit Party Obligations shall not obligate them to pay any Credit Party Obligations which have already been fully satisfied.

     Section 10.5. Authorization.

     Each of the Guarantors authorizes the Administrative Agent and each Lender, without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of the Credit Party Obligations or any part thereof in accordance with this Credit Agreement, including any increase or decrease of the rate of interest thereon, (b) take and hold security from any Guarantor or any other party for the payment of this Guaranty or the

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Credit Party Obligations and exchange, enforce waive and release any such security, (c) apply such security and direct the order or manner of sale thereof as the Administrative Agent and the Lenders in their discretion may determine, and (d) release or substitute any one or more endorsers, Guarantors, the Borrower or other obligors.

     Section 10.6. Reliance.

     It is not necessary for the Administrative Agent or the Lenders to inquire into the capacity or powers of the Borrower or the officers, directors, members, partners or agents acting or purporting to act on its behalf, and any Credit Party Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder.

     Section 10.7. Waiver.

     (a) Each of the Guarantors waives any right (except as shall be required by applicable statute and cannot be waived) to require the Administrative Agent or any Lender to (i) proceed against the Borrower, any other guarantor or any other party, (ii) proceed against or exhaust any security held from the Borrower, any other guarantor or any other party, or (iii) pursue any other remedy in the Administrative Agent’s or any Lender’s power whatsoever. Each of the Guarantors waives any defense based on or arising out of any defense of the Borrower, any other guarantor or any other party other than payment in full of the Credit Party Obligations (other than contingent indemnity obligations), including without limitation any defense based on or arising out of the disability of the Borrower, any other guarantor or any other party, or the unenforceability of the Credit Party Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment in full of the Credit Party Obligations. The Administrative Agent may, at its election, foreclose on any security held by the Administrative Agent by one or more judicial or nonjudicial sales (to the extent such sale is permitted by Applicable Law), or exercise any other right or remedy the Administrative Agent or any Lender may have against the Borrower or any other party, or any security, without affecting or impairing in any way the liability of any Guarantor hereunder except to the extent the Credit Party Obligations have been paid in full and all of the Commitments have been terminated. Each of the Guarantors waives any defense arising out of any such election by the Administrative Agent or any of the Lenders, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of the Guarantors against the Borrower or any other party or any security.

     (b) Each of the Guarantors waives all presentments, demands for performance, protests and notices, including without limitation notices of nonperformance, notice of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Credit Party Obligations. Each Guarantor assumes all responsibility for being and keeping itself informed of the Borrower’s financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Credit Party Obligations and the nature,

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scope and extent of the risks which such Guarantor assumes and incurs hereunder, and agrees that neither the Administrative Agent nor any Lender shall have any duty to advise such Guarantor of information known to it regarding such circumstances or risks.

     (c) Each of the Guarantors hereby agrees it will not exercise any rights of subrogation which it may at any time otherwise have as a result of this Guaranty (whether contractual, under Section 509 of the U.S. Bankruptcy Code, or otherwise) to the claims of the Lenders against the Borrower or any other guarantor of the Credit Party Obligations of the Borrower owing to the Lenders (collectively, the “Other Parties”) and all contractual, statutory or common law rights of reimbursement, contribution or indemnity from any Other Party which it may at any time otherwise have as a result of this Guaranty until such time as the Credit Party Obligations shall have been paid in full and all of the Commitments have been terminated. Each of the Guarantors hereby further agrees not to exercise any right to enforce any other remedy which the Administrative Agent or the Lenders now have or may hereafter have against any Other Party, any endorser or any other guarantor of all or any part of the Credit Party Obligations of the Borrower and any benefit of, and any right to participate in, any security or collateral given to or for the benefit of the Lenders to secure payment of the Credit Party Obligations of the Borrower until such time as the Credit Party Obligations (other than contingent indemnity obligations) shall have been paid in full and all of the Commitments have been terminated.

     Section 10.8. Limitation on Enforcement.

     The Lenders agree that this Guaranty may be enforced only by the action of the Administrative Agent acting upon the instructions of the Required Lenders and that no Lender shall have any right individually to seek to enforce or to enforce this Guaranty, it being understood and agreed that such rights and remedies may be exercised by the Administrative Agent for the benefit of the Lenders under the terms of this Credit Agreement. The Lenders further agree that this Guaranty may not be enforced against any director, officer, employee or stockholder of the Guarantors.

     Section 10.9. Confirmation of Payment.

     The Administrative Agent and the Lenders will, upon request after payment of the indebtedness and obligations which are the subject of this Guaranty and termination of the Commitments relating thereto, confirm to the Borrower, the Guarantors or any other Person that such indebtedness and obligations have been paid and the Commitments relating thereto terminated, subject to the provisions of Section 10.2.

     Section 10.10. Limitation of Guaranty of CSF. Notwithstanding anything to contrary contained herein, CSF shall not be deemed a Guarantor with respect to any and all indebtedness that it owes to the Administrative Agent and the Lenders as a Borrower hereunder (but shall continue to be a Guarantor with respect to all other indebtedness).

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Remainder of Page Intentionally Left Blank.
Signature Pages Follow.

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     IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed and delivered by its proper and duly authorized officers as of the day and year first above written.

BORROWER:	CAPITALSOURCE INC., a Delaware corporation
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer
BORROWER AND GUARANTOR:	CAPITALSOURCE FINANCE LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer
GUARANTORS:	CAPITALSOURCE TRS LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer
	CSE MORTGAGE LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer
	CAPITALSOURCE SF TRS LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer
	CAPITALSOURCE CF LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer

	CAPITALSOURCE FINANCE II LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer
	CSE CHR HOLDCO LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer
	CSE CHR HOLDINGS LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer
	CS FUNDING IX DEPOSITOR LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer
AGREED AND AFFIRMED:	CAPITALSOURCE INTERNATIONAL INC., a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
	Name:		Jeffrey A. Lipson
	Title:		Senior Vice President and Treasurer

Signatures Continued on Following Page

ADMINISTRATIVE AGENT	WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent, as Issuing Lender, and as a Lender
	By:	/S/ RAJ SHAH
	Name:		Raj Shah
	Title:		Managing Director

Signatures Continued on Following Page

BANK OF AMERICA, N.A., as a Lender
By:	/S/ ALLEN D. SHIFFLET
Name:		Allen D. Shifflet
Title:		Managing Director

Signatures Continued on Following Page

BANK OF AMERICA, N.A., as Issuing Lender and as a Lender
By:	/S/ JOHN W. WOODIEL III
Name:		John W. Woodiel III
Title:		Senior Vice President

Signatures Continued on Following Page

MORGAN STANLEY BANK, N.A., as a Lender
By:	/S/ RYAN VETSCH
Name:		Ryan Vetsch
Title:		Authorized Signatory

Signatures Continued on Following Page

SUNTRUST BANK, as a Lender
By:	/S/ MARK KELLEY
Name:		Mark Kelley
Title:		Managing Director

Signatures Continued on Following Page

CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, F/K/A CREDIT SUISSE, CAYMAN ISLAND BRANCH, as a Lender
By:	/S/ JAY CHALL
Name:		Jay Chall
Title:		Director
By:	/S/ KEVIN BUDDHDEW
Name:		Kevin Buddhdew
Title:		Associate

Signatures Continued on Following Page

BMO CAPITAL MARKETS FINANCING, INC., as a Lender
By:	/S/ CATHERINE GRYCZ
Name:		Catherine Grycz
Title:		Vice President

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BARCLAYS BANK PLC, as a Lender
By:	/S/ MARK MANSKI
Name:		Mark Manski
Title:		Managing Director

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BEAR STEARNS CORPORATE LENDING INC., as a Lender
By:	/S/ RICHARD J. POWOROZNEK
Name:		Richard J. Poworoznek
Title:		Executive Director

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BAYERISCHE HYPO-UND VEREINSBANK AG, as a Lender
By:	/S/ LORIANN CURNYN
Name:		Loriann Curnyn
Title:		Managing Director
By:	/S/ FREDERICK SCHLOMANN
Name:		Frederick Schlomann
Title:		Director

DEUTSCHE BANK AG NEW YORK BRANCH, as a Lender
By:	/S/ ROBERT CHESLEY
Name:		Robert Chesley
Title:		Director
By:	/S/ MICHAEL CAMPITES
Name:		Michael Campites
Title:		Vice President

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JPMORGAN CHASE BANK, N.A., as a Lender
By:	/S/ RICHARD J. POWOROZNEK
Name:		Richard J. Poworoznek
Title:		Executive Director

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SOCIÉTÉ GÉNÉRALE, as a Lender
By:	/S/ WILLIAM AISHTON
Name:		William Aishton
Title:		Director

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FORTIS BANK SA/NV, New York Branch, as a Lender
By:	/S/ BARRY CHUNG
Name:		Barry Chung
Title:		Director
By:	/S/ JACK AU
Name:		Jack Au
Title:		Director

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FIRST COMMERCIAL BANK NEW YORK AGENCY, as a Lender
By:	/S/ MAY HSIAO
Name:		May Hsiao
Title:		Assistant General Manager

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MEGA INTERNATIONAL COMMERCIAL BANK CO., LTD., LOS ANGELES BRANCH, as a Lender
By:	/S/ CHIA JANG LIU
Name:		Chia Jang Liu
Title:		SVP & General Manager

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CHANG HWA COMMERCIAL BANK, LTD., NEW YORK BRANCH, as a Lender
By:	/S/ DAWN CHENG
Name:		Dawn Cheng
Title:		Assistant Vice President

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THE BANK OF EAST ASIA, LTD., NEW YORK BRANCH, as a Lender
By:	/S/ KENNETH PETTIS
Name:		Kenneth Pettis
Title:		Senior Vice President
By:	/S/ KITTY SIN
Name:		Kitty Sin
Title:		Senior Vice President

Signatures Continued on Following Page

CITIBANK, N.A., as a Lender
By:	/S/ ROBERT GOLDSTEIN
Name:		Robert Goldstein
Title:		Managing Director/Senior Credit Officer

EX-10.11

Exhibit 10.11

COMPOSITE VERSION:

reflects all amendments through November 5, 2009

AMENDED SECURITY AGREEMENT

     This AMENDED SECURITY AGREEMENT (this “Security Agreement”), is entered into as of July 27, 2009 by and among (i) CAPITALSOURCE INC., a Delaware corporation (“Initial Borrower”), (ii) the direct and indirect Subsidiaries of the Initial Borrower listed on Part A of Schedule 1 attached hereto and any other Subsidiary of the Initial Borrower that becomes a guarantor under the Credit Agreement referred to below (collectively, the “Guarantors” and such parties, together with Initial Borrower, collectively the “Obligors” and each individually as an “Obligor”) and (iii) WACHOVIA BANK, NATIONAL ASSOCIATION, in its capacity as Collateral Agent under the Intercreditor Agreement referred to below (in such capacity, the “Collateral Agent”) for the Secured Parties (as defined below).

RECITALS

     WHEREAS, certain Obligors are party to that certain Credit Agreement dated as of March 14, 2006 (as amended, modified, extended, renewed, restated, replaced or Refinanced (as defined in the Intercreditor Agreement) from time to time, the “Credit Agreement”), among certain Obligors, other Credit Parties (as defined therein), the several banks and other financial institutions as may from time to time become parties thereto (the “Lenders”) and Wachovia Bank, National Association, as the Administrative Agent (the “Administrative Agent”);

     WHEREAS, the Guarantors other than the Initial Borrower and CapitalSource International Inc. (“CS International”) have, pursuant to the Credit Agreement, unconditionally guaranteed the Credit Agreement Obligations (as defined below);

     WHEREAS, the Initial Borrower and CS International (the “CSF Guarantors”) have, pursuant to that certain Guaranty Agreement, dated as of December 20, 2006 (the “CSF Guaranty”), among the CSF Guarantors and the Administrative Agent, unconditionally guaranteed the Guaranteed Obligations (as defined in the CSF Guaranty);

     WHEREAS, the Obligors have, pursuant to that certain Security Agreement, dated as of December 23, 2008, as amended on July 10, 2009 and as supplemented through the date hereof (“Original Security Agreement”), by the Obligors in favor of the Administrative Agent for the ratable benefit of the Lenders, granted to the Administrative Agent a security interest in the Collateral (as defined below);

     WHEREAS, the Initial Borrower has issued its 12.75% First Priority Senior Secured Notes due 2014 in an initial aggregate principal amount of $300,000,000 pursuant to an Indenture dated as of July 27, 2009 (as the same may be amended, supplemented, modified, extended, renewed, restated, replaced or Refinanced from time to time, the “Indenture”) which provides for the issuance by the Borrower of its 12.75% First Priority Senior Secured Notes due in 2014 in on or more series (all notes from time to time pursuant to the Indenture, as the same may be amended, supplemented, modified, extended, renewed, restated, replace or Refinanced from time to time, the “Senior Secured Notes”) and in connection with any issuance, certain Obligors listed on Part B on Schedule 1 (as the same may be amended, substituted or replaced from time to time)(each a “SN Note Obligor”) have issued and/or may issue to the Initial Borrower promissory notes (each such note issued from time to time, as the same may be amended, supplemented or otherwise modified from time to time, a “SN Intercompany Note”) each in a principal amount up to the aggregate principal amount of the outstanding Senior Secured Notes that is secured by such SN Note Obligor’s Specified Collateral (as defined below);

     WHEREAS, all SN Intercompany Notes, upon issuance, are to be pledged, and all of the Initial Borrower’s rights, title and interest in (i) this Security Agreement, (ii) an Amended Pledge Agreement dated as of July 27, 2009 among the Initial Borrower, other Obligors listed therein, the Collateral Agent, the servicer party thereto and the collateral custodian party thereto (as the same may be amended, supplemented or otherwise modified from time to time, the “Pledge Agreement”), and (iii) certain other collateral documents shall be collaterally assigned, pursuant to a Pledge and Collateral Assignment Agreement dated as of July 27, 2009 between the Initial Borrower and the Trustee under the Indenture (the “Note Trustee”) (as the same may be amended, supplemented or otherwise modified from time to time, the “Pledge and Assignment”), by the Initial Borrower to the Note Trustee as security for the Initial Borrower’s obligations in respect of the Senior Secured Notes;

     WHEREAS, the Obligors have entered into that certain Amendment No. 8 to Credit Agreement, dated as of July 10, 2009 (“Amendment No. 8”), pursuant to which the Administrative Agent and the Lenders have agreed to permit the issuance of certain Senior Secured Notes;

     WHEREAS, the Collateral Agent, the Administrative Agent, as Authorized Representative (as defined in the Intercreditor Agreement) under the Credit Agreement, and the Note Trustee, as Authorized Representative under the Indenture, have entered into an Intercreditor Agreement dated as of July 27, 2009 (as the same may be amended, supplemented or otherwise modified from time to time, the “Intercreditor Agreement”), consented to by each Obligor, that provides that the Credit Agreement Secured Parties (as defined below) and the Notes Secured Parties (as defined below) (other than the Initial Borrower), during the continuation of an Event of Default, will share with each other any proceeds realized by them in excess of their pro rata share (as described in the Intercreditor Agreement) of any of the Shared Collateral (as defined therein);

     WHEREAS, each Obligor acknowledges that it has and will continue to derive substantial direct and indirect benefit from the Extensions of Credit under the Credit Agreement and will derive substantial direct and indirect benefit from the issuance of the Senior Secured Notes; and

     WHEREAS, in connection with the transactions and agreements contained in and contemplated by Amendment No. 8, the Intercreditor Agreement, and the issuance of the Senior Secured Notes, the Obligors and the Administrative Agent have agreed to amend the terms and provisions of the Original Security Agreement to be in favor of the Collateral Agent for the ratable benefit of the Secured Parties (as defined below) to (i) in the case of the Obligors other than CS International, secure the payment and performance of all of the Credit Agreement Obligations, (ii) in the case of CS International, secure the payment and performance of the Guaranteed Obligations, (iii) in the case of the Obligors (other than any SN Note Obligor), secure the payment and performance of all of the Note Obligations, and (iv) in the case of the SN Note Obligors, secure the payment and performance of all of the SN Intercompany Notes Obligations.

     NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby amend the Original Security Agreement to read as follows:

     1. Definitions.

     (a) Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Intercreditor Agreement, and to the extent not defined therein, the Credit Agreement, and the following terms which are defined in the UCC are used herein as so defined: Accessions, Accounts, As-Extracted Collateral, Chattel Paper, Commercial Tort Claims, Consumer Goods, Control, Deposit Accounts, Documents, Electronic Chattel Paper, Equipment, Farm Products,

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Fixtures, General Intangibles, Goods, Instruments, Inventory, Investment Property, Letter-of-Credit Rights, Manufactured Homes, Proceeds, Securities Account, Securities Intermediary, Security Entitlement, Software, Supporting Obligations and Tangible Chattel Paper.

     (b) In addition, the following terms shall have the following meanings:

     “Administrative Agent” shall have the meaning set forth in the recitals.

     “Amendment No. 8” shall have the meaning set forth in the recitals.

     “Assigned Agreements” shall have the meaning set forth in Section 3.

     “Collateral” shall have the meaning set forth in Section 3.

     “Collateral Agent” shall have the meaning set forth in the preamble.

     “Collateral Agent Resignation Event” shall mean the occurrence of each of the following: (i) the Administrative Agent shall have resigned or been removed as Collateral Agent pursuant to Section 4.06 of the Intercreditor Agreement and (ii) the Credit Agreement Obligations have been paid in full and the Commitments under the Credit Agreement have been terminated without being Refinanced.

     “Control Agreements” mean collectively, the Deposit Account Control Agreements and the Securities Account Control Agreements.

     “Copyrights” means any and all copyrights and copyright registrations, including, (i) the copyright registrations and recordings thereof and all applications in connection therewith, (ii) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including payments under all licenses entered into in connection therewith and damages and payments for past or future infringements thereof, (iii) the right to sue for past, present and future infringements thereof, and (iv) all of each Obligor’s rights corresponding thereto throughout the world.

     “Credit Agreement” shall have the meaning set forth in the recitals.

     “Credit Agreement Obligations” means all debts, liabilities and obligations for monetary amounts (including, but not limited to, all Credit Party Obligations), owing by any Obligor to the Lenders and the Administrative Agent whenever arising, or any of their assigns, as the case may be, whether due or to become due, matured or unmatured, liquidated or unliquidated, contingent or non-contingent, and all covenants and duties of any Obligor regarding such amounts, of any kind or nature, present or future, arising under or in respect of any Credit Document, whether or not evidenced by any separate note, agreement or other instrument. The term Credit Agreement Obligations includes, without limitation, all interest (including interest that accrues after the commencement against any Obligor of any action under the Bankruptcy Code), prepayment penalties or premiums, liquidated damages, fees, expenses, costs, indemnities, or other sums (including reasonable attorney costs) chargeable to an Obligor under the Credit Documents. Subject to compliance with Section 31 hereof, for purposes of this definition “Credit Agreement Obligations” shall also include any Refinanced Credit Agreement Obligations.

     “Credit Agreement Secured Parties” means the Lenders (including the Swingline Lender and the Issuing Lender) and the Administrative Agent.

     “CS International” shall have the meaning set forth in the recitals.

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     “Deposit Account” shall have the meaning assigned to such term in Section 9-102 of the UCC.

     “Deposit Account Control Agreement” shall mean an agreement reasonably satisfactory to the Collateral Agent establishing the Collateral Agent’s Control with respect to any Deposit Account.

     “Directing Holder” shall have the meaning set forth in Section 32(c).

     “Event of Default” shall have the meaning set forth in Section 10.

     “Excluded Collateral” means the following: (a) Capital Stock of the Initial Borrower held as treasury stock; (b) any lease, license, permit, contract or agreement or any property or assets subject to any lease, license, permit, contract or agreement, if and for so long as a grant of a Lien thereon under the Secured Credit Documents shall constitute or result in (i) the abandonment, invalidation or unenforceability of any right, title or interest of any Obligor or Subsidiary therein or (ii) a breach or termination pursuant to the terms of, or a default under, any such lease, license, contract, permit or agreement (other than (x) to the extent that there would be no abandonment, invalidation, unenforceability, breach or termination with the consent of, or by the taking of any action solely by, any Obligor or any of their respective Affiliates that does not involve obtaining the consent or approval of any third party or (y) to the extent that any such term would be rendered ineffective pursuant to the UCC (including, without limitation, pursuant to Sections 9-406, 9-407, 9-408, or 9-409 of the UCC) of any relevant jurisdiction or other Applicable Law including Insolvency Law (at such time as it may be applicable), or principles of equity), provided that such lease, license, contract, permit or agreement was not entered into in violation of the restrictions set forth in Section 5.36 of the Credit Agreement or Section 4.08 of the Indenture; (c) any fixed or capital asset in which any Obligor has an interest that is subject to a Permitted Lien (as defined in clause (vii) of the definition of “Permitted Lien” in the Credit Agreement) and so long as the contractual obligation pursuant to which such Lien is granted (or in the document providing for such capital lease) prohibits or requires the consent of any Person (other than the Initial Borrower and its Affiliates) as a condition to the creation of any other Lien on such asset; and (d) any “intent to use” Trademark applications for which a statement of use has not been filed (but only until such statement is filed); provided, however, the term “Excluded Collateral” shall not include any proceeds, products, substitutions or replacements of Excluded Collateral (unless such proceeds, products, substitutions or replacements would otherwise constitute Excluded Collateral).

     “Guarantor” shall have the meaning set forth in the preamble.

     “Indemnified Party” shall have the meaning set forth in Section 11.

     “Indenture” shall have the meaning set forth in the recitals.

     “Indenture Documents” means the Indenture, the Senior Secured Notes and the Guarantees (as defined in the Indenture) endorsed thereon, the Registration Rights Agreement (as defined in the Indenture), the Security Agreement, the Pledge Agreement and the Pledge and Assignment (including any documents with respect to a Refinancing of such indebtedness).

     “Initial Borrower” shall have the meaning set forth in the preamble.

     “Intellectual Property” means any and all Licenses, Patents, Copyrights, Trademarks, the goodwill associated with such Trademarks, Software, trade secrets and other intellectual property rights in all jurisdictions, whether registered or not registered.

     “Intercreditor Agreement” shall have the meaning set forth in the recitals.

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     “Lenders” shall have the meaning set forth in the recitals.

     “Licenses” means rights under or interests in any Patent, Trademark, Copyright or other Intellectual Property, including software license agreements with any other party, whether the applicable Obligor is a licensee or licensor under any such license agreement and the right to use the foregoing in connection with the enforcement of the Secured Parties’ rights under the Secured Credit Documents.

     “Note Obligations” means all debts, liabilities and obligations for monetary amounts owing by any Obligor (other than any SN Note Obligor) to the Holders and the Note Trustee, whenever arising, or any of their assigns, as the case may be, whether due or to become due, matured or unmatured, liquidated or unliquidated, contingent or non-contingent, and all covenants and duties of any Obligor (other than any SN Note Obligor) regarding such amounts, of any kind or nature, present or future, arising under or in respect of any of the Indenture, the Senior Secured Notes or any other Indenture Document (other than the Pledge and Assignment), whether or not evidenced by any separate note, agreement or other instrument. The term Note Obligations includes, without limitation, all interest (including interest that accrues after the commencement against any Obligor of any action under the Bankruptcy Code), prepayment penalties or premiums, make whole amounts, liquidated damages, fees, expenses, costs, indemnities, or other sums (including reasonable attorney costs) chargeable to an Obligor (other than any SN Note Obligor) under the Indenture, the Senior Secured Notes or any of the other Indenture Documents (other than the Pledge and Assignment). Subject to compliance with Section 31 hereof, for purposes of this definition “Note Obligations” shall also include any Refinanced Note Obligations.

     “Note Trustee” shall have the meaning set forth in the recitals.

     “Notes Secured Parties” means and includes (i) solely with respect to any SN Intercompany Notes Obligations, the Initial Borrower, and (ii) solely with respect to any Note Obligations owed by the Initial Borrower or CapitalSource Finance LLC, the Note Trustee for the benefit of the Holders; provided that the Note Secured Parties shall only include the Initial Borrower if the subordination provisions contained in Sections 5.13 and 5.14 of the Intercreditor Agreement are at all times in full force and effect with respect to the Initial Borrower acting on its own behalf; provided, further, that in no event shall the immediately preceding proviso have the effect of excluding the Initial Borrower as a Notes Secured Party with respect to (x) actions taken by the Note Trustee or any Holders pursuant to the Indenture, the Senior Secured Notes or the Pledge and Assignment in connection with Section 5.15 of the Intercreditor Agreement or (y) the creation of a security interest hereunder in each SN Note Obligor’s Specified Collateral.

     “Obligor” or “Obligors” shall have the meaning set forth in the preamble.

     “Patents” means patents and patent applications, including, (i) all reissues, reexaminations, divisionals, continuations, continuations-in-part, substitutions, extensions, or renewals thereof and improvements thereon, (ii) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including payments under all licenses entered into in connection therewith and damages and payments for past or future infringements thereof, (iii) the right to sue for past, present and future infringements thereof, and (iv) all of each Obligor’s rights corresponding thereto throughout the world.

     “Permitted Liens” shall have the meaning specified in the Credit Agreement and, if the Credit Agreement is no longer in effect, the Indenture.

     “Pledge Agreement” shall have the meaning set forth in the recitals.

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     “Pledge and Assignment” shall have the meaning set forth in the recitals.

     “Requisite Holders” means (i) with respect to the Credit Agreement Obligations, the Required Lenders or such other group of Lenders as may from time to time be required under the Credit Agreement and (ii) with respect to the Note Obligations and the SN Intercompany Note Obligations, the Holders of at least 66⅔ % in aggregate principal amount of Senior Secured Notes then outstanding or such other group of Holders as may from time to time be required under the Indenture.

     “Secured Obligations” shall have the meaning set forth in Section 2.

     “Secured Parties” means (i) the Credit Agreement Secured Parties and (ii) the Notes Secured Parties (including, without limitation, each Directing Holder).

     “Securities Account” shall have the meaning assigned to such term in Section 8-501 of the UCC.

     “Securities Account Control Agreement” means a control agreement in a form reasonably satisfactory to the Collateral Agent establishing the Collateral Agent’s Control with respect to any Securities Account.

     “Security Agreement” shall have the meaning set forth in the preamble.

     “Senior Secured Notes” shall have the meaning set forth in the recitals.

     “SN Intercompany Note” shall have the meaning set forth in the recitals.

     “SN Intercompany Notes Obligations” means all obligations and indebtedness (including, but not limited to, all expenses and charges, legal and otherwise, incurred by any holder of any SN Intercompany Note (other than the Initial Borrower) or the Note Trustee in collecting or enforcing any of the SN Intercompany Notes Obligations or in realizing on or protecting any security therefor, including, without limitation, the security granted hereunder, pursuant to Section 13 of each SN Intercompany Note, and all indemnities, fees and interest thereon) of each SN Note Obligor, whether now existing or hereafter incurred under, arising out of or in connection with the SN Intercompany Note or Notes issued by such SN Note Obligor and the due performance and compliance by such SN Note Obligor with all the terms, conditions and agreements contained in the SN Intercompany Note or Notes issued by such SN Note Obligor, howsoever evidenced, created, incurred or acquired, whether primary, secondary, direct, contingent, or joint and several, whether now existing or hereafter incurred.

     “SN Note Obligor” shall have the meaning set forth in the recitals.

     “Software” means “software” as such term is defined in Section 9-102(a)(75) of the UCC.

     “Specified Collateral” of any SN Note Obligor, means the Collateral owned by such SN Note Obligor.

     “Trademarks” means any and all trademarks, trade names, registered trademarks, trademark applications, service marks, registered service marks, service mark applications, and domain names, including (i) all renewals thereof, (ii) all income, royalties, damages and payments now and hereafter due or payable under and with respect thereto, including payments under all licenses entered into in connection therewith and damages and payments for past or future infringements or dilutions thereof, (iii) the right to sue for past, present and future infringements and dilutions thereof, (iv) the goodwill of

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each Obligor’s business symbolized by the foregoing or connected therewith, and (v) all of each Obligor’s rights corresponding thereto throughout the world.

     “UCC” shall mean the Uniform Commercial Code as from time to time in effect in the State of New York; provided, however, that, in the event that, by reason of mandatory provisions of law, any of the attachment, perfection or priority of the Collateral Agent’s and the Secured Parties security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term “UCC” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions.

     2. Security for Obligations.

     This Security Agreement is made by each Obligor for the benefit of the respective Secured Parties to secure:

     (a) the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the Credit Agreement Obligations, owing by each Obligor (other than CS International);

     (b) the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the Guaranteed Obligations, owing by CS International;

     (c) the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the Note Obligations, owing by each Obligor (other than any SN Note Obligor);

     (d) the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the SN Intercompany Notes Obligations, owing by each SN Note Obligor;

     (e) any and all amounts, advances, liabilities and obligations owing by any Obligor (other than the SN Note Obligors with respect to the Note Obligations, but without limiting such amounts, advances, liabilities and obligations owing by any SN Note Obligor with respect to the SN Intercompany Notes Obligations) or otherwise to the Collateral Agent whenever arising, including, without limitation (i) any and all costs, expenses, fees, indemnities and other sums chargeable to any Obligor pursuant to any Secured Credit Document, (ii) in collecting or enforcing any of the Credit Agreement Obligations, Guaranteed Obligations or Note Obligations, (iii) in realizing on or protecting or preserving any security therefor, or (iv) for taking any action under or otherwise in connection with any Secured Credit Document, howsoever evidenced, created, incurred or acquired, whether primary, secondary, direct, contingent or joint and several, whether now existing or hereafter incurred;

     (f) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations, or liabilities referred to in clauses (a) through (e) above, after an Event of Default shall have occurred and be continuing, the expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by the Collateral Agent of its rights hereunder, together with attorneys’ fees and court costs; and

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     (g) all amounts paid by the Collateral Agent or any Secured Party as to which the Collateral Agent or such Secured Party has the right to reimbursement under Section 11(b) of this Security Agreement,

all such obligations, liabilities, sums and expenses set forth in clauses (a) through (g) of this Section 2 being hereinafter collectively called the “Secured Obligations”.

     3. Grant of Security Interest in the Collateral.

     (a) To secure the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the Secured Obligations owing by each Obligor, each Obligor hereby grants to the Collateral Agent, for the ratable benefit of the respective Secured Parties, a continuing security interest in any and all right, title and interest of such Obligor in and to the following, whether now owned or existing or owned, acquired, or arising hereafter (collectively, the “Collateral”):

     (i) all Accounts;

     (ii) all cash and Cash Equivalents;

     (iii) all Chattel Paper (including Electronic Chattel Paper);

     (iv) those certain Commercial Tort Claims of such Obligor set forth on Schedule 3(a)(iv) attached hereto (as such Schedule may be updated from time to time by such Obligor);

     (v) all Copyrights;

     (vi) all Deposit Accounts;

     (vii) all Documents;

     (viii) all Equipment;

     (ix) all Fixtures;

     (x) all General Intangibles;

     (xi) all Goods;

     (xii) all Instruments;

     (xiii) all Inventory;

     (xiv) all Investment Property;

     (xv) all Letter-of-Credit Rights;

     (xvi) all Licenses;

     (xvii) all Material Contracts and all such other agreements, contracts, leases, licenses, tax sharing agreements or hedging arrangements now or hereafter entered into by an Obligor, as

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such agreements may be amended or otherwise modified from time to time (collectively, the “Assigned Agreements”), including without limitation, (A) all rights of an Obligor to receive moneys due and to become due under or pursuant to the Assigned Agreements, (B) all rights of an Obligor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (C) claims of an Obligor for damages arising out of or for breach of or default under the Assigned Agreements and (D) the right of an Obligor to terminate the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder;

     (xviii) all Payment Intangibles;

     (xix) all Patents;

     (xx) all Securities Accounts;

     (xxi) all Trademarks;

     (xxii) all Software;

     (xxiii) all Supporting Obligations;

     (xxiv) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks, and related data processing software (owned by such Obligor or in which it has an interest) that at any time evidence or contain information relating to any Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon;

     (xxv) all other personal property of any kind or type whatsoever owned by such Obligor; and

     (xxvi) to the extent not otherwise included, all Accessions, Proceeds and products of any and all of the foregoing.

     (b) The Obligors and the Collateral Agent, on behalf of the respective Secured Parties, hereby acknowledge and agree that the security interest created hereby in the Collateral is not to be construed as a present assignment of any Intellectual Property.

     (c) Notwithstanding anything to the contrary contained in clause (a) above, the security interest created by this Security Agreement shall not extend to and the term “Collateral” shall not include (i) any Excluded Collateral, (ii) any Pledged Collateral (as defined in the Pledge Agreement) in which the Collateral Agent has been granted a perfected security interest pursuant to the Pledge Agreement, (iii) any SN Intercompany Notes and, to the extent not otherwise constituting Shared Collateral, any proceeds, products, substitutions or replacements thereof or (iv) any right, title or interest of the Initial Borrower, solely in its capacity as a Secured Party, in or to any agreement that grants security to the Initial Borrower in the Specified Collateral and which agreement is collaterally assigned by the Initial Borrower to the Note Trustee pursuant to the Pledge and Assignment as in effect on the date hereof.

     (d) (i) Notwithstanding anything herein or in any other Credit Document to the contrary, the maximum liability under this Security Agreement and under the other Credit Documents of each Obligor shall not exceed an amount equal to the largest amount that would not render such Obligor’s obligations hereunder subject to avoidance under Section 548 of the Bankruptcy Code or any equivalent provision of the law of any state and (ii) notwithstanding anything herein or in any other Indenture Document to the

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contrary, the maximum liability under this Security Agreement and under the other Indenture Documents of each Obligor shall not exceed an amount equal to the largest amount that would not render such Obligor’s obligations hereunder subject to avoidance under Section 548 of the Bankruptcy Code or any equivalent provision of the law of any state.

     4. Provisions Relating to Accounts, Contracts and Agreements.

     (a) Anything herein to the contrary notwithstanding, each of the Obligors shall remain liable under each of its Accounts, contracts and agreements to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account or the terms of such contract or agreement. Neither the Collateral Agent nor any Secured Party (other than the Initial Borrower) shall have any obligation or liability under any Account (or any agreement giving rise thereto), contract or agreement by reason of or arising out of this Security Agreement or the receipt by the Collateral Agent or any Secured Party (other than the Initial Borrower) of any payment relating to such Account, contract or agreement pursuant hereto, nor shall the Collateral Agent or any Secured Party (other than the Initial Borrower) be obligated in any manner to perform any of the obligations of an Obligor under or pursuant to any Account (or any agreement giving rise thereto), contract or agreement, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto), contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

     (b) The Collateral Agent hereby authorizes the Obligors to collect the Accounts; provided, that the Collateral Agent may curtail or terminate such authority at any time after the occurrence and during the continuation of an Event of Default. If required by the Collateral Agent at any time after the occurrence and during the continuation of an Event of Default, any payments of Accounts, when collected by the Obligors (i) shall be forthwith (and in any event within two (2) Business Days) deposited by the Obligors in a collateral account in which the Collateral Agent maintains Control, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in Section 12 hereof, and (ii) until so turned over, shall be held by the Obligors in trust for the Collateral Agent and the Secured Parties, segregated from other funds of the Obligors.

     (c) At any time and from time to time, subject to the limitations set forth in this clause (c) and Section 5.5 of the Credit Agreement, the Collateral Agent shall have the right, but not the obligation, to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Obligors shall furnish all such assistance and information as the Collateral Agent may require in connection with such test verifications. Upon the Collateral Agent’s request following the occurrence and during the continuation of an Event of Default and at the expense of the Obligors, the Obligors shall cause independent public accountants or others satisfactory to the Collateral Agent to furnish to the Collateral Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts. Following the occurrence and during the continuation of an Event of Default, the Collateral Agent in its own name or in the name of others may communicate with account debtors on the Accounts to verify with them to the Collateral Agent’s satisfaction the existence, amount and terms of any Accounts.

     5. Representations and Warranties. Each Obligor hereby represents and warrants to the Collateral Agent, for the benefit of the Secured Parties, that so long as any of the Secured Obligations (other than unasserted contingent indemnity obligations that survive termination of the Secured Credit Documents pursuant to the stated terms thereof) or any Senior Secured Notes remain outstanding, any

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Secured Credit Document is in effect and until all Commitments under the Credit Agreement shall have been terminated:

     (a) Chief Executive Office; Books & Records; Legal Name; State of Formation. As of the date hereof, each Obligor’s chief executive office and chief place of business are (and for the prior twelve (12) months has been) located at the locations set forth on Schedule 5(a), and as of the date hereof, each Obligor keeps its books and records at such locations. As of the date hereof, each Obligor’s exact legal name is as shown in this Security Agreement and its state of incorporation or organization is (and for the prior twelve (12) months has been) the location set forth on Schedule 5(a). Except for the changes described on Schedule 5(a), no Obligor has in the twelve (12) months preceding date hereof changed its name, been party to a merger or consolidation.

     (b) Intentionally Omitted.

     (c) Intentionally Omitted.

     (d) Ownership. Each Obligor is the legal and beneficial owner of its Collateral.

     (e) Security Interest/Priority. This Security Agreement creates a valid security interest in favor of the Collateral Agent, for the benefit of the respective Secured Parties, in the Collateral of such Obligor and, when properly perfected by filing, shall constitute a valid first priority, perfected security interest in such Collateral, to the extent such security interest can be perfected by filing a financing statement under the UCC of the jurisdiction of organization of such Obligor, free and clear of all Liens except for Permitted Liens.

     (f) Consents. Except for (i) the filing or recording of UCC financing statements and/or (ii) the filing of appropriate notices with the United States Patent and Trademark Office and the United States Copyright Office and applicable foreign intellectual property offices, no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder, member or creditor of such Obligor), is required (A) for the grant by such Obligor of the security interest in the Collateral granted hereby or for the execution, delivery or performance of this Security Agreement by such Obligor or (B) for the perfection of such security interest.

     (g) Types of Collateral. None of the Collateral consists of, or is the Proceeds of, As-Extracted Collateral, Consumer Goods, Farm Products, Manufactured Homes or standing timber (as such term is used in the UCC).

     (h) Intentionally Omitted.

     (i) Intentionally Omitted.

     (j) Intentionally Omitted.

     (k) Intentionally Omitted.

     (l) Intentionally Omitted.

     (m) Intentionally Omitted.

     (n) Intentionally Omitted.

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     (o) Binding Obligation; Perfection. This Security Agreement constitutes a valid and binding obligation of the Obligors enforceable against them in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, or similar laws relating to the enforcement of creditors’ rights generally and by general equitable principles.

     (p) Intentionally Omitted.

     6. Covenants. Each Obligor covenants that, so long as any of the Secured Obligations (other than unasserted contingent indemnity obligations that survive termination of the Secured Credit Documents pursuant to the stated terms thereof) or any Senior Secured Notes remain outstanding, any Secured Credit Document is in effect and until all Commitments under the Credit Agreement shall have been terminated, such Obligor shall:

     (a) Perfection of Security Interest by Filing, Etc. Execute and deliver to the Collateral Agent and/or file such agreements, assignments or instruments (including affidavits, notices, reaffirmations and amendments and restatements of existing documents, as the Collateral Agent may reasonably request) and do all such other things as the Collateral Agent may reasonably deem necessary or appropriate (i) to assure to the Collateral Agent its security interests hereunder are perfected, including (A) such financing statements (including continuation statements) or amendments thereof or supplements thereto or other instruments as the Collateral Agent may from time to time reasonably request in order to perfect and maintain the security interests granted hereunder in accordance with the UCC and any other personal property security legislation in the appropriate state(s) or province(s), (B) with regard to Copyrights, a Notice of Grant of Security Interest in Copyrights for filing with the United States Copyright Office in the form of Schedule 6(a)-1 attached hereto, (C) with regard to Patents, a Notice of Grant of Security Interest in Patents for filing with the United States Patent and Trademark Office in the form of Schedule 6(a)-2 attached hereto, (D) with regard to Trademarks, a Notice of Grant of Security Interest in Trademarks for filing with the United States Patent and Trademark Office in the form of Schedule 6(a)-3 attached hereto and (E) with regard to non-U.S. Intellectual Property, such recordation and other filings deemed necessary or desirable by the Collateral Agent, (ii) to consummate the transactions contemplated hereby and (iii) to otherwise protect and assure the Collateral Agent of its rights and interests hereunder, provided, however, that so long as no Default or Event of Default shall have occurred and be continuing, the perfection obligations of the Obligors pursuant to this Security Agreement shall be limited to such actions as are necessary or desirable to perfect security interests by the filing of a financing statement in the jurisdiction of each Obligor’s location (as defined in §9-307 of the UCC). Each Obligor hereby authorizes the Collateral Agent (at such Obligor’s expense) to prepare and file such financing statements (including continuation statements) or amendments thereof or supplements thereto or other instruments as the Collateral Agent may from time to time deem necessary or appropriate in order to perfect and maintain the security interests granted hereunder in accordance with the UCC, including, without limitation, any financing statement that describes the Collateral as “all personal property” or “all assets” of such Obligor or that describes the Collateral in some other manner as the Collateral Agent deems necessary or advisable.

     (b) Intentionally Omitted.

     (c) Perfection of Security Interest Through Control. If any Collateral shall consist of Deposit Accounts or Securities Accounts, execute and deliver (and, with respect to any Collateral consisting of a Securities Account, cause the Securities Intermediary to execute and deliver) to the Collateral Agent all Control Agreements, assignments, instruments or other documents as reasonably requested by and in form and substance reasonably satisfactory to the Collateral Agent for the purposes of obtaining and maintaining Control of such Collateral; provided that the following Obligors shall promptly deliver (and in any event not later than 45 days after the date hereof) duly executed amended control agreements with

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the applicable Securities Intermediary with respect to the Securities Accounts owned by CapitalSource Finance LLC and CSE Mortgage LLC; provided, further, however, that the Collateral Agent agrees to not deliver any notice of exclusive control or take any other similar action until an Event of Default has occurred and is continuing; provided, further, that upon the occurrence of a Collateral Agent Resignation Event, the applicable Obligor shall use commercially reasonable efforts to (y) assign any Control Agreement existing on the date of the Collateral Agent Resignation Event to the replacement Collateral Agent or replace any such Control Agreement and (z) with respect to any Deposit Account or Securities Account established on or after the Collateral Agent Resignation Event, enter into a Control Agreement with respect thereto. Notwithstanding anything to the contrary contained herein, Control Agreements shall not be required for (i) Deposit Accounts used solely and exclusively for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of employees and, to the extent consistent with past practice and in the ordinary course of business, contractors of the Initial Borrower and its Subsidiaries, (ii) the proceeds in any deposit account that have been pledged to a Financing Agent (as defined in the Lockbox Agreement) pursuant to the Lockbox Agreement or (iii) any immaterial Deposit Accounts; provided, that the aggregate balance in (A) all Deposit Accounts and Securities Accounts of the Obligors not subject to a Control Agreement and (B) all unrestricted cash in accounts of Subsidiaries that are not Obligors shall at all times be less than $10,000,000 plus any amounts that are inadvertently or mistakenly deposited in, or transferred to, any such accounts by a third Person and which are promptly (and, in any event, within three Business Days) deposited or transferred to a Deposit Account or a Securities Account subject to a Deposit Account Control Agreement or Securities Account Control Agreement, as applicable.

     (d) Other Liens. Keep the Collateral free from all Liens, except for Permitted Liens. Neither the Collateral Agent nor any Secured Party authorizes any Obligor to, and no Obligor shall, sell, exchange, transfer, assign, lease or otherwise dispose of the Collateral or any interest therein, except as permitted under the Credit Agreement and the Indenture.

     (e) Preservation of Collateral. Except as could not reasonably be expected to have a Material Adverse Effect, keep the Collateral in good order, condition and repair in all material respects, ordinary wear and tear and casualty events excepted; not use the Collateral in violation of the provisions of this Security Agreement or any other agreement relating to the Collateral or any policy insuring the Collateral or any requirement of Applicable Law.

     (f) Changes in Structure or Location. Not, without providing ten (10) Business Days (or such shorter period as the Collateral Agent may approve) prior written notice to the Collateral Agent and without filing (or confirming that the Collateral Agent has filed) such financing statements and amendments to any previously filed financing statements as the Collateral Agent may require, (i) change its state of incorporation or organization or (ii) change its registered legal name.

     (g) Intentionally Omitted.

     (h) Intentionally Omitted.

     (i) Treatment of Accounts. Maintain at its principal place of business a record of Accounts consistent with customary business practices.

     (j) Intentionally Omitted.

     (k) Intentionally Omitted.

     (l) Intentionally Omitted.

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     (m) Intentionally Omitted.

     (n) Intentionally Omitted.

     (o) Intentionally Omitted.

     (p) Intentionally Omitted.

     (q) Regulatory Approvals. Following the occurrence and during the continuation of an Event of Default, promptly, and at its expense, execute and deliver, or cause to be executed and delivered, all applications, certificates, instruments, registration statements, and all other documents and papers the Collateral Agent may reasonably request and as may be required by law to acquire any Governmental Approval or the consent, approval, registration, qualification or authorization of any other Person deemed necessary or appropriate for the effective exercise of any of the rights under this Security Agreement. Without limiting the generality of the foregoing, if an Event of Default shall have occurred and be continuing, each Obligor shall take any action which the Collateral Agent may request in order to transfer and assign to the Collateral Agent, or to such one or more third parties as the Collateral Agent may designate, or to a combination of the foregoing, each Government Approval of such Obligor. To enforce the provisions of this subsection, upon the occurrence and during the continuance of an Event of Default, the Collateral Agent is empowered to request the appointment of a receiver from any court of competent jurisdiction. Such receiver shall be instructed to seek from the Governmental Authority an involuntary transfer of control of each such Governmental Approval for the purpose of seeking a bona fide purchaser to whom control will ultimately be transferred. Each Obligor hereby agrees to authorize such an involuntary transfer of control upon the request of the receiver so appointed, and, if such Obligor shall refuse to authorize the transfer, its approval may be required by the court. Upon the occurrence and continuance of an Event of Default, such Obligor shall further use its best efforts to assist in obtaining Governmental Approvals, if required, for any action or transaction contemplated by this Security Agreement, including, without limitation, the preparation, execution and filing with the Governmental Authority of such Obligor’s portion of any necessary or appropriate application for the approval of the transfer or assignment of any portion of the assets (including any Governmental Approval) of such Obligor. Because each Obligor agrees that the Collateral Agent’s remedy at law for failure of such Obligor to comply with the provisions of this subsection would be inadequate and that such failure would not be adequately compensable in damages, such Obligor agrees that the covenants contained in this subsection may be specifically enforced, and such Obligor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants.

     (r) Intentionally Omitted.

     (s) Intentionally Omitted.

     (t) Intentionally Omitted.

     (u) Joinder. The Initial Borrower shall cause each Subsidiary which, from time to time, after the date hereof, shall be required pursuant to the provisions of the Credit Agreement or the Indenture, or for which the Initial Borrower shall determine advisable on a voluntary basis, to grant a security interest in any of its assets to the Collateral Agent, by promptly executing a joinder to this Security Agreement substantially in the form attached hereto as Exhibit A and any additional documents, instruments or agreements consistent with the requirements hereof as the Collateral Agent shall reasonably request. Upon execution and delivery of such joinder, such Subsidiary shall constitute an “Obligor” for all purposes hereunder with the same force and effect as if originally named an Obligor herein. The execution and delivery of such joinder agreement shall not require the consent of any Obligor hereunder.

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The rights and obligations of each Obligor hereunder shall remain in full force and effect notwithstanding the addition of any new Obligor as a party to this Security Agreement.

     7. Power of Attorney for Perfection of Liens. Each Obligor hereby irrevocably makes, constitutes and appoints the Collateral Agent, its nominee or any other person whom the Collateral Agent may designate, as such Obligor’s attorney-in-fact with full power and for the limited purpose to file any financing statements, or amendments and supplements to financing statements, continuation financing statements, notices or any similar documents which in the Collateral Agent’s discretion would be necessary, appropriate or convenient in order to perfect, maintain perfection of, preserve or protect the security interests granted hereunder in a manner consistent with the perfection actions required hereby, such power, being coupled with an interest, being and remaining irrevocable so long as any of the Secured Obligations (other than unasserted contingent indemnity obligations that survive termination of the Secured Credit Documents pursuant to the stated terms thereof) or any Senior Secured Notes remain outstanding, any Secured Credit Document is in effect and until all Commitments under the Credit Agreement shall have been terminated. In the event for any reason the law of any jurisdiction other than New York becomes or is applicable to the Collateral of any Obligor or any part thereof, or to any of the Secured Obligations, such Obligor agrees to execute and deliver all such instruments and to do all such other things as the Collateral Agent in its sole discretion reasonably deems necessary or appropriate to preserve, protect and enforce the security interests of the Collateral Agent under the law of such other jurisdiction (and, if an Obligor shall fail to do so promptly upon the request of the Collateral Agent, then the Collateral Agent may execute any and all such requested documents on behalf of such Obligor pursuant to the power of attorney granted hereinabove).

     8. License of Intellectual Property. The Obligors hereby grant, assign, transfer and convey to the Collateral Agent, exercisable upon the occurrence of any Event of Default, the nonexclusive right and license without liability for royalties or any other charges to use, sublicense, and otherwise exploit all Intellectual Property owned or used by any Obligor that relate to the Collateral and any other collateral granted by the Obligors as security for the Secured Obligations, together with any goodwill associated therewith, for such term or terms, on such conditions and in such manner as the Collateral Agent shall determine, whether general, special or otherwise, and whether on an exclusive or nonexclusive basis, and including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof. The use of such license or sublicense by the Collateral Agent shall be exercised, at the option of the Collateral Agent, and only upon the occurrence and during the continuation of an Event of Default; provided, that any license, sublicense or other transaction entered into by the Collateral Agent in accordance herewith shall be binding upon each applicable Obligor notwithstanding any subsequent cure of an Event of Default. This right and license shall inure to the benefit of all successors, assigns and transferees of the Collateral Agent and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to the Obligors.

     9. Performance of Obligations; Advances by Collateral Agent. On failure of any Obligor to perform any of the covenants and agreements contained herein, the Collateral Agent may, at its sole option and in its sole discretion, perform or cause to be performed the same and in so doing may expend such sums as the Collateral Agent may deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums, the payment of any taxes, a payment to obtain a release of a Lien, expenditures made in defending against any adverse claim and all other expenditures which the Collateral Agent may make for the protection of the security interest hereof or may be compelled to make by operation of law. All such sums and amounts so expended shall be repayable by the Obligors on a joint and several basis promptly upon timely notice thereof and demand therefor, shall

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constitute additional Secured Obligations and shall bear interest from the date said amounts are expended at the ABR Default Rate under the Credit Agreement. No such performance of any covenant or agreement by the Collateral Agent on behalf of any Obligor, and no such advance or expenditure therefor, shall relieve the Obligors of any default under the terms of this Security Agreement or any other Secured Credit Documents. The Collateral Agent may make any payment hereby authorized in accordance with any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien, title or claim except to the extent such payment is being contested in good faith by an Obligor in appropriate proceedings and against which adequate reserves are being maintained in accordance with GAAP.

     10. Events of Default. The occurrence of an event which under the Credit Agreement, the Indenture or the Senior Secured Notes would constitute an Event of Default shall be an event of default hereunder (an “Event of Default”).

     11. Remedies.

     (a) General Remedies. If an Event of Default shall have occurred and be continuing, the Collateral Agent may, without notice to or demand upon any Obligor, declare this Security Agreement to be in default, and the Collateral Agent shall thereafter have in any jurisdiction in which enforcement hereof is sought, in addition to all other rights and remedies, the rights and remedies of a secured party under the UCC or the Uniform Commercial Code of any other jurisdiction in which Collateral of any Obligor is located, including, without limitation, the right to take possession of the Collateral of any Obligor, and for that purpose the Collateral Agent may, so far as the relevant Obligor can give authority therefor, enter upon any premises on which the Collateral of such Obligor may be situated and remove the same therefrom. If an Event of Default shall have occurred and be continuing, the Collateral Agent may in its discretion require such Obligor to assemble all or any part of the Collateral of such Obligor at such location or locations within the jurisdiction(s) of such Obligor’s principal office(s) or at such other locations as the Collateral Agent may designate. Unless the Collateral of such Obligor is perishable or threatens to decline speedily in value, the Collateral Agent shall give to such Obligor at least 10 days’ prior notice of the time and place of any public sale of such Collateral or of the time after which any private sale or any other intended disposition is to be made. Each Obligor hereby acknowledges that 10 days’ prior notice of such sale or sales shall be reasonable notice. In addition, each Obligor waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the Collateral Agent’s rights hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral of such Obligor and to exercise its rights with respect thereto.

     (b) Remedies Relating to Accounts. Upon the occurrence of an Event of Default and during the continuation thereof, whether or not the Collateral Agent has exercised any or all of its rights and remedies hereunder, the Collateral Agent shall have the right to enforce any Obligor’s rights against any account debtors and obligors on such Obligor’s Accounts. Each Obligor acknowledges and agrees that the Proceeds of its Accounts remitted to or on behalf of the Collateral Agent in accordance with the provisions of this Section shall be solely for the Collateral Agent’s own convenience and that such Obligor shall not have any right, title or interest in such Proceeds or in any such other amounts except as expressly provided herein. To the extent required by the Collateral Agent, each Obligor agrees to execute any document or instrument, and to take any action, necessary under applicable law in order for the Collateral Agent to exercise its rights and remedies (or be able to exercise its rights and remedies at some future date) with respect to any Accounts of such Obligor where the account debtor is a Governmental Authority; provided, however, unless an Event of Default has occurred and is continuing, the Collateral Agent shall hold in escrow all documents and instruments executed by the Obligors to comply with applicable state law and shall not file such documents and instruments with any Governmental Authority.

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The Collateral Agent and the Secured Parties shall have no liability or responsibility to any Obligor for acceptance of a check, draft or other order for payment of money bearing the legend “payment in full” or words of similar import or any other restrictive legend or endorsement or be responsible for determining the correctness of any remittance. Each Obligor (other than the SN Note Obligors with respect to the Note Obligations, but without limiting the obligation of any SN Note Obligor to provide the indemnity required hereby with respect to the SN Intercompany Notes Obligations) hereby agrees to indemnify the Collateral Agent, the Secured Parties (other than the Initial Borrower) and their affiliates and their respective officers, directors, employees and agents from and against all liabilities, damages, losses, actions, claims, judgments, costs, expenses, charges and reasonable attorneys’ fees suffered or incurred by the Collateral Agent or such Secured Parties (each, an “Indemnified Party”) because of the maintenance of the foregoing arrangements except as relating to or arising out of the gross negligence or willful misconduct of an Indemnified Party or its officers, employees or agents, as finally determined by a court of competent jurisdiction. In the case of any investigation, litigation or other proceeding, the foregoing indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by an Obligor, its directors, shareholders or creditors or an Indemnified Party or any other Person or any other Indemnified Party is otherwise a party thereto.

     (c) Access. In addition to the rights and remedies hereunder, upon the occurrence of an Event of Default and during the continuation thereof, the Collateral Agent shall, so far as the relevant Obligor can give authority therefor, have the right to enter and remain upon the various premises of the Obligors without cost or charge to the Collateral Agent, and use the same, together with materials, supplies, books and records of the Obligors for the purpose of collecting and liquidating the Collateral, or for preparing for sale and conducting the sale of the Collateral, whether by foreclosure, auction or otherwise. In addition, the Collateral Agent may remove Collateral, or any part thereof, from such premises and/or any records with respect thereto, in order to effectively collect or liquidate such Collateral. If the Collateral Agent exercises its right to take possession of the Collateral, each Obligor shall also at its expense perform any and all other steps reasonably requested by the Collateral Agent to preserve and protect the security interest hereby granted in the Collateral, such as placing and maintaining signs indicating the security interest of the Collateral Agent, appointing overseers for the Collateral and maintaining inventory records.

     (d) Nonexclusive Nature of Remedies. Failure by the Collateral Agent or the Secured Parties to exercise any right, remedy or option under this Security Agreement, any other Secured Credit Document, or as provided by law, or any delay by the Collateral Agent or the Secured Parties in exercising the same, shall not operate as a waiver of any such right, remedy or option. No waiver hereunder shall be effective unless it is in writing, signed by the party against whom such waiver is sought to be enforced and then only to the extent specifically stated, which in the case of the Collateral Agent or the Secured Parties shall only be granted as provided herein. To the extent permitted by law, neither the Collateral Agent, the Secured Parties (other than the Initial Borrower), nor any party acting as attorney for the Collateral Agent or such Secured Parties, shall be liable hereunder for any acts or omissions or for any error of judgment or mistake of fact or law other than their gross negligence or willful misconduct hereunder, as finally determined by a court of competent jurisdiction. The rights and remedies of the Collateral Agent and the Secured Parties under this Security Agreement shall be cumulative and not exclusive of any other right or remedy which the Collateral Agent or the Secured Parties may have.

     (e) Actions With Respect to Collateral. Subject to Section 30, the Secured Parties agree that this Security Agreement may be enforced only by the action of the Collateral Agent, acting upon the instructions of the Required Creditors, and that no other Secured Party shall have any right individually to seek to enforce or to enforce this Security Agreement or to realize upon the security to be granted hereby. Notwithstanding any provision of this Security Agreement to the contrary, to the extent any provision in

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this Security Agreement conflicts or is inconsistent with the Intercreditor Agreement, then the Intercreditor Agreement shall prevail.

     (f) Retention of Collateral. In addition to the rights and remedies hereunder, upon the occurrence of an Event of Default and during the continuation thereof, the Collateral Agent may, after providing the notices required by Sections 9-620 and 9-621 of the UCC (or any successor sections of the UCC) or otherwise complying with the notice requirements of applicable law of the relevant jurisdiction, accept or retain all or any portion of the Collateral in satisfaction of the Secured Obligations. Unless and until the Collateral Agent shall have provided such notices, however, the Collateral Agent shall not be deemed to have retained any Collateral in satisfaction of any Secured Obligations for any reason.

     (g) Deficiency. In the event that the proceeds of any sale, collection or realization are insufficient to pay all amounts to which the Collateral Agent or the Secured Parties are legally entitled, the Obligors (other than the SN Note Obligors with respect to the Note Obligations) shall be jointly and severally liable for the deficiency, together with interest thereon at the ABR Default Rate under the Credit Agreement, together with the costs of collection and the reasonable fees of any attorneys employed by the Collateral Agent to collect such deficiency. Any surplus remaining after the full payment and satisfaction of the Secured Obligations shall be returned to the Obligors or to whomsoever a court of competent jurisdiction shall determine to be entitled thereto.

     (h) Other Security. To the extent that any of the Secured Obligations are now or hereafter secured by property other than the Collateral (including, without limitation, real and other personal property and securities owned by an Obligor), or by a guarantee, endorsement or property of any other Person, then the Collateral Agent shall have the right to proceed against such other property, guarantee or endorsement upon the occurrence and during the continuation of any Event of Default, and the Collateral Agent shall have the right, in its sole discretion, to determine which rights, security, Liens, security interests or remedies the Collateral Agent shall at any time pursue, relinquish, subordinate, modify or take with respect thereto, without in any way modifying or affecting any of them or any of the Collateral Agent’s rights or the Secured Obligations under this Security Agreement, or under any other of the Secured Credit Documents.

     12. Standards for Exercising Remedies. To the extent that applicable law imposes duties on the Collateral Agent to exercise remedies in a commercially reasonable manner, each Obligor acknowledges and agrees that it is not commercially unreasonable for the Collateral Agent (a) to fail to complete raw material or work in process into finished goods or other finished products for disposition or to postpone any such disposition pending any such preparation or processing; (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of; (c) to fail to exercise collection remedies against account debtors or other persons obligated on Collateral or to remove any Lien on or any adverse claims against Collateral; (d) to exercise collection remedies against account debtors and other persons obligated on Collateral directly or through the use of collection agencies and other collection specialists; (e) to contact other persons, whether or not in the same business as an Obligor, for expressions of interest in acquiring all or any portion of the Collateral of such Obligor; (f) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature; (g) to disclaim disposition warranties; (h) to dispose of assets in wholesale rather than retail markets; (i) to purchase insurance or credit enhancements to insure the Collateral Agent against risks of loss, collection or disposition of Collateral or to provide to the Collateral Agent a guaranteed return from the collection or disposition of Collateral; or (j) to the extent deemed appropriate by the Collateral Agent, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Collateral Agent in the collection or disposition of any of the Collateral; except in any instance where the Collateral

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Agent has acted negligently or failed to act as result of its negligence or willful misconduct, as finally determined by a court of competent jurisdiction. Each Obligor acknowledges that the purpose of this Section 12 is to provide non-exhaustive indications of what actions or omissions by the Collateral Agent would not be commercially unreasonable in the Collateral Agent’s exercise of remedies against the Collateral and that other actions or omissions by the Collateral Agent shall not be deemed commercially unreasonable solely on account of not being indicated in this Section 12. Without limiting the foregoing, nothing contained in this Section 12 shall be construed to grant any rights to any Obligor or to impose any duties on the Collateral Agent that would not have been granted or imposed by this Security Agreement or by applicable law in the absence of this Section 12.

     13. Rights of the Collateral Agent.

     (a) Power of Attorney. In addition to other powers of attorney contained herein, each Obligor hereby designates and appoints the Collateral Agent, on behalf of the Secured Parties, and each of its designees or agents, as attorney-in-fact of such Obligor, irrevocably and with power of substitution, with authority to take any or all of the following actions upon the occurrence and during the continuation of an Event of Default:

     (i) to demand, collect, settle, compromise, adjust and give discharges and releases concerning the Collateral of such Obligor, all as the Collateral Agent may reasonably determine in respect of such Collateral;

     (ii) to commence and prosecute any actions at any court for the purposes of collecting any Collateral and enforcing any other right in respect thereof;

     (iii) to defend, settle, adjust or compromise any action, suit or proceeding brought with respect to the Collateral and, in connection therewith, give such discharge or release as the Collateral Agent may deem reasonably appropriate;

     (iv) to receive, open and dispose of mail addressed to an Obligor and endorse checks, notes, drafts, acceptances, money orders, bills of lading, warehouse receipts or other instruments or documents evidencing payment, shipment or storage of the goods giving rise to the Collateral of such Obligor, or securing or relating to such Collateral, on behalf of and in the name of such Obligor;

     (v) to sell, assign, transfer, make any agreement in respect of, or otherwise deal with or exercise rights in respect of, any Collateral or the goods or services which have given rise thereto, as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes;

     (vi) to adjust and settle claims under any insurance policy relating to the Collateral;

     (vii) to execute and deliver and/or file all assignments, conveyances, statements, financing statements, continuation financing statements, security agreements, affidavits, notices and other agreements, instruments and documents that the Collateral Agent may determine necessary in order to perfect and maintain the security interests and Liens granted in this Security Agreement and in order to fully consummate all of the transactions contemplated herein;

     (viii) to institute any foreclosure proceedings that the Collateral Agent may deem appropriate;

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     (ix) to execute any document or instrument, and to take any action, necessary under applicable law in order for the Collateral Agent to exercise its rights and remedies (or to be able to exercise its rights and remedies at some future date) with respect to any Account of an Obligor where the account debtor is a Governmental Authority; and

     (x) to do and perform all such other acts and things as the Collateral Agent may deem to be necessary, proper or convenient in connection with the Collateral.

This power of attorney is a power coupled with an interest and shall be irrevocable for so long as any of the Secured Obligations (other than unasserted contingent indemnity obligations that survive termination of the Secured Credit Documents pursuant to the stated terms thereof) or any Senior Secured Notes remain outstanding or any Secured Credit Document is in effect and until all Commitments under the Credit Agreement shall have been terminated. The Collateral Agent shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to the Collateral Agent in this Security Agreement, and shall not be liable for any failure to do so or any delay in doing so. The Collateral Agent shall not be liable for any act or omission or for any error of judgment or any mistake of fact or law in its individual capacity or its capacity as attorney-in-fact except acts or omissions resulting from its gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction. This power of attorney is conferred on the Collateral Agent solely to protect, preserve and realize upon its security interest in the Collateral.

     (b) The Collateral Agent’s Duty of Care. Other than the exercise of reasonable care to assure the safe custody of the Collateral while being held by the Collateral Agent hereunder, the Collateral Agent shall have no duty or liability to preserve rights pertaining thereto, it being understood and agreed that the Obligors shall be responsible for preservation of all rights in the Collateral, and the Collateral Agent shall be relieved of all responsibility for the Collateral upon surrendering it or tendering the surrender of it to the Obligors. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Collateral Agent accords its own property, it being understood that the Collateral Agent shall not have responsibility for taking any necessary steps to preserve rights against any parties with respect to any of the Collateral. In the event of a public or private sale of Collateral pursuant to Section 11 hereof, the Collateral Agent shall have no obligation to clean-up, repair or otherwise prepare the Collateral for sale. The powers conferred on the Collateral Agent, its directors, officers and agents pursuant to this Section 13 are solely to protect the Collateral Agent’s interests in the Collateral and shall not impose any duty upon any of them to exercise any such powers. The Collateral Agent shall be accountable only for the amounts that it actually receives as a result of the exercise of its powers under this Section, and neither it nor any of its officers, directors, employees or agents shall be responsible to any Obligor for any act or failure to act, except for the Collateral Agent’s or such person’s own gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction.

     (c) THE COLLATERAL AGENT SHALL NOT BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO ANY SECURED CREDIT DOCUMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF ANY TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

     (d) Resignation and Other Matters. Notwithstanding anything to the contrary in this Agreement, the Collateral Agent may resign at any time as Collateral Agent under this Security Agreement (and shall be discharged from its duties and obligations hereunder) as provided in Section 4.06

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of the Intercreditor Agreement. Sections 4.03, 4.04 and 4.05 of the Intercreditor Agreement shall be applicable to this Security Agreement as set forth herein mutatis mutandis.

     14. Marshalling. The Collateral Agent shall not be required to marshal any present or future collateral security (including but not limited to this Security Agreement and the Collateral) for, or other assurances of payment of, the Secured Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order, and all of its rights hereunder and in respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights, however existing or arising. To the extent that it lawfully may, each Obligor hereby agrees that it shall not invoke any law relating to the marshalling of collateral which might cause delay in or impede the enforcement of the Collateral Agent’s rights under this Security Agreement or under any other instrument creating or evidencing any of the Secured Obligations or under which any of the Secured Obligations is outstanding or by which any of the Secured Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, each Obligor hereby irrevocably waives the benefits of all such laws.

     15. Application of Proceeds.

     (a) All moneys or other proceeds collected by the Collateral Agent upon any sale by it or other disposition of or realization upon the Collateral after an Event of Default pursuant to the terms of this Security Agreement, together with all other moneys or other proceeds received by the Collateral Agent hereunder, shall be applied to the payment of the Secured Obligations secured by such Collateral, moneys or proceeds as follows:

     (i) first, to the payment of all Secured Obligations owing to the Collateral Agent of the type described in clauses (e), (f) and (g) of Section 2 of this Security Agreement;

     (ii) second, to the extent moneys remain after the application pursuant to the preceding clause (i), in accordance with Section 2.01 of the Intercreditor Agreement; and

     (iii) third, to the extent moneys remain after the application pursuant to the preceding clauses (i) and (ii), and following termination of this Security Agreement pursuant to Section 17(a) hereof, to the relevant Obligor or to whomever may be lawfully entitled to receive such surplus.

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     (b) All payments required to be made hereunder shall be made (x) if to the Credit Agreement Secured Parties, to the Administrative Agent for the account of the Credit Agreement Secured Parties and (y) if to the Notes Secured Parties (including as a result of any payments made in respect of the SN Intercompany Notes Obligations), to the Note Trustee for the account of the Notes Secured Parties.

     (c) For purposes of applying payments received in accordance with this Section 15, the Collateral Agent shall be entitled to rely upon (i) the Administrative Agent, as Authorized Representative under the Credit Agreement, and (ii) the Note Trustee, as Authorized Representative under the Indenture, for a determination (which the Administrative Agent, the Note Trustee and the Secured Parties agree to provide upon request of the Collateral Agent), of the outstanding Secured Obligations owed to the respective Secured Parties.

     (d) Each Obligor irrevocably waives the right to direct the application of such payments and proceeds and acknowledges and agrees that the Collateral Agent shall have the continuing and exclusive right to apply and reapply any and all such proceeds in the Collateral Agent’s sole discretion, notwithstanding any entry to the contrary upon any of its books and records.

     16. Costs of Counsel. If at any time hereafter, whether upon the occurrence of an Event of Default or not, the Collateral Agent (i) employs counsel to prepare or consider amendments, waivers or consents with respect to this Security Agreement, or to take action or make a response in or with respect to any legal or arbitral proceeding relating to this Security Agreement or relating to the Collateral then the Obligors agree to promptly pay upon demand any and all reasonable out-of-pocket costs and expenses of the Collateral Agent or (ii) employs counsel or any other Person to protect the Collateral or exercise any rights or remedies under this Security Agreement or with respect to the Collateral, then the Obligors (other than the SN Note Obligors with respect to the Note Obligations, but without limiting the obligation of any SN Note Obligor to pay any amounts, costs and expenses required hereby with respect to the SN Intercompany Notes Obligations) agree to promptly pay upon demand any and all such costs and expenses of the Collateral Agent, all of which such costs and expenses set forth in clauses (i) and (ii) shall constitute Secured Obligations hereunder.

     17. Continuing Agreement.

     (a) This Security Agreement shall be a continuing agreement in every respect and shall remain in full force and effect so long as any of the Secured Obligations (other than unasserted contingent indemnity obligations that survive termination of the Secured Credit Documents pursuant to the stated terms thereof) or any Senior Secured Notes remain outstanding, any Secured Credit Document is in effect and until all Commitments under the Credit Agreement shall have been terminated. Subject to Section 10.10 of the Indenture, upon such payment and termination, this Security Agreement shall be automatically terminated and the Collateral Agent and the Secured Parties shall, upon the request and at the expense of the Obligors, forthwith release all of the Liens and security interests granted hereunder and shall execute and/or deliver all UCC termination statements and/or other documents reasonably requested by the Obligors evidencing such termination. Furthermore, all Collateral shall be released from the Lien of this Security Agreement in accordance with Section 8.11 of the Credit Agreement and Sections 10.03 and 10.10 of the Indenture or as otherwise permitted under the Indenture. Notwithstanding the foregoing all releases and indemnities provided hereunder shall survive termination of this Security Agreement.

     (b) This Security Agreement shall continue to be effective or be automatically reinstated, as the case may be, if at any time payment, in whole or in part, of any of the Secured Obligations is rescinded or must otherwise be restored or returned by the Collateral Agent or any Secured Party as a preference, fraudulent conveyance or otherwise under any bankruptcy, insolvency or similar law, all as though such payment had not been made; provided that in the event payment of all or any part of the

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Secured Obligations is rescinded or must be restored or returned, all costs and expenses (including without limitation any reasonable legal fees and disbursements) incurred by the Collateral Agent or any Secured Party in defending and enforcing such reinstatement shall be deemed to be included as a part of the Secured Obligations.

     18. Amendments; Waivers; Modifications. This Security Agreement and the provisions hereof may not be amended, waived, modified, changed, discharged or terminated unless in writing duly signed by each of the Obligors directly affected thereby and the Collateral Agent (acting at the direction of the Authorized Representative for the Required Creditors (as defined in the Intercreditor Agreement but without the proviso in clause (i) of definition thereof)); provided that any amendment, waiver, modification, change, discharge or termination (i) affecting the rights or benefits of the Secured Parties of a single Series of Secured Obligations (and not all Secured Parties in a like or similar manner) shall require the written consent of the Requisite Holders or the Authorized Representative (acting at the direction of the applicable Requisite Holder or otherwise pursuant to its authority under the Credit Agreement or the Indenture) of such affected Series of Secured Obligations, (ii) adversely affecting the rights or benefits of a single Secured Party (and not all Secured Parties of the same Series in a like or similar manner) shall require the written consent of the Secured Party so affected, (iii) that is material and adverse to the interests of any Series of Secured Obligations shall require the written consent of the Requisite Holders or an Authorized Representative (acting at the direction of the applicable Requisite Holder or otherwise pursuant to its authority under the Credit Agreement or the Indenture) of such affected Series of Secured Obligations and (iv) releasing all or substantially all, or any substantial portion of, the Collateral shall require the prior written consent of all of the Lenders and all of the Holders (except as expressly permitted under the Credit Agreement or the Indenture).

     19. Successors in Interest. This Security Agreement shall create a continuing security interest in the Collateral and shall be binding upon each Obligor, its successors and assigns and shall inure, together with the rights and remedies of the Collateral Agent and the Secured Parties hereunder, to the benefit of the Collateral Agent and the Secured Parties and their successors and permitted assigns; provided, however, that none of the Obligors may assign its rights or delegate its duties hereunder without the prior written consent of the Collateral Agent and the Requisite Holders or an Authorized Representative (acting at the direction of the applicable Requisite Holder or otherwise pursuant to its authority under the Credit Agreement or the Indenture). Without limitation of the foregoing, the Initial Borrower’s rights under the SN Intercompany Notes arising under this Security Agreement shall be collaterally assigned to the Note Trustee for the benefit of the Holders pursuant to the Pledge and Assignment. To the fullest extent permitted by law, each Obligor hereby releases the Collateral Agent and each Secured Party (other than the Initial Borrower), each of their respective officers, employees and agents and each of their respective successors and assigns, from any liability for any act or omission relating to this Security Agreement or the Collateral, except for any liability arising from the gross negligence or willful misconduct of the Collateral Agent or such Secured Party or their respective officers, employees and agents, in each case as finally determined by a court of competent jurisdiction.

     20. Notices. All notices required or permitted to be given under this Security Agreement shall be in conformance with Section 5.01 of the Intercreditor Agreement and with respect to notices to be given to the Obligors, Section 9.2 of the Credit Agreement.

     21. Counterparts. This Security Agreement may be executed in any number of counterparts, each of which where so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Security Agreement to produce or account for more than one such counterpart.

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     22. Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning, construction or interpretation of any provision of this Security Agreement.

     23. Governing Law. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

     24. Waiver of Jury Trial. THE OBLIGORS AND THE COLLATERAL AGENT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS SECURITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. The Obligors and the Collateral Agent agree not to assert any claim against any other party to this Security Agreement or any of their respective directors, officers, employees, attorneys, Affiliates or agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to any of the transactions contemplated herein.

     25. Consent to Jurisdiction and Service of Process. Any legal action or proceeding with respect to this Security Agreement shall be brought in the courts of the State of New York in New York County or of the United States for the Southern District of New York, and, by execution and delivery of this Security Agreement, each Obligor and the Collateral Agent accepts, for itself and in connection with its properties, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and irrevocably agrees to be bound by any final judgment rendered thereby in connection with this Security Agreement from which no appeal has been taken or is available. Each Obligor and the Collateral Agent irrevocably agrees that all service of process in any such proceedings in any such court may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid and return receipt requested, to it at its address set forth in Section 5.01 of the Intercreditor Agreement, and with respect to notices to any Obligor, at its address set forth in Section 9.2 of the Credit Agreement or at such other address of which the Collateral Agent shall have been notified pursuant thereto, such service being hereby acknowledged by such Obligor to be effective and binding service in every respect. Each Obligor and the Collateral Agent irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in any such jurisdiction. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Secured Party to bring proceedings against any Obligor in the court of any other jurisdiction.

     26. Severability. If any provision of this Security Agreement is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions.

     27. Entirety. This Security Agreement and the other Secured Credit Documents represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements (including the Original Security Agreement) and understandings, oral or written, if any, including any commitment letters or correspondence relating to this Security Agreement, the other Secured Credit Documents, or the transactions contemplated herein and therein.

     28. Survival. All representations and warranties of the Obligors hereunder shall survive the execution and delivery of this Security Agreement and the other Secured Credit Documents and the issuance of the Senior Secured Notes.

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     29. Joint and Several Obligations of Obligors.

     (a) Each of the Obligors (other than the SN Note Obligors with respect to the Note Obligations) is accepting joint and several liability hereunder in consideration of the financial accommodations to be provided by the Secured Parties under the Credit Agreement and the Senior Secured Notes, for the mutual benefit, directly and indirectly, of each of the Obligors and in consideration of the undertakings of each of the Obligors (other than the SN Note Obligors with respect to the Note Obligations) to accept joint and several liability for the obligations of each of them.

     (b) Each of the Obligors (other than the SN Note Obligors with respect to the Note Obligations) jointly and severally hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Obligors (other than the SN Note Obligors with respect to the Note Obligations) with respect to the payment and performance of all of the Secured Obligations (other than the SN Note Obligors with respect to the Note Obligations) arising under this Security Agreement and the other Secured Credit Documents, it being the intention of the parties hereto that all the Secured Obligations shall be the joint and several obligations of each of the Obligors (other than the SN Note Obligors with respect to the Note Obligations) without preferences or distinction among them.

     (c) Notwithstanding any provision to the contrary contained herein or in any other of the Secured Credit Documents, to the extent the obligations of an Obligor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of such Obligor hereunder shall be limited to the maximum amount that is permissible under applicable law (whether federal or state and including, without limitation, the Bankruptcy Code).

     30. Rights of Required Creditors. All rights of the Collateral Agent hereunder, if not exercised by the Collateral Agent, may be exercised by the Required Creditors.

     31. Refinancings. Notwithstanding anything in this Security Agreement to the contrary, the Secured Obligations of any Series may be Refinanced, in whole or in part, in each case, without notice to, or the consent of any Obligor, all without affecting the Liens provided for herein or the other provisions hereof; provided that the Authorized Representative of the holders of any such Refinancing indebtedness shall have executed (1) a Joinder Agreement to the Intercreditor Agreement on behalf of the holders of such Refinancing indebtedness and a joinder to this Security Agreement (to the extent such indebtedness is intended to be secured hereunder), and (2) in the case of a successor Collateral Agent appointed in accordance with Section 4.06 of the Intercreditor Agreement, a supplement to this Security Agreement agreeing to and acknowledging the terms set forth herein. Following any such Refinancing and execution of such joinder agreements or supplements, each lender, note holder, administrative agent, collateral agent, trustee, custodian, issuing bank or other similar creditor or agent party to the Series (or portion thereof) Refinanced shall be automatically deemed to be a Secured Party for all purposes hereof.

     32. Indemnification and Expenses.

     (a) The Collateral Agent shall not in any way be responsible for the performance or discharge of, and the Collateral Agent does not hereby undertake to perform or discharge, any obligation, duty, responsibility, or liability of any Obligor in connection with the Collateral or otherwise. The Obligors (other than the SN Note Obligors with respect to the Note Obligations, but without limiting the obligation of any SN Note Obligor to provide the indemnity, pay and reimburse costs and expenses and hold harmless as required hereby with respect to the SN Intercompany Notes Obligations), jointly and severally, agree (i) to indemnify the Collateral Agent and any Secured Party (other than the Initial

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Borrower) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time be imposed on, incurred by or asserted against the Collateral Agent or such Secured Party in any way relating to or arising out of the Security Agreement, any other Secured Credit Document, the Intercreditor Agreement, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Collateral Agent under or in connection with any of the foregoing, (ii) to pay or reimburse the Collateral Agent for all reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation, negotiation and execution of, and any amendment, supplement or modification to, this Security Agreement, any other Secured Credit Documents, the Intercreditor Agreement and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, together with the reasonable fees and disbursements of counsel to the Collateral Agent, (iii) to pay or reimburse the Collateral Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Security Agreement or any other Secured Credit Document or the Intercreditor Agreement, including, without limitation, the fees and disbursements of counsel to the Collateral Agent (including reasonable allocated costs of in-house legal counsel of Collateral Agent), (iv) on demand, to pay, indemnify, and hold the Collateral Agent harmless from, any and all recording and filing fees payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Security Agreement, any other Secured Credit Documents, the Intercreditor Agreement, or any document related thereto, and (v) to pay, indemnify, and hold the Collateral Agent and its affiliates, employees, officers and directors harmless from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever to the extent arising from third party claims with respect to the execution, delivery, enforcement, performance and administration of this Security Agreement, any other Secured Credit Document, the Intercreditor Agreement, or any other documents related thereto; provided, however, that no Obligor shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the gross negligence or willful misconduct of the Collateral Agent or such Secured Party, as determined by a court of competent jurisdiction pursuant to a final, non-appealable order. The agreements in this Section 32(a) shall survive the termination of this Security Agreement, the other Secured Credit Documents, the Intercreditor Agreement and payment in full of the Credit Agreement Obligations, the Note Obligations, the Senior Secured Notes, and all other amounts payable hereunder or under any of the other Secured Credit Documents and the Intercreditor Agreement.

     (b) Each Lender and each Directing Holder agrees to indemnify the Collateral Agent, in its capacity as such, and its Affiliates (to the extent not reimbursed by the Obligors and without limiting the obligation of the Obligors to do so), ratably according to the outstanding amount of the Secured Obligations owing to the Lenders and the Directing Holders on the date on which indemnification is sought under this Section 32(b), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation following the Discharge of the Secured Obligations or the termination of this Security Agreement) be imposed on, incurred by or asserted against the Collateral Agent in any way relating to or arising out of this Security Agreement, any other First Lien Security Documents or the Pledge and Assignment or any action taken or omitted by the Collateral Agent under or in connection with any of the foregoing; provided that no Lender or Directing Holder shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the gross negligence or willful misconduct of the Collateral Agent, as determined by a court of competent jurisdiction in a final, non-

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appealable order. The agreements in this Section 32(b) shall survive the termination of this Security Agreement and the repayment of the Secured Obligations.

     (c) A Holder may constitute a portion of the Required Creditors for purposes of pursuing a remedy (or directing the Collateral Agent) with respect to this Security Agreement or any other First Lien Security Document (whether such Holder pursues such remedy (or gives such direction) directly, to the extent permitted, or indirectly by instructing the Trustee) only if such Holder first offers to the Collateral Agent and, if requested by the Collateral Agent, agrees to be a “Directing Holder” for the purposes of Section 32(b) and the other provisions of this Security Agreement. A Holder so agreeing shall be a “Directing Holder” for purposes of Section 32(b).

     (d) The Collateral Agent may refuse to follow any direction that conflicts with law or this Security Agreement that the Collateral Agent determines may be prejudicial to the rights of other Secured Parties or that may involve the Collateral Agent in personal liability.

     33. Appointment and Authority. The Initial Borrower hereby irrevocably appoints Wachovia Bank, National Association, to act on its behalf as the Collateral Agent hereunder and authorizes the Collateral Agent to take such actions on its behalf and to exercise such powers as are delegated to the Collateral Agent by the terms hereof, including for purposes of acquiring, holding and enforcing any and all Liens on the Specified Collateral granted by any SN Note Obligor to secure any of the SN Intercompany Notes Obligations, together with such powers and discretion as are reasonably incidental thereto, provided, however, that in no event shall the Collateral Agent be required to take any such action (except to the extent set forth in the Intercreditor Agreement or for purposes of acquiring and holding any and all Liens on the Specified Collateral granted by any SN Note Obligor to secure any of the SN Intercompany Notes Obligations), and any such action taken by the Collateral Agent shall be subject to the Intercreditor Agreement (including, without limitation, Sections 5.12 and 5.13 thereof).

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     IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Security Agreement to be duly executed and delivered as of the date first above written.

OBLIGORS	CAPITALSOURCE INC., a Delaware corporation
	By:	/S/ JEFFREY A. LIPSON
		Name:	Jeffrey A. Lipson
		Title:	Senior Vice President and Treasurer

CAPITALSOURCE FINANCE LLC, a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CAPITALSOURCE TRS LLC, a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CSE MORTGAGE LLC, a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CAPITALSOURCE SF TRS LLC, a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer

CAPITALSOURCE CF LLC, a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CAPITALSOURCE FINANCE II LLC, a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CAPITALSOURCE INTERNATIONAL INC., a Delaware corporation
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CSE CHR HOLDINGS LLC a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CSE CHR HOLDCO LLC a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CS FUNDING IX DEPOSITOR LLC a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer

Accepted and agreed to as of the date first above written. WACHOVIA BANK, NATIONAL ASSOCIATION, as Collateral Agent
By:	/S/ RAJ SHAH
	Name:	Raj Shah
	Title:	Managing Director

EX-10.12

Exhibit 10.12

COMPOSITE VERSION:
reflects all amendments through November 5, 2009

AMENDED PLEDGE AGREEMENT

     This AMENDED PLEDGE AGREEMENT (this “Pledge Agreement”) is entered into as of July 27, 2009, by and among (i) CapitalSource Inc., a Delaware corporation (“Initial Borrower”), (ii) the direct and indirect Subsidiaries of the Initial Borrower listed on Part A of Schedule 1(a) attached hereto and any other Subsidiary of the Initial Borrower that becomes a guarantor under the Credit Agreement referred to below (collectively, the “Guarantors” and such parties, together with Initial Borrower, each individually a “Pledgor” and collectively, the “Pledgors”), (iii) Wachovia Bank, National Association, in its capacity as Collateral Agent under the Intercreditor Agreement referred to below (in such capacity, the “Collateral Agent”) for the Secured Parties (as defined below), (iv) Wells Fargo Bank, National Association (“Wells Fargo”) in its capacity as Collateral Custodian for the Collateral Agent and (v) CapitalSource Finance LLC in its capacity as Servicer (as defined below).

RECITALS

     WHEREAS, the Pledgors (other than CapitalSource International Inc. (“CS International”)) are party to that certain Credit Agreement dated as of March 14, 2006 (as amended, modified, extended, renewed, restated, replaced or Refinanced (as defined in the Intercreditor Agreement) from time to time, the “Credit Agreement”), among certain Pledgors, the several banks and other financial institutions as may from time to time become parties thereto (the “Lenders”) and Wachovia Bank, National Association, as the Administrative Agent (the “Administrative Agent”);

     WHEREAS, the Pledgors other than the Initial Borrower and CS International have, pursuant to the Credit Agreement, unconditionally guaranteed the Credit Agreement Obligations (as defined below);

     WHEREAS, the Initial Borrower and CS International (the “CSF Guarantors”) have, pursuant to that certain Guaranty Agreement, dated as of December 20, 2006 (the “CSF Guaranty”), among the CSF Guarantors and the Administrative Agent, unconditionally guaranteed the Guaranteed Obligations (as defined in the CSF Guaranty);

     WHEREAS, the Pledgors have, pursuant to that certain Pledge Agreement, dated as of December 23, 2008, as amended on July 10, 2009 and as supplemented through the date hereof (the “Original Pledge Agreement”), by the Pledgors in favor of the Administrative Agent for the ratable benefit of the Lenders, granted to the Administrative Agent a security interest in the Pledged Collateral (as defined below), and the Administrative Agent appointed Wells Fargo as Collateral Custodian to hold such Pledged Collateral for the benefit of the Administrative Agent;

     WHEREAS, the Initial Borrower has issued its 12.75% First Priority Senior Secured Notes due 2014 in an initial aggregate principal amount of $300,000,000 pursuant to an Indenture dated as of July 27, 2009 (as the same may be amended, supplemented, modified, extended, renewed, restated, replaced or Refinanced from time to time, the “Indenture”) which provides for the issuance by the Initial Borrower of its 12.75% First Priority Senior Secured Notes due 2014 in one or more series (all notes issued from time to time pursuant to the Indenture, as the same may be amended, supplemented, modified, extended, renewed, restated, replaced or Refinanced from time to time, the “Senior Secured Notes”) and in connection with any such issuance, certain Pledgors listed on Part B of Schedule 1(a) (as the same may be amended, substituted or replaced from time to time) (each a “SN Note Obligor”) have issued and/or may issue to the Initial Borrower promissory notes (each such note issued from time to time, as the same may be amended, supplemented or otherwise modified from time to time, a “SN

Intercompany Note”) each in a principal amount up to aggregate principal amount of the outstanding Senior Secured Notes that is secured by such SN Note Obligor’s Specified Collateral (as defined below);

     WHEREAS, all SN Intercompany Notes, upon issuance, are to be pledged, and all of the Initial Borrower’s rights, title and interest in (i) this Pledge Agreement, (ii) an Amended Security Agreement dated as of July 27, 2009 among the Initial Borrower, other Pledgors listed therein and the Collateral Agent, and (iii) certain other collateral documents, shall be collaterally assigned, pursuant to a Pledge and Collateral Assignment Agreement dated as of July 27, 2009 between the Initial Borrower and the Trustee under the Indenture (the “Note Trustee”) (as the same may be amended, supplemented or otherwise modified from time to time, the “Pledge and Assignment”), by the Initial Borrower to the Note Trustee as security for the Initial Borrower’s obligations in respect of the Senior Secured Notes;

     WHEREAS, the Pledgors have entered into that certain Amendment No. 8 to Credit Agreement, dated as of July 10, 2009 (“Amendment No. 8”), pursuant to which the Administrative Agent and the Lenders have agreed to permit the issuance of certain Senior Secured Notes;

     WHEREAS, the Collateral Agent, the Administrative Agent, as Authorized Representative (as defined in the Intercreditor Agreement) under the Credit Agreement, and the Note Trustee, as Authorized Representative under the Indenture, have entered into an Intercreditor Agreement dated as of July 27, 2009 (as the same may be amended, supplemented or otherwise modified from time to time, the “Intercreditor Agreement”), consented to by each Pledgor, that provides that the Credit Agreement Secured Parties (as defined below) and the Notes Secured Parties (as defined below) (other than the Initial Borrower), during the continuance of an Event of Default, will share with each other any proceeds realized by them in excess of their pro rata share (as described in the Intercreditor Agreement) of any of the Shared Collateral (as defined therein);

     WHEREAS, each Pledgor acknowledges that it has and will continue to derive substantial direct and indirect benefit from the Extensions of Credit under the Credit Agreement and will derive substantial direct and indirect benefit from the issuance of the Senior Secured Notes;

     WHEREAS, in connection with the transactions and agreements contained in and contemplated by Amendment No. 8, the Intercreditor Agreement, and the issuance of the Senior Secured Notes, the Pledgors, the Administrative Agent, the Collateral Custodian and the Servicer have agreed to amend the terms and provisions of the Original Pledge Agreement to be in favor of the Collateral Agent for the ratable benefit of the Secured Parties (as defined below) to: (i) (w) in the case of the Pledgors other than CS International, secure the payment and performance of all of the Credit Agreement Obligations, (x) in the case of CS International, secure the payment and performance of all of the Guaranteed Obligations, (y) in the case of the Pledgors (other than any SN Note Obligor), secure the payment and performance of all of the Note Obligations, and (z) in the case of the SN Note Obligors, secure the payment and performance of all of the SN Intercompany Notes Obligations and (ii) to appoint Wells Fargo as Collateral Custodian with respect to the Pledged Collateral held by it for the benefit of the Collateral Agent as collateral agent for the Secured Parties;

     WHEREAS, CapitalSource Finance LLC as Servicer performs servicing functions with respect to certain Pledged Collateral; and

     WHEREAS, it is a condition precedent to the issuance of the Senior Secured Notes that Wells Fargo shall have executed and delivered this amended Pledge Agreement as Collateral Custodian and CapitalSource Finance LLC shall have executed and delivered this amended Pledge Agreement as Servicer.

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     NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend the Original Pledge Agreement as follows:

     1. (a) Definitions. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Intercreditor Agreement, and to the extent not defined therein, the Credit Agreement, or, if not defined therein, in the UCC. The following terms shall have the following meanings:

     “2007-A” shall have the meaning set forth in Section 10(h).

     “Administrative Agent” shall have the meaning set forth in the recitals.

     “Asset Checklist” shall mean an electronic list of loan documents delivered by or on behalf of any Pledgor to the Collateral Agent and the Collateral Custodian (with respect to Custodian Pledged Collateral) that identifies each of the items contained in the related Asset File, as amended from time to time.

     “Asset Files” shall mean with respect to any Asset and Related Security pursuant to clauses (a) and (b) of the definition thereof, copies of each of the Required Asset Documents and duly executed originals (to the extent required by the Credit and Collection Policy) and copies of any other Records relating to such Asset and Related Security.

     “Asset List” shall mean the Asset List provided by the Pledgors to the Collateral Agent and the Collateral Custodian (with respect to the portion of the Asset List listing Custodian Pledged Collateral), attached hereto as Schedule 2(a), as such list may be amended, supplemented or modified from time to time.

     “Assets” shall mean Loans, individually or collectively, as the context requires.

     “Assigned Loan” shall mean a Loan originated by a Person other than a Subsidiary of the Initial Borrower and in which a constant percentage has been assigned to any Pledgor in accordance with the Credit and Collection Policy.

     “Assignment of Mortgage” shall mean, as to each Loan secured by an interest in real property, one or more assignments, notices of transfer or equivalent instruments, each in recordable form and sufficient under the laws of the relevant jurisdiction to reflect the transfer of the related mortgage or similar security instrument and all other documents related to such Loan and to the applicable Pledgor and to grant a perfected lien thereon by the applicable Pledgor in favor of the Collateral Agent, on behalf of the Secured Parties, each such Assignment of Mortgage to be substantially in the form of Exhibit 1 hereto.

     “Available Assets Collateral” shall mean all assets described in clause (ii) of Section 2(b) relating to Available Assets (as defined in the Credit Agreement) and described in clauses (a) through (d) of the definition thereof, and all products and proceeds thereof of the type described in Sections 2(b)(iii) and (iv); provided, however, from and after the Credit Agreement Termination Date, “Available Assets Collateral” shall mean all assets which qualify as Available Assets Collateral as determined by reference to the Credit Agreement as in effect on the date hereof, as the same may be amended, modified or otherwise supplemented from time to time, provided that such amendment, modification or supplement (x) is made in good faith by the parties thereto and in accordance with the terms of the Credit Agreement,

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and (y) is not made immediately prior to or in contemplation of any repayment, refinancing, restructuring, extension, exchange or replacement of any indebtedness under the Credit Agreement.

     “Collateral Agent” shall have the meaning set forth in the preamble.

     “Collateral Agent Resignation Event” shall mean the occurrence of each of the following: (i) the Administrative Agent shall have resigned or been removed as Collateral Agent pursuant to Section 4.06 of the Intercreditor Agreement and (ii) the Credit Agreement Obligations have been paid in full and the Commitments under the Credit Agreement have been terminated without being Refinanced.

     “Collateral Custodian” shall mean Wells Fargo, not in its individual capacity, but solely as Collateral Custodian, its successor in interest pursuant to Section 5(c) or such Person as shall have been appointed Collateral Custodian pursuant to Section 5(e).

     “Collateral Custodian Fee” shall have the meaning set forth in Section 5(d).

     “Collateral Custodian Termination Notice” shall have the meaning set forth in Section 5(e).

     “Collateral Restrictions” shall have the meaning set forth in Section 7(j).

     “Control” shall have the meaning assigned to such term in Section 8-106 of the UCC.

     “Core Collateral” shall mean that portion of the Pledged Collateral not constituting Residual Collateral.

     “Credit Agreement” shall have the meaning set forth in the recitals.

     “Credit Agreement Obligations” means all debts, liabilities and obligations for monetary amounts (including, but not limited to, all Credit Party Obligations), owing by any Pledgor to the Lenders and the Administrative Agent whenever arising, or any of their assigns, as the case may be, whether due or to become due, matured or unmatured, liquidated or unliquidated, contingent or non-contingent, and all covenants and duties of any Pledgor regarding such amounts, of any kind or nature, present or future, arising under or in respect of any Credit Document, whether or not evidenced by any separate note, agreement or other instrument. The term Credit Agreement Obligations includes, without limitation, all interest (including interest that accrues after the commencement against any Pledgor of any action under the Bankruptcy Code), prepayment penalties or premiums, liquidated damages, fees, expenses, costs, indemnities, or other sums (including reasonable attorney costs) chargeable to a Pledgor under the Credit Documents. Subject to compliance with Section 38 hereof, for purposes of this definition “Credit Agreement Obligations” shall also include any Refinanced Credit Agreement Obligations.

     “Credit Agreement Secured Parties” means the Lenders (including the Swingline Lender and the Issuing Lender) and the Administrative Agent.

     “Credit Agreement Termination Date” means the date on which the Credit Agreement Obligations have been paid in full and the Commitments under the Credit Agreement have been terminated without having been Refinanced.

     “Credit and Collection Policy” shall mean the written credit policies and procedures manual of the applicable Pledgors and the Servicer in the form provided to the Collateral Agent pursuant to Section 4.26 of the Credit Agreement, as it may be as amended or supplemented from time to time.

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     “CS International” shall have the meaning set forth in the recitals.

     “Custodian Pledged Collateral” shall mean any Core Collateral held by a Pledgor that (i) constitutes Available Assets (as defined in the Credit Agreement) pursuant to clauses (a), (b), (c) and (d) (in the case of clauses (c) and (d), only to the extent that any such Collateral constitutes certificated securities) of the definition thereof or (ii) constitutes Capital Stock of a Material Pledged Subsidiary; provided, however, from and after the Credit Agreement Termination Date, “Custodian Pledged Collateral” shall mean all assets which qualify as Custodian Pledged Collateral as determined by reference to the Credit Agreement as in effect on the date hereof, as the same may be amended, modified or otherwise supplemented from time to time, provided that such amendment, modification or supplement (x) is made in good faith by the parties thereto and in accordance with the terms of the Credit Agreement, and (y) is not made immediately prior to or in contemplation of any repayment, refinancing, restructuring, extension, exchange or replacement of any indebtedness under the Credit Agreement.

     “Entitlement Order” shall have the meaning assigned to such term in Section 8-102 of the UCC.

     “Event of Default” shall have the meaning set forth in Section 15.

     “Excluded Collateral” shall mean the following: (a) Capital Stock of the Initial Borrower held as treasury stock; (b) Margin Stock (other than any shares of Capital Stock of the Healthcare REIT listed on a U.S. national securities exchange or the NASDAQ Stock Market and which are held by a Pledgor); (c) any lease, license, permit, contract or agreement or any property or assets subject to any lease, license, permit, contract or agreement, if and for so long as a grant of a Lien thereon under the Secured Credit Documents shall constitute or result in (i) the abandonment, invalidation or unenforceability of any right, title or interest of any Pledgor or Subsidiary therein or (ii) a breach or termination pursuant to the terms of, or a default under, any such lease, license, contract, permit or agreement (other than (x) to the extent that there would be no abandonment, invalidation, unenforceability, breach or termination with the consent of, or by the taking of any action solely by, any Pledgor or any of their respective Affiliates that does not involve obtaining the consent or approval of any third party or (y) to the extent that any such term would be rendered ineffective pursuant to the UCC (including, without limitation, pursuant to Sections 9-406, 9-407, 9-408, or 9-409 of the UCC) of any relevant jurisdiction or other Applicable Law including Insolvency Law (at such time as it may be applicable), or principles of equity), provided that such lease, license, contract, permit or agreement was not entered into in violation of the restrictions set forth in Section 5.36 of the Credit Agreement or Section 4.08 of the Indenture; (d) any fixed or capital asset that is subject to a Permitted Lien (as defined in clause (vii) of the definition of “Permitted Lien” in the Credit Agreement) and so long as the contractual obligation pursuant to which such Lien is granted (or in the document providing for such capital lease) prohibits or requires the consent of any Person (other than the Initial Borrower and its Affiliates) as a condition to the creation of any other Lien on such asset; and (e) any “intent to use” Trademark applications for which a statement of use has not been filed (but only until such statement is filed); provided, however, the term “Excluded Collateral” shall not include any proceeds, products, substitutions or replacements of Excluded Collateral (unless such proceeds, products, substitutions or replacements would otherwise constitute Excluded Collateral).

     “Excluded Foreign Subsidiary” shall mean any Subsidiary that is not a Domestic Subsidiary (other than any fiscally transparent Subsidiary that is not otherwise owned by an Excluded Foreign Subsidiary).

     “Excluded Foreign Subsidiary Voting Stock” shall mean the voting Capital Stock of any Excluded Foreign Subsidiary. For the purposes of this definition, “voting Capital Stock” means, with respect to any issuer, the issued and outstanding shares of each class of Capital Stock of such issuer entitled to vote (within the meaning of United States Treasury Regulations § 1.956—2(c)(2)).

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     “Funding III” shall have the meaning set forth in Section 10(h).

     “Funding VII” shall have the meaning set forth in Section 10(h).

     “Guarantor” shall have the meaning set forth in preamble.

     “Indenture” shall have the meaning set forth in the recitals.

     “Indenture Documents” means the Indenture, the Senior Secured Notes and the Guarantees (as defined in the Indenture) endorsed thereon, the Registration Rights Agreement (as defined in the Indenture), the Security Agreement, the Pledge Agreement and the Pledge and Assignment (including any documents with respect to a Refinancing of such indebtedness).

     “Initial Borrower” shall have the meaning set forth in preamble.

     “Insurance Policy” shall mean with respect to any Asset, an insurance policy covering liability and physical damage to or loss of the Related Property.

     “Intercreditor Agreement” shall have the meaning set forth in the recitals.

     “Lender” or “Lenders” shall have the meaning set forth in the recitals.

     “Loan” shall mean any loan that is identified on an Asset List, which loan includes, without limitation, (i) the Required Asset Documents and Asset File, and (ii) all right, title and interest of any Pledgor in and to the loan, any Related Property and any contract rights associated with such loan.

     “Loan Register” shall mean a register maintained by the Servicer with respect each Noteless Loan on which the Servicer records (v) the name of the Obligor, (w) the identification number of such Loan, (x) the date of origination of such Loan, (y) the maturity date of such Loan and (z) the commitment amount that is attributable to the Pledged Collateral.

     “Material Pledged Subsidiary” shall mean (a) CHR and CapitalSource Bank, in each case, unless released by the Collateral Agent in accordance with the Credit Agreement, the Indenture and the Intercreditor Agreement and (b) each Subsidiary of a Pledgor that from time to time is:

     (i) a Credit Party,

     (ii) a Domestic Securitization Note Subsidiary which owns any CapitalSource Securitization Note included in Available Assets; and

     (iii) a Subsidiary which either (i) is the Domestic Real Property Subsidiary referenced in clause (e) of the definition of Available Assets with respect to any Real Property Owned that is included in the calculation of Available Assets pursuant to such clause (e); (ii) is the Tier 1 Intermediate Holdco referenced in clause (f) of the definition of Available Assets with respect to any Real Property Owned that is included in the calculation of Available Assets pursuant to such clause (f), or (iii) is the Tier 2 Intermediate Holdco referenced in clause (g) of the definition of Available Assets with respect to any Real Property Owned that is included in the calculation of Available Assets pursuant to such clause (g).

provided, however, from and after the Credit Agreement Termination Date, “Material Pledged Subsidiary” shall mean each Subsidiary which qualifies as a Material Pledged Subsidiary as determined

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by reference to the Credit Agreement as in effect on the date hereof, as the same may be amended, modified or otherwise supplemented from time to time, provided that such amendment, modification or supplement (x) is made in good faith by the parties thereto and in accordance with the terms of the Credit Agreement, and (y) is not made immediately prior to or in contemplation of any repayment, refinancing, restructuring, extension, exchange or replacement of any indebtedness under the Credit Agreement.

     “Material Pledged Subsidiary Capital Stock” means the Subsidiary Capital Stock of each Material Pledged Subsidiary.

     “Mortgage” means the mortgage, deed of trust or other instrument creating a first or second Lien on an interest in real property securing a Loan, including any assignment of leases and rents related thereto.

     “Note Obligations” means all debts, liabilities and obligations for monetary amounts owing by any Pledgor (other than any SN Note Obligor) to the Holders and the Note Trustee, whenever arising, or any of their assigns, as the case may be, whether due or to become due, matured or unmatured, liquidated or unliquidated, contingent or non-contingent, and all covenants and duties of any Pledgor (other than any SN Note Obligor) regarding such amounts, of any kind or nature, present or future, arising under or in respect of any of the Indenture, the Senior Secured Notes or any other Indenture Document (other than the Pledge and Assignment), whether or not evidenced by any separate note, agreement or other instrument. The term Note Obligations includes, without limitation, all interest (including interest that accrues after the commencement against any Pledgor of any action under the Bankruptcy Code), prepayment penalties or premiums, make whole amounts, liquidated damages, fees, expenses, costs, indemnities, or other sums (including reasonable attorney costs) chargeable to a Pledgor (other than any SN Note Obligor) under the Indenture, the Senior Secured Notes or any of the other Indenture Documents (other than the Pledge and Assignment). Subject to compliance with Section 38 hereof, for purposes of this definition “Note Obligations” shall also include any Refinanced Note Obligations.

     “Notes Secured Parties” means and includes (i) solely with respect to any SN Intercompany Notes Obligations, the Initial Borrower, and (ii) solely with respect to any Note Obligations owed by the Initial Borrower or CapitalSource Finance LLC, the Note Trustee for the benefit of the Holders; provided that the Note Secured Parties shall only include the Initial Borrower if the subordination provisions contained in Sections 5.13 and 5.14 of the Intercreditor Agreement are at all times in full force and effect with respect to the Initial Borrower acting on its own behalf; provided, further, that in no event shall the immediately preceding proviso have the effect of excluding the Initial Borrower as a Notes Secured Party with respect to (x) actions taken by the Note Trustee or any Holders pursuant to the Indenture, the Senior Secured Notes or the Pledge and Assignment in connection with Section 5.15 of the Intercreditor Agreement or (y) the creation of a security interest hereunder in each SN Note Obligor’s Specified Collateral.

     “Note Trustee” shall have the meaning set forth in the recitals.

     “Noteless Loan” shall mean a Loan with respect to which the Underlying Instruments do not require the Obligor to execute and deliver a promissory note to evidence the indebtedness created under such Loan.

     “Obligor” shall mean with respect to any Asset, any Person or Persons obligated to make payments pursuant to or with respect to such Asset, including any guarantor thereof.

     “Permitted Liens” shall have the meaning specified in the Credit Agreement and, if the Credit Agreement is no longer in effect, the Indenture.

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     “Pledge and Assignment” shall have the meaning set forth in the recitals.

     “Pledge Agreement” shall have the meaning set forth in the preamble.

     “Pledged Capital Stock” shall have the meaning set forth in Section 2(b).

     “Pledged Collateral” shall have the meaning set forth in Section 2(a).

     “Pledged Notes” shall have the meaning set forth in Section 2(b).

     “Pledgor” or “Pledgors” shall have the meaning set forth in the preamble.

     “Proceeds” shall have the meaning assigned to such term in Section 9-102 of the UCC.

     “QRS I” shall have the meaning set forth in Section 10(h).

     “Records” shall mean all documents relating to the Assets, including books, records and other information (including without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) executed in connection with the origination or acquisition of the Pledged Collateral or maintained with respect to the Pledged Collateral and the related Obligors in which any Pledgor or the Servicer have otherwise obtained an interest.

     “Related Property” shall mean with respect to an Asset, any property or other assets pledged as collateral to the applicable Pledgor to secure repayment of such Asset, including all Proceeds from any sale or other disposition of such property or other assets.

     “Related Security”: All of each Pledgor’s right, title and interest in and to:

     (a) any Related Property securing an Asset and all recoveries related thereto;

     (b) all Required Asset Documents, Asset Files, Records, and the documents, agreements, and instruments included in the Asset File or Records;

     (c) all Insurance Policies with respect to any Asset;

     (d) all security interests, liens, guaranties, warranties, letters of credit, accounts, bank accounts, mortgages or other encumbrances and property subject thereto from time to time purporting to secure or support payment of any Asset, together with all UCC financing statements or similar filings signed by an Obligor relating thereto;

     (e) other contract rights with respect to any Asset;

     (f) any hedging agreement and any payment from time to time due thereunder;

     (g) the Proceeds of each of the foregoing.

     “REO Asset” shall mean, with respect to any Loan, any Related Property that has been foreclosed on or repossessed from the current Pledgor by the Servicer, and is being managed by the Servicer on behalf of, and in the name of, any REO Asset Owner, for the benefit of the Secured Parties and any other equity holder of such REO Asset Owner.

     “REO Asset Owner” shall have the meaning set forth in Section 37(a).

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     “REO Servicing Standard” shall have the meaning set forth in Section 37(a).

     “Required Asset Documents” shall mean with respect to (i) any Noteless Loan identified as a Noteless Loan on the Asset Checklist, a copy of the related Loan Register (together with a certificate of a Responsible Officer of the Servicer certifying to the accuracy of such Loan Register as of the date such Loan is included as a part of the Pledged Collateral), (ii) all Loans other than Noteless Loans, the duly executed original of the promissory note and an assignment (which may be by endorsement or allonge) of each such promissory note to the applicable Pledgor and then the Collateral Agent, signed by an officer of the applicable Persons, (iii) any Loan, any related loan agreement and the Asset Checklist together with, to the extent set forth on the Asset Checklist, duly executed (if applicable) originals or copies of each of any related participation agreement, acquisition agreement, subordination agreement, intercreditor agreement, security agreements or similar instruments, UCC financing statements, guarantee, or certificate of insurance, (iv) each Loan secured by real property, an Assignment of Mortgage and (v) any Loan identified as an Assigned Loan on the Asset Checklist, the duly executed original assignment agreement; provided that with respect to any Assigned Loan, any of the foregoing documents, other than any related promissory notes in the case of Assigned Loans only, may be copies.

     “Requisite Holders” means (i) with respect to Credit Agreement Obligations, the Required Lenders or such other group of Lenders as may from time to time be required under the Credit Agreement, and (ii) with respect to the Note Obligations and the SN Intercompany Notes Obligations, the Holders of at least 66⅔ % in aggregate principal amount of Senior Secured Notes then outstanding or such other group of Holders as may from time to time be required under the Indenture.

     “Residual Collateral” shall mean any Pledged Collateral described in Section 2(b) that does not constitute (i) Material Pledged Subsidiary Capital Stock or (ii) Available Assets Collateral.

     “Review Criteria” shall have the meaning set forth in Section 5(b).

     “Scheduled Payments” shall mean with respect to any Loan, each monthly, quarterly, or annual payment of principal required to be made by the Obligor thereof under the terms of such Loan; in all cases, excluding any payment in the nature of, or constituting, interest.

     “Secured Obligations” shall have the meaning set forth in Section 3.

     “Secured Parties” means (i) the Credit Agreement Secured Parties and (ii) the Notes Secured Parties (including, without limitation, each Directing Holder).

     “Securities Account” shall have the meaning assigned to such term in Section 8-501 of the UCC.

     “Security Entitlement” shall have the meaning assigned to such term in Section 8-102 of the UCC.

     “Securities Intermediary” shall have the meaning assigned to such term in Section 8-102 of the UCC.

     “Senior Secured Notes” shall have the meaning set forth in the recitals.

     “Servicer” shall mean CapitalSource Finance LLC or any other Subsidiary of the Initial Borrower as a servicer of Loans, individually or collectively, as the context requires.

     “SN Intercompany Note” shall have the meaning set forth in the recitals.

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     “SN Intercompany Notes Obligations” means all obligations and indebtedness (including, but not limited to, all expenses and charges, legal and otherwise, incurred by any holder of any SN Intercompany Note (other than the Initial Borrower) or the Note Trustee in collecting or enforcing any of the SN Intercompany Notes Obligations or in realizing on or protecting any security therefor, including, without limitation, the security granted hereunder, pursuant to Section 13 of each SN Intercompany Note, and all indemnities, fees and interest thereon) of each SN Note Obligor, whether now existing or hereafter incurred under, arising out of or in connection with the SN Intercompany Note or Notes issued by such SN Note Obligor and the due performance and compliance by such SN Note Obligor with all the terms, conditions and agreements contained in the SN Intercompany Note or Notes issued by such SN Note Obligor, howsoever evidenced, created, incurred or acquired, whether primary, secondary, direct, contingent, or joint and several, whether now existing or hereafter incurred.

     “SN Note Obligor” shall have the meaning set forth in the recitals.

     “Specified Collateral” of any SN Note Obligor, means the Pledged Collateral owned by such SN Note Obligor.

     “Subsidiary Capital Stock” shall have the meaning set forth in Section 2(b).

     “UCC” shall mean the Uniform Commercial Code as from time to time in effect in the State of New York; provided, however, that, in the event that, by reason of mandatory provisions of law, any of the attachment, perfection or priority of the Collateral Agent’s and the Secured Parties’ security interest in any Pledged Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term “UCC” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions.

     “Uncertificated Security” shall have the meaning assigned to such term in Section 8-102 of the UCC.

     “Uncertificated Securities Available Assets” shall mean any Core Collateral held by a Pledgor in the form of an Uncertificated Security that constitutes (a) Available Assets pursuant to clause (d) of the definition thereof or (b) CapitalSource Repurchased Securitization Notes; provided, however, from and after the Credit Agreement Termination Date, “Uncertificated Securities Available Assets” shall mean all assets which qualify as Uncertificated Securities Available Assets as determined by reference to the Credit Agreement as in effect on the date hereof, as the same may be amended, modified or otherwise supplemented from time to time, provided that such amendment, modification or supplement (x) is made in good faith by the parties thereto and in accordance with the terms of the Credit Agreement, and (y) is not made immediately prior to or in contemplation of any repayment, refinancing, restructuring, extension, exchange or replacement of any indebtedness under the Credit Agreement.

     “Underlying Instruments” shall mean the indenture, loan agreement, credit agreement or other agreement pursuant to which a Loan has been issued or created and each other agreement that governs the terms of or secures the obligations represented by such Loan or of which the holders of such Loan are the beneficiaries.

     “Unencumbered” shall mean with respect to a Loan or any other asset, that such Loan or other asset is not subject to any Lien other than Permitted Liens (for the purposes of this definition only, Permitted Liens shall not include any Permitted Liens described in clause (xiii) of the definition of Permitted Liens in the Credit Agreement).

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     “Wells Fargo” shall have the meaning set forth in the preamble.

     (b) Interpretation. The rules of interpretation specified in the Credit Agreement shall be applicable to this Pledge Agreement.

     (c) Resolution of Drafting Ambiguities. Each Pledgor acknowledges and agrees that it was represented by counsel in connection with the execution and delivery of this Pledge Agreement, that it and its counsel reviewed and participated in the preparation and negotiation hereof and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party (i.e., the Collateral Agent) shall not be employed in the interpretation hereof.

     2. Pledge.

     (a) Grant of Security Interest. To secure the payment or performance, as the case may be, in full of the Secured Obligations owing by each Pledgor, whether at stated maturity, by acceleration or otherwise, each Pledgor hereby pledges to the Collateral Agent, and grants to the Collateral Agent for the benefit of the respective Secured Parties a first priority security interest in the collateral described in Section 2(b) (collectively, the “Pledged Collateral”) owned by such Pledgor; provided, however, that in no event shall any portion of the Pledged Collateral (i) constituting Residual Collateral include Excluded Collateral and (ii) include (x) any SN Intercompany Notes and, to the extent not otherwise constituting Shared Collateral, any proceeds, products, substitutions or replacements therefor or (y) any right, title or interest of the Initial Borrower, solely in its capacity as a Secured Party, in or to any agreement that grants security to the Initial Borrower in the Specified Collateral and which agreement is collaterally assigned by the Initial Borrower to the Note Trustee pursuant to the Pledge and Assignment as in effect on the date hereof; provided further, that (A) notwithstanding anything herein or in any other Credit Document to the contrary, the maximum liability under this Pledge Agreement and under the other Credit Documents of each Pledgor shall not exceed an amount equal to the largest amount that would not render such Pledgor’s obligations hereunder subject to avoidance under Section 548 of the Bankruptcy Code or any equivalent provision of the law of any state and (B) notwithstanding anything herein or in any other Indenture Document to the contrary, the maximum liability under this Pledge Agreement and under the other Indenture Documents of each Pledgor shall not exceed an amount equal to the largest amount that would not render such Pledgor’s obligations hereunder subject to avoidance under Section 548 of the Bankruptcy Code or any equivalent provision of the law of any state. The pledge and grant of a security interest under this Section 2 does not constitute and is not intended to result in a creation or an assumption by the Collateral Agent or any of the Secured Parties (other than the Initial Borrower) of any obligation of the Pledgors or any other Person in connection with any or all of the Pledged Collateral or under any agreement or instrument relating thereto. Anything herein to the contrary notwithstanding, (a) the Pledgors shall remain liable under the Pledged Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Pledge Agreement had not been executed, (b) the exercise by the Collateral Agent, as agent for the Secured Parties, of any of its rights in the Collateral (other than taking title thereto) shall not release any Pledgor from any of its duties or obligations under the Pledged Collateral, and (c) none of the Collateral Agent or the Secured Parties (other than the Initial Borrower) shall have any obligations or liability under the Pledged Collateral by reason of this Pledge Agreement, nor shall the Collateral Agent or any Secured Party (other than the Initial Borrower) be obligated to perform any of the obligations or duties of any Pledgor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder or preserve any Pledgor’s rights under this Pledge Agreement.

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     (b) Description of Pledged Collateral. The Pledged Collateral is described as follows:

     (i) all right, title and interest of each Pledgor as a holder (whether now or in the future) of (y) Capital Stock of any (A) Material Pledged Subsidiary, and (B) other Subsidiary that is not a Material Pledged Subsidiary, whether such Capital Stock is represented by a certificate or not, or acquired hereafter or any warrants to purchase or depository shares or other rights in respect of any such Capital Stock, (z) all shares of stock, membership interest certificates, partnership certificates, other certificates, instruments or other documents evidencing or representing the Capital Stock referred to in the preceding clause (y) (the Pledged Collateral listed in clauses (y) and (z), collectively, the “Subsidiary Capital Stock”); provided that in no event shall more than 66% of the total outstanding Excluded Foreign Subsidiary Voting Stock of any Excluded Foreign Subsidiary be required to be pledged hereunder;

     (ii) all right, title and interest of each Pledgor in any Unencumbered Loans (including, without limitation, the CapitalSource Securitization Notes, the CapitalSource Repurchased Securitization Notes and any debt securities of the type referred to in clause (d) of the definition of Available Assets), including, but not limited to, (x) all promissory notes, instruments or chattel paper issued in connection with such Unencumbered Loans (whether now owned or existing or owned or arising hereafter) and held by such Pledgor at any time (the “Pledged Notes”), (y) any Capital Stock issued in connection with such Unencumbered Loans and held by such Pledgor (including, but not limited to, Capital Stock in any REO Asset Owner held by such Pledgor), whether such Capital Stock is represented by a certificate or not, or any warrants to purchase or depository shares or other rights in respect of any such Capital Stock, and (z) all shares of stock, membership interest certificates, partnership certificates, other certificates, instruments or other documents evidencing or representing the Capital Stock referred to in the preceding clause (y) (the Pledged Collateral listed in clauses (y) and (z) and together with the Subsidiary Capital Stock, collectively, the “Pledged Capital Stock”);

     (iii) all right, title and interest of each Pledgor in and to all present and future payments, Proceeds, dividends, distributions, instruments, compensation, property, assets, interests and rights in connection with or related to the Pledged Collateral of such Pledgor listed in clauses (i) through (ii) above, including any Securities Account to which the Pledged Collateral is credited, and all monies due or to become due and payable to such Pledgor in connection with or related to such collateral or otherwise paid, issued or distributed from time to time in respect of or in exchange therefor, and any certificate, instrument or other document evidencing or representing the same (including, without limitation, all proceeds of dissolution or liquidation and all recoveries received by such Pledgor in connection with a REO Asset); and

     (iv) to the extent not covered by clauses (i) through (iii) above, all Proceeds of all of the foregoing, of every kind, and all Proceeds of such Proceeds.

     Without limiting the generality of the foregoing, it is hereby specifically understood and agreed that a Pledgor may from time to time hereafter pledge and deliver additional Capital Stock or promissory notes or other interests to the Collateral Custodian as collateral security for the Secured Obligations. Upon such pledge and delivery to the Collateral Custodian, such additional Capital Stock or promissory notes or other interests shall be deemed to be part of the Pledged Collateral of such Pledgor and shall be subject to the terms of this Pledge Agreement whether or not Schedules 2(a) and (b) are amended to refer to such additional Pledged Collateral.

     (c) The Pledgors and the Collateral Agent, on behalf of the respective Secured Parties, hereby acknowledge and agree that the security interest created hereby in the Pledged Collateral, or in the

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Specified Collateral in the case of subclause (iv) below, constitutes continuing collateral security for (i) in the case of the Pledgors other than CS International, all of the Credit Agreement Obligations, (ii) in the case of CS International, all of the Guaranteed Obligations, whether now existing or hereafter arising, (iii) in the case of the Pledgors (other than any SN Note Obligor), all of the Note Obligations, and (iv) in the case of the SN Note Obligors, all of the SN Intercompany Notes Obligations.

     3. Security for Secured Obligations. This Pledge Agreement is made by each Pledgor for the benefit of the respective Secured Parties to secure:

     (a) the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the Credit Agreement Obligations, owing by each Pledgor (other than CS International);

     (b) the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the Guaranteed Obligations, owing by CS International;

     (c) the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the Note Obligations, owing by each Pledgor (other than any SN Note Obligor);

     (d) the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the SN Intercompany Notes Obligations, owing by each SN Note Obligor;

     (e) any and all amounts, advances, liabilities and obligations owing by any Pledgor (other than the SN Note Obligors with respect to the Note Obligations, but without limiting such amounts, advances, liabilities and obligations owing by any SN Note Obligor with respect to the SN Intercompany Notes Obligations) or otherwise to the Collateral Agent whenever arising, including, without limitation (i) any and all costs, expenses, fees, indemnities and other sums chargeable to any Pledgor pursuant to any Secured Credit Document, (ii) in collecting or enforcing any of the Credit Agreement Obligations, Guaranteed Obligations or Note Obligations, (iii) in realizing on or protecting or preserving any security therefor, or (iv) for taking any action under or otherwise in connection with any Secured Credit Document, howsoever evidenced, created, incurred or acquired, whether primary, secondary, direct, contingent or joint and several, whether now existing or hereafter incurred;

     (f) any fees, costs or expenses incurred by the Collateral Custodian in connection with its collateral custodian activities pursuant to this Pledge Agreement (including but not limited to, the Collateral Custodian Fee) howsoever evidenced, created, incurred or acquired, whether primary, secondary, direct, contingent or joint and several, whether now existing or hereafter incurred; and

     (g) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations, or liabilities referred to in clauses (a) through (f) above, after an Event of Default shall have occurred and be continuing, the expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Pledged Collateral, or of any exercise by the Collateral Agent of its rights hereunder, together with attorneys’ fees and court costs,

all such obligations, liabilities, sums and expenses set forth in clauses (a) through (g) of this Section 3 being hereinafter collectively called the “Secured Obligations”.

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     4. Delivery of the Pledged Collateral; Perfection of Security Interest. Each Pledgor hereby agrees that:

     (a) Delivery of Certificates and Instruments to Custodian. Such Pledgor shall, or shall cause the Servicer, as applicable, to deliver the Custodian Pledged Collateral to the Collateral Custodian (in each case, subject to the limitations set forth in Section 2 above) (i) on or prior to January 15, 2009, all original shares of stock, membership interest certificates, partnership certificates, other certificates, instruments, promissory notes and other documents evidencing or representing the Core Collateral owned by such Pledgor, (ii) on or prior to January 15, 2009, the Required Asset Documents (including, but not limited to, an electronic file (in EXCEL or a comparable format) that contains the related Asset List or that otherwise contains the Asset identification number and the name of the Obligor with respect to each related Asset) and the Asset Files with respect to all Loans included in the Core Collateral, (iii) promptly upon the receipt thereof by or on behalf of a Pledgor, all other original shares of stock, membership interest certificates, partnership certificates, other certificates, instruments, promissory notes and other documents constituting Core Collateral owned by a Pledgor, and (iv) promptly upon the receipt of any additional Custodian Pledged Collateral by or on behalf of a Pledgor, the Required Asset Documents (including, but not limited to, an electronic file (in EXCEL or a comparable format) that contains the related Asset List or that otherwise contains the Asset identification number and the name of the Obligor with respect to each related Asset) and Asset Files with respect to such additional Custodian Pledged Collateral. Prior to delivery to the Collateral Custodian, all such original shares of stock, membership interest certificates, partnership certificates, other certificates, instruments, promissory notes and other documents constituting Pledged Collateral of a Pledgor shall be held in trust by such Pledgor for the benefit of the Collateral Agent pursuant hereto. All such original shares of stock, membership interest certificates, partnership certificates, other certificates, instruments, promissory notes and other documents shall be delivered in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank, substantially in the form provided in Exhibit 4(a).

     (b) Additional Securities. If such Pledgor shall receive by virtue of its being or having been the owner of any Core Collateral constituting Subsidiary Capital Stock, any (i) shares of stock, membership interest certificates, partnership certificates, other certificates, instruments or other documents, including without limitation, any certificates, instruments or other documents representing a dividend or distribution in connection with any increase or reduction of capital, reclassification, merger, consolidation, sale of assets, combination of Capital Stock, stock splits, spin-off or split-off, promissory notes or other instruments; (ii) option or right, whether as an addition to, substitution for, or an exchange for, any Core Collateral or otherwise; (iii) dividends paid in Capital Stock; or (iv) distributions of Capital Stock or other equity interests in connection with a partial or total liquidation, dissolution or reduction of capital, capital surplus or paid-in surplus, then such Pledgor shall receive such certificate, instrument, option, right or distribution in trust for the benefit of the Collateral Agent, shall segregate it from such Pledgor’s other property and shall deliver it forthwith to the Collateral Custodian, in the exact form received accompanied by duly executed instruments of transfer or assignment in blank, substantially in the form provided in Exhibit 4(a) attached hereto, to be held by the Collateral Custodian, as Pledged Collateral and as further collateral security for the Secured Obligations.

     (c) Financing Statements. Each Pledgor hereby authorizes the Collateral Agent and the Collateral Custodian to prepare and file such financing statements (including continuation statements) or amendments thereof or supplements thereto or other instruments as the Collateral Agent may from time to time deem necessary or appropriate in order to perfect and maintain the security interests granted hereunder in accordance with the UCC, including, without limitation, any financing statement that describes the Pledged Collateral as “all personal property” or “all assets” of such Pledgor or that describes the Pledged Collateral in some other manner as the Collateral Agent deems necessary or advisable. Each Pledgor shall also execute and deliver to the Collateral Agent or, with respect to the Custodian Pledged

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Collateral, the Collateral Custodian, as applicable, and/or file such agreements, assignments or instruments (including affidavits, notices, reaffirmations and amendments and restatements of existing documents, as the Collateral Agent may request) and do all such other things as the Collateral Agent may deem reasonably necessary or appropriate (i) to assure to the Collateral Agent its security interests hereunder are perfected, including such financing statements (including continuation statements) or amendments thereof or supplements thereto or other instruments as the Collateral Agent may from time to time reasonably request in order to perfect and maintain the security interests granted hereunder in accordance with the UCC and any other personal property security legislation in the appropriate jurisdictions, (ii) to consummate the transactions contemplated hereby and (iii) to otherwise protect and assure the Collateral Agent of its rights and interests hereunder. The Collateral Custodian shall not be under any obligation to monitor the sufficiency of any financing statement or the need to file any continuation statement in connection therewith. The Collateral Custodian shall not be obligated to file any financing statement or continuation statement.

     (d) Provisions Relating to Uncertificated Securities, Securities Entitlements and Securities Accounts. With respect to any Uncertificated Securities Available Assets, (a) not later than February 17, 2009 (or such later date as may be permitted by the Collateral Agent), the applicable Securities Intermediary shall enter into, an agreement with the Collateral Agent granting Control to the Collateral Agent over such Uncertificated Securities Available Assets, such agreement to be in form and substance reasonably satisfactory to the Collateral Agent, (b) promptly, and in any event not later than 45 days after the date of this Pledge Agreement, the following Pledgors shall deliver duly executed amended control agreements with the applicable Securities Intermediary with respect to the Securities Accounts owned by CapitalSource Finance LLC and CSE Mortgage LLC and (c) the Collateral Agent shall be entitled, upon the occurrence and during the continuance of an Event of Default, to notify the applicable issuer of the Uncertificated Security or the applicable Securities Intermediary that it should follow the instructions or the Entitlement Orders, respectively, of the Collateral Agent and no longer follow the instructions or the Entitlement Orders, respectively, of the applicable Pledgor; provided that upon the occurrence of a Collateral Agent Resignation Event, the applicable Pledgor shall (i) use commercially reasonable efforts to assign any control agreement existing on the date of the Collateral Agent Resignation Event to the replacement Collateral Agent or replace any such control agreement and (ii) with respect to any securities accounts established on or after a Collateral Agent Resignation Event, not deposit Uncertificated Securities Available Assets into such account unless a control agreement has been entered into with respect thereto. Upon receipt by a Pledgor of notice from a Securities Intermediary of its intent to terminate the Securities Account of such Pledgor held by such Securities Intermediary, prior to the termination of such Securities Account the Uncertificated Securities Available Assets in such Securities Account shall be (x) transferred to a new Securities Account, upon the request of the Collateral Agent, which shall be subject to a control agreement as provided above or (y) transferred to an account held by the Collateral Agent (in which it will be held until a new Securities Account is established); provided further, that the obligations set forth in this sentence shall be limited to using commercially reasonable efforts on or after the occurrence of a Collateral Agent Resignation Event.

     5. Collateral Custodian.

     (a) Designation of Collateral Custodian.

     (i) Initial Collateral Custodian. The role of collateral custodian with respect to the Required Asset Documents shall be conducted by the Person designated as Collateral Custodian hereunder from time to time in accordance with this Section 5(a).

     (ii) Successor Collateral Custodian. Upon the Collateral Custodian’s receipt of a Collateral Custodian Termination Notice from the Collateral Agent of the designation of a

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successor Collateral Custodian pursuant to the provisions of Section 5(e), the Collateral Custodian agrees that it will terminate its activities as Collateral Custodian hereunder.

     (b) Duties of Collateral Custodian.

     (i) Appointment. The Collateral Agent hereby appoints Wells Fargo to act as Collateral Custodian, for the benefit of the Collateral Agent, as collateral agent for the Secured Parties. The Collateral Custodian hereby accepts such appointment and agrees to perform the duties and obligations with respect thereto set forth herein.

     (ii) Duties. Until its removal pursuant to Section 5(e), the Collateral Custodian shall perform on behalf of the Collateral Agent and the Secured Parties, the following duties and obligations:

     (A) The Collateral Custodian shall take and retain custody of the Required Asset Documents delivered by any Pledgor in accordance with the terms and conditions of this Pledge Agreement, all for the benefit of the Secured Parties and subject to the Lien thereon in favor of the Collateral Agent as collateral agent for the Secured Parties. Within five Business Days of its receipt of any Required Asset Documents, the Collateral Custodian shall review such Required Asset Documents to confirm that (A) such Required Asset Documents, to the extent indicated on the Asset Checklist, have been executed and, on their face, have no missing or mutilated pages, (B) any UCC and other filings (as set forth on the Asset Checklists) are contained in the Asset File and have a file stamp set forth thereon, (C) a certificate of insurance (as set forth on the Asset Checklist) is contained in the Asset File, and (D) the related Asset identification number and Obligor name with respect to such Asset is referenced on the related Asset List and is not a duplicate Asset (collectively, the “Review Criteria”). In order to facilitate the foregoing review by the Collateral Custodian, in connection with each delivery of Required Asset Documents hereunder to the Collateral Custodian, the Servicer shall provide to the Collateral Custodian an electronic file (in EXCEL or a comparable format) that contains the Asset Checklist and the related Asset List that otherwise contains the Asset identification number and the name of the Obligor with respect to each related Asset. At the conclusion of such review, the Collateral Custodian shall deliver a receipt in the form attached hereto as Exhibit 5(b). The Servicer and the related Pledgor shall use commercially reasonable efforts to correct any non-compliance with a Review Criteria identified on such receipt. Two times each calendar month, the Collateral Custodian shall deliver to the Servicer and the Collateral Agent an exception report identifying, with particularity, each Asset and each of the applicable Review Criteria that such Asset fails to satisfy. In addition, if requested in writing by the Servicer and approved by the Collateral Agent or as otherwise directed by the Collateral Agent within ten Business Days of the Collateral Custodian’s delivery of such exception report, the Collateral Custodian shall return any Asset which fails to satisfy a Review Criteria to the applicable Person; provided that no such approval or direction of the Collateral Agent shall be required after the occurrence of the Credit Agreement Termination Date so long as (i) the Collateral Agent shall continue to have a first priority perfected security interest in the Asset so returned and any Proceeds thereof, and (ii) the Servicer, in requesting the return of such Asset, is acting in good faith consistent with past practice. Other than the foregoing, the Collateral Custodian shall not have any responsibility for reviewing any Required Asset Documents; provided further, that (x) by requesting the return of any Asset after the occurrence of the Credit Agreement Termination Date pursuant to this Section 5(b)(ii)(A), the Servicer represents and warrants that clauses (i) and (ii) of the

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foregoing proviso are true and correct in all material respects, and (y) the Collateral Custodian shall have no duty, obligation or responsibility for making such determination or verifying that such matters are true.

     (B) In taking and retaining custody of the Required Asset Documents, the Collateral Custodian shall be deemed to be acting as the agent of the Collateral Agent and the Secured Parties; provided that the Collateral Custodian makes no representations as to the existence, perfection or priority of any Lien on the Required Asset Documents or the instruments therein; and provided further that, the Collateral Custodian’s duties as agent shall be limited to those expressly contemplated herein.

     (C) All Required Asset Documents kept by the Collateral Custodian shall be kept in fire resistant vaults, rooms or cabinets at the locations specified on Schedule 5(b) attached hereto, or at such other office as shall be specified to the Collateral Agent by the Collateral Custodian in a written notice delivered at least forty-five (45) days prior to such change. All Required Asset Documents shall be electronically tracked and maintained in such a manner so as to permit retrieval and access. All notes and Loan Registers included in the Pledged Collateral shall be clearly electronically or physically segregated from any other documents or instruments maintained by the Collateral Custodian. At the reasonable request of the Collateral Agent, the Initial Borrower shall promptly (and in any event within ten (10) Business Days) deliver to the Collateral Agent copies of all Asset Files that have not been segregated.

     (D) In performing its duties, the Collateral Custodian shall use the same degree of care and attention as it employs with respect to similar collateral that it holds as collateral custodian.

     (c) Merger or Consolidation. Any Person (i) into which the Collateral Custodian may be merged or consolidated, (ii) that may result from any merger or consolidation to which the Collateral Custodian shall be a party, or (iii) that may succeed to the properties and assets of the Collateral Custodian substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Collateral Custodian hereunder, shall be the successor to the Collateral Custodian under this Pledge Agreement without further act of any of the parties to this Pledge Agreement.

     (d) Collateral Custodian Compensation. As compensation for its collateral custodian activities hereunder, the Collateral Custodian shall be entitled to a custodial fee (the “Collateral Custodian Fee”) pursuant to a separate fee letter with the Servicer. The Collateral Custodian’s entitlement to receive the Collateral Custodian Fee shall cease on the earlier to occur of: (i) its removal as Collateral Custodian pursuant to Section 5(e) or (ii) the termination of this Pledge Agreement.

     (e) Collateral Custodian Removal. The Collateral Custodian may be removed, with cause (or, following the occurrence and during the continuance of a Default or Event of Default, without cause), by the Collateral Agent by notice given in writing to the Collateral Custodian (the “Collateral Custodian Termination Notice”); provided that, notwithstanding its receipt of a Collateral Custodian Termination Notice, the Collateral Custodian shall continue to act in such capacity until a successor Collateral Custodian has been appointed, has agreed to act as Collateral Custodian hereunder, and has received all Required Asset Documents held by the previous Collateral Custodian.

     (f) Limitation on Liability.

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     (i) The Collateral Custodian may conclusively rely on and shall be fully protected in acting upon any certificate, instrument, opinion, notice, letter, telegram, electronic mail or other document delivered to it and that in good faith it reasonably believes to be genuine and that has been signed by the proper party or parties. The Collateral Custodian may rely conclusively on and shall be fully protected in acting upon (a) the written instructions of any designated officer of the Collateral Agent or (b) the verbal instructions of any designated officer of the Collateral Agent. The Collateral Custodian shall not have any liability to any Secured Party in connection with following the written or verbal instruction of the Collateral Agent.

     (ii) The Collateral Custodian may consult counsel satisfactory to it and the advice or opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the advice or opinion of such counsel.

     (iii) The Collateral Custodian shall not be liable for any error of judgment, or for any act done or step taken or omitted by it, in good faith, or for any mistakes of fact or law, or for anything that it may do or refrain from doing in connection herewith except in the case of its willful misconduct or grossly negligent performance or omission of its duties and in the case of its negligent performance of its duties in taking and retaining custody of the Required Asset Documents.

     (iv) The Collateral Custodian makes no warranty or representation and shall have no responsibility (except as expressly set forth in this Pledge Agreement) as to the content, enforceability, completeness, validity, sufficiency, value, genuineness, ownership or transferability of the Custodian Pledged Collateral, and will not be required to and will not make any representations as to the validity or value (except as expressly set forth in this Pledge Agreement) of any of the Custodian Pledged Collateral. The Collateral Custodian shall not be obligated to take any legal action hereunder that might in its judgment involve any expense or liability unless it has been furnished with an indemnity reasonably satisfactory to it.

     (v) The Collateral Custodian shall have no duties or responsibilities except such duties and responsibilities as are specifically set forth in this Pledge Agreement and no covenants or obligations shall be implied in this Pledge Agreement against the Collateral Custodian.

     (vi) The Collateral Custodian shall not be required to expend or risk its own funds in the performance of its duties hereunder.

     (vii) It is expressly agreed and acknowledged that the Collateral Custodian is not guaranteeing performance of or assuming any liability for the obligations of the other parties hereto or any parties to the Custodian Pledged Collateral.

     (viii) The Collateral Custodian shall be under no responsibility or duty with respect to the disposition of any Asset Files while such Asset Files are not in its possession.

     (ix) The Collateral Custodian may rely upon the validity of documents delivered to it, without investigation as to their authenticity or legal effectiveness.

     (x) The Collateral Custodian shall not be responsible to the Pledgors, the Collateral Agent, the Servicer or any other party for recitals, statements or warranties or representations of the Pledgors contained herein or in any document, or be bound to ascertain or inquire as to the

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performance or observance of any of the terms of this Pledge Agreement or any other agreement on the part of any party, except as may otherwise be specifically set forth herein.

     (xi) The Collateral Custodian is authorized, in its sole discretion, to disregard any and all notices or instructions given by any other party hereto or by any other person, firm or corporation, except only such notices or instructions as are herein provided for and orders or process of any court entered or issued with or without jurisdiction. If any property subject hereto is at any time attached, garnished or levied upon under any court order or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in case any order, judgment or decree shall be made or entered by any court affecting such property or any part hereof, then and in any of such events the Collateral Custodian is authorized, in its sole discretion, to rely upon and comply with any such order, writ, judgment or decree with which it is advised by legal counsel of its own choosing is binding upon it, and if it complies with any such order, writ, judgment or decree it shall not be liable to any other party hereto or to any other person, firm or corporation by reason of such compliance even though such order, writ, judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated.

     (xii) The Initial Borrower shall indemnify and hold the Collateral Custodian harmless from and against all claims, liabilities, damages, losses, fees (including reasonable out-of-pocket attorney’s fees and expenses) and costs and expenses incurred by the Collateral Custodian as a result of the entering into and performance of its duties hereunder, unless such claims, liabilities, damages, loss, fees, costs and expenses shall arise from the Collateral Custodian’s gross negligence or willful misconduct. The Collateral Custodian’s rights to indemnification shall survive the termination of this Pledge Agreement.

     (xiii) The Collateral Custodian shall have no duty or obligation to review or be responsible for the contents of the Indenture, the Credit Agreement, the Intercreditor Agreement, or any other document related to the Credit Agreement Obligations or Note Obligations, to which it is not a party. To the extent of any conflict between this Pledge Agreement and any of the foregoing documents as it relates to the duties and obligations of the Collateral Custodian, the provisions of this Pledge Agreement shall control.

     (g) The Collateral Custodian Not to Resign. The Collateral Custodian shall not resign from the obligations and duties hereby imposed on it except for the failure of the Servicer to pay the Collateral Custodian Fee or upon the Collateral Custodian’s determination that (i) the performance of its duties hereunder is or becomes impermissible under Applicable Law, (ii) there is no reasonable action that the Collateral Custodian could take to make the performance of its duties hereunder permissible under Applicable Law and (iii) the performance of its duties hereunder create a conflict of interest. Any such determination permitting the resignation of the Collateral Custodian shall be evidenced by an opinion of counsel, in form and substance satisfactory to the Collateral Agent in its sole discretion, to such effect delivered to the Collateral Agent. No such resignation shall become effective until a successor Collateral Custodian shall have assumed the responsibilities and obligations of the Collateral Custodian hereunder.

     (h) Release of Documents.

     (i) Release for Servicing. From time to time and as appropriate for the enforcement or servicing of any of the Custodian Pledged Collateral, the Collateral Custodian is hereby authorized (unless and until such authorization is revoked by the Collateral Agent), upon written receipt from the Servicer of a request for release of documents and receipt in the form annexed hereto as Exhibit 5(h) to release to the Servicer the related Required Asset Documents or the

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documents set forth in such request and receipt to the Servicer. All documents so released to the Servicer shall be held by the Servicer in trust for the benefit of the Collateral Agent in accordance with the terms of this Pledge Agreement. The Servicer shall return to the Collateral Custodian the Required Asset Documents or other such documents (i) immediately upon the request of the Collateral Agent, or (ii) when the Servicer’s need therefor in connection with such foreclosure or servicing no longer exists, unless the Asset shall be liquidated, in which case, upon receipt of an additional request for release of documents and receipt certifying such liquidation from the Servicer to the Collateral Custodian in the form annexed hereto as Exhibit 5(h), the Servicer’s request and receipt submitted pursuant to the first sentence of this subsection shall be released by the Collateral Custodian to the Servicer.

     (ii) Limitation on Release. The foregoing provision respecting release to the Servicer of the Required Asset Documents and documents by the Collateral Custodian upon request by the Servicer shall be operative only to the extent that at any time the Collateral Custodian shall not have released to the Servicer active Required Asset Documents (including those requested) pertaining to more than fifteen (15) Assets at the time being serviced by the Servicer under this Pledge Agreement. Any additional Required Asset Documents or documents requested to be released by the Servicer may be released (x) at any time prior to the Credit Agreement Termination Date, only upon written authorization of the Collateral Agent and (y) at any time thereafter, as reasonably required by the Servicer in its commercially reasonable business judgment and in good faith consistent with past practice; provided that the Servicer shall not request the release of any additional Required Asset Documents unless the Collateral Agent shall continue to have a first priority perfected security interest in the related Asset or the proceeds thereof; provided further, that (A) by requesting the return of any Required Asset Documents pursuant to this Section 5(h)(ii), the Servicer represents and warrants that it is acting in good faith consistent with past practice and that the foregoing proviso is true and correct in all material respects, and (B) the Collateral Custodian shall have no duty, obligation or responsibility for making such determination or verifying that such matters are true. The Collateral Custodian shall not be required to track the number of files released to the Servicer at any one time, but shall identify such files on the exception report. The limitations of this paragraph shall not apply to the release of Required Asset Documents to the Servicer pursuant to the immediately succeeding subsection.

     (iii) Release. Upon receipt by the Collateral Custodian of the Servicer’s request for release of documents and receipt in the form annexed hereto as Exhibit 5(h), the Collateral Custodian shall promptly release the related Required Asset Documents to the Servicer.

     (i) Return of Required Asset Documents. Any Pledgor or the Servicer may, without the prior consent of the Collateral Agent, require that the Collateral Custodian return each Required Asset Document or other Custodian Pledged Collateral (a) delivered to the Collateral Custodian in error, (b) that is required to be redelivered to such Pledgor in connection with the termination of this Pledge Agreement or (c) as otherwise permitted by Section 8.11 of the Credit Agreement and Sections 10.03 and 10.10 of the Indenture or as otherwise permitted under the Indenture, in each case by submitting to the Collateral Custodian (with a copy to the Collateral Agent) a written request in the form of Exhibit 5(h) hereto (signed by such Pledgor or the Servicer, as applicable) specifying the Collateral to be so returned and reciting that the conditions to such release have been met (and specifying the Section or Sections of this Pledge Agreement being relied upon for such release). The Collateral Custodian shall upon its receipt of each such request for return executed by such Pledgor, the Collateral Agent or the Servicer, promptly, but in any event within five Business Days, return the Required Asset Documents so requested to such Pledgor or the Servicer, as applicable.

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     (j) Access to Certain Documentation and Information Regarding the Collateral; Audits. The Collateral Custodian shall provide to the Collateral Agent access to the Required Asset Documents and all other documentation regarding the Custodian Pledged Collateral including in such cases where the Collateral Agent is required in connection with the enforcement of the rights or interests of the Secured Parties, or by applicable statutes or regulations, to review such documentation, such access being afforded without charge but only (i) upon reasonable prior written request, (ii) during normal business hours and (iii) subject to the Servicer’s and Collateral Custodian’s normal security and confidentiality procedures. At the discretion of the Collateral Agent, the Collateral Agent may, at the Pledgors’ expense, review the Servicer’s collection and administration of the Custodian Pledged Collateral in order to assess compliance by the Servicer with the Credit and Collection Policy, as well as with this Pledge Agreement and may conduct an audit of the Custodian Pledged Collateral and Required Asset Documents in conjunction with such a review; provided that such review shall be no more frequent than twice each Fiscal Year so long as no Default or Event of Default shall have occurred and be continuing, and as often as may reasonably be desired in the event that a Default or an Event of Default shall have occurred and be continuing. Such review shall be reasonable in scope and shall be completed in a reasonable period of time. Without limiting the foregoing provisions of this Section 5(j), from time to time on request of the Collateral Agent, the Collateral Custodian shall permit certified public accountants or other auditors acceptable to the Collateral Agent to conduct, at the Servicer’s expense, a review of the Required Asset Documents and all other documentation regarding the Custodian Pledged Collateral; provided that such review shall be no more frequent than twice each Fiscal Year so long as no Default or Event of Default shall have occurred and be continuing, and as often as may reasonably be desired in the event that a Default or an Event of Default shall have occurred and be continuing.

     (k) Security Interest. If the Collateral Custodian has or subsequently obtains by agreement, operation of law, or otherwise a security interest in any of the Custodian Pledged Collateral, the Collateral Custodian agrees that such security interest shall be subordinated to the security interest of the Collateral Agent.

     (l) Credit Agreement Termination Date. Promptly after the occurrence of the Credit Agreement Termination Date, the Initial Borrower shall deliver to the Collateral Custodian written notice that the Credit Agreement Termination Date has occurred and the Collateral Custodian shall be entitled to conclusively rely on such notice.

     6. Intentionally Omitted.

     7. Representations and Warranties of Pledgors. Each Pledgor hereby represents and warrants to the Collateral Agent, for the benefit of the Secured Parties, that so long as any of the Secured Obligations (other than unasserted contingent indemnity obligations that survive termination of Secured Credit Documents pursuant to the stated terms thereof) or any Senior Secured Notes remain outstanding or any Secured Credit Document is in effect, and until all of the Commitments under the Credit Agreement shall have been terminated:

     (a) Pledgor’s Legal Status. As of the date hereof, (a) such Pledgor is an organization, as set forth on Schedule 7(a) attached hereto; (b) such organization is of the type, and is organized in the jurisdiction, set forth on Schedule 7(a) attached hereto; and (c) Schedule 7(a) hereto sets forth such Pledgor’s organizational identification number or states that such Pledgor has none.

     (b) Pledgor’s Legal Name. As of the date hereof, such Pledgor’s exact legal name is that set forth on Schedule 7(a) attached hereto and on the signature page hereof.

     (c) Intentionally Omitted.

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     (d) Asset Files and Checklist. Other than exceptions noted (which such exceptions shall not in the aggregate be material) in any receipt delivered by the Custodian pursuant to Section 5(b), the Asset Files and Asset Checklist in respect of any Core Collateral are true, complete and correct in all material respects.

     (e) Authority; Binding Obligation; No Conflict. Such Pledgor has full power and authority to execute, deliver and perform its obligations in accordance with the terms of this Pledge Agreement and to grant to the Collateral Agent the security interest in the Core Collateral of such Pledgor pursuant hereto, without the consent or approval of any other Person other than any consent or approval which has been obtained and is in full force and effect. This Pledge Agreement has been duly authorized, executed and delivered by such Pledgor and is the legal, valid and binding obligation of such Pledgor, enforceable against such Pledgor in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or similar laws or equitable principles relating to or limiting creditors’ rights generally. The granting to the Collateral Agent of the security interest in the Core Collateral of such Pledgor hereunder does not and will not, with or without the passage of time and/or the giving of notice (a) result in the existence or imposition of any Lien nor obligate such Pledgor to create any Lien (other than such security interest) in favor of any Person over all or any of its assets; (b) violate or result in a default under, or give rise to a right of termination, amendment or modification of any agreement, mortgage, bond or other instrument to which such Pledgor is a party or which is binding upon such Pledgor or any of its assets; (c) violate such Pledgor’s certificate of incorporation, partnership agreement, limited liability company agreement, operating agreement, by-laws or other organizational or charter documents; or (d) violate any law, regulation or judicial order binding on such Pledgor or any of the Core Collateral of such Pledgor.

     (f) Title to Collateral. The Pledged Collateral of such Pledgor is owned by such Pledgor free and clear of any Lien, except for Permitted Liens. Such Pledgor has not filed or consented to the filing and has no knowledge of the filing of any financing statement or analogous document under the UCC or any other applicable laws covering any Pledged Collateral of such Pledgor, except, in each case, for Permitted Liens. There exists no “adverse claim” within the meaning of Section 8-102 of the UCC with respect to the Core Collateral of such Pledgor. None of the Pledged Notes or Loan Registers, as applicable, that constitute or evidence Core Collateral has any marks or notations indicating that it has been pledged, assigned or otherwise conveyed to any person other than the Collateral Agent.

     (g) Pledged Collateral. As of the date hereof, set forth on Schedules 2(a) and (b) attached hereto are complete and accurate lists and descriptions of all the Pledged Collateral of such Pledgor constituting Core Collateral or Subsidiary Capital Stock. All of the Subsidiary Capital Stock, attributable to any Pledgor, is registered in the name of the applicable Pledgor.

     (h) Percentage Ownership. As of the date hereof, the Subsidiary Capital Stock pledged by such Pledgor hereunder and listed on (i) Part A of Schedule 2(b) constitutes all of the Subsidiary Capital Stock of Material Pledged Subsidiaries owned by such Pledgor and (ii) Part B of Schedule 2(b) constitutes all of the Subsidiary Capital Stock of other Subsidiaries owned by such Pledgor that are not Material Pledged Subsidiaries (or, in the case of Excluded Foreign Subsidiary Voting Stock, 66% of the outstanding Excluded Foreign Subsidiary Voting Stock of such Subsidiary).

     (i) Due Authorization, Etc., of Capital Stock; Not Margin Stock. As of the date hereof, the Material Pledged Subsidiary Capital Stock held by such Pledgor listed on Schedule 2(b) attached hereto have been duly authorized and validly issued and are fully paid and non-assessable (if such issuer is a corporation) and are not subject to any options to purchase or any preemptive or similar rights of any Person (other than the Initial Borrower or any Subsidiary in respect of which a Purpose Statement on Federal Reserve Form FR U-1 has been provided). None of the Pledged Capital Stock of such Pledgor

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constitutes Margin Stock (other than any shares of Capital Stock of the Healthcare REIT listed on a U.S. national securities exchange or the NASDAQ Stock Market and which are held by a Pledgor); provided, that in the event the Capital Stock of Healthcare REIT becomes Margin Stock, such Capital Stock shall cease to be Pledged Capital Stock until such time as a Purpose Statement on Federal Reserve Form FR U-1 has been provided (unless such Pledged Capital Stock has otherwise been released from the Pledged Collateral); and provided further that the Initial Borrower shall deliver to the Collateral Agent not less than thirty (30) days’ written notice of the anticipated effective date of any registration statement in connection with the listing of any shares of the Capital Stock of Healthcare REIT on a U.S. national securities exchange or the NASDAQ Stock Market. All Pledged Notes issued by any Subsidiary or Affiliate of any Pledgor have been, and to the extent that any Pledged Note is hereafter issued, such Pledged Note will be, upon such issuance, duly and validly issued by such issuer. All Pledged Notes and the Underlying Instruments of Noteless Loans issued by any Subsidiary or Affiliate of any Pledgor and, to such Pledgor’s knowledge, all other Pledged Notes and Underlying Instruments of Noteless Loans are the legal, valid and binding obligation of the issuer thereof.

     (j) Required Consents. Except as may be required in connection with any disposition of any portion of the Pledged Collateral of such Pledgor by laws affecting the offering and sale of securities generally, filings required under the UCC and those that have been obtained prior to the date hereof, no consent of any Person (including, without limitation, partners, shareholders or creditors of such Pledgor or of any subsidiary of such Pledgor) and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental instrumentality is required in connection with (i) the execution, delivery, performance, validity or enforceability of this Pledge Agreement, (ii) the perfection or maintenance of the security interest created hereby (including the first priority nature of such security interest) or (iii) subject to (x) any consent required by regulations of the Federal Deposit Insurance Corporation or the California Department of Financial Institutions in the case of any Capital Stock of a CapitalSource Bank Entity, (y) assignment restrictions applicable to any Loan and (z) change of control or similar restrictions (the “Collateral Restrictions”) arising under securitizations or indebtedness of Subsidiaries that are not Credit Parties, the exercise by the Collateral Agent of the rights provided for in this Pledge Agreement in respect of the Core Collateral (including, without limitation, any sale or other disposition of any Pledged Collateral by the Collateral Agent). Schedule 7(j) contains as of the date on which any Compliance Certificate is delivered pursuant to the Credit Agreement or Indenture, all Collateral Restrictions arising under securitizations or Indebtedness of Material Pledged Subsidiaries (other than CapitalSource Bank). With respect to any Fiscal Quarter or Fiscal Year, Schedule 7(j) may be updated from time to time by the Borrower prior to the date on which any such Compliance Certificate is delivered.

     (k) Nature of Security Interest.

     (i) Upon the delivery of the certificated Core Collateral held by such Pledgor to the Collateral Custodian, as applicable, endorsed to the Collateral Custodian, as applicable, or in blank, the pledge of the certificated Core Collateral pursuant to this Pledge Agreement creates a valid and perfected first priority security interest in all of the certificated Core Collateral, securing the prompt and complete payment, performance and observance of the respective Secured Obligations of such Pledgor.

     (ii) When UCC financing statements or other appropriate filings, recordings or registrations containing a description of the Pledged Collateral of such Pledgor have been filed in the appropriate governmental, municipal or other office of such Pledgor’s jurisdiction of organization, which are all the filings, recordings and registrations necessary to perfect the security interest in favor of the Collateral Agent in respect of all Pledged Collateral of such Pledgor in which the security interest may be perfected by filing, recording or registration in the

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United States, no further or subsequent filing, refiling, recording, rerecording, registration or reregistration is necessary in any such jurisdiction, except as provided under applicable law.

     (l) Amendment to Limited Liability Company Agreement. Except to the extent not permitted pursuant to the terms of any securitization or other indebtedness of a Subsidiary that is not a Credit Party set forth on Schedule 7(1) attached hereto, the operating agreement or limited liability company agreement of each Material Pledged Subsidiary, the Capital Stock of which is being pledged hereunder that is a limited liability company has been amended to include the provisions set forth in Exhibit 7(1) attached hereto.

     8. Representations and Warranties of the Collateral Custodian. The Collateral Custodian in its individual capacity and as Collateral Custodian represents and warrants as follows:

     (a) Organization and Corporate Power. It is a duly organized and validly existing national banking association in good standing under the laws of the United States. It has full corporate power, authority and legal right to execute, deliver and perform its obligations as Collateral Custodian under this Pledge Agreement.

     (b) Due Authorization. The execution and delivery of this Pledge Agreement and the consummation of the transactions provided for herein have been duly authorized by all necessary association action on its part, either in its individual capacity or as Collateral Custodian, as the case may be.

     (c) No Conflict. The execution and delivery of this Pledge Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with, result in any breach of any of the material terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which the Collateral Custodian is a party or by which it or any of its property is bound.

     (d) No Violation. The execution and delivery of this Pledge Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with or violate, in any material respect, any Applicable Law.

     (e) All Consents Required. All approvals, authorizations, consents, orders or other actions of any Person or Governmental Authority applicable to the Collateral Custodian, required in connection with the execution and delivery of this Pledge Agreement, the performance by the Collateral Custodian of the transactions contemplated hereby and the fulfillment by the Collateral Custodian of the terms hereof have been obtained.

     (f) Validity, Etc. The Agreement constitutes the legal, valid and binding obligation of the Collateral Custodian, enforceable against the Collateral Custodian in accordance with its terms, except as such enforceability may be limited by applicable Insolvency Laws and general principles of equity (whether considered in a suit at law or in equity).

     9. Representations and Warranties of Servicer. The Servicer represents and warrants as follows:

     (a) Organization and Corporate Power. It is a duly organized and validly existing limited liability company in good standing under the laws of Delaware. It has full corporate power, authority and legal right to execute, deliver and perform its obligations as Servicer under this Pledge Agreement.

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     (b) Due Authorization. The execution and delivery of this Pledge Agreement and the consummation of the transactions provided for herein have been duly authorized by all necessary limited liability company action on its part.

     (c) No Conflict. The execution and delivery of this Pledge Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with, result in any breach of any of the material terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which the Servicer is a party or by which it or any of its property is bound.

     (d) No Violation. The execution and delivery of this Pledge Agreement, the performance of the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with or violate, in any material respect, any Applicable Law.

     (e) All Consents Required. All approvals, authorizations, consents, orders or other actions of any Person or Governmental Authority applicable to the Servicer, required in connection with the execution and delivery of this Pledge Agreement, the performance by the Servicer of the transactions contemplated hereby and the fulfillment by the Servicer of the terms hereof have been obtained.

     (f) Validity, Etc. The Agreement constitutes the legal, valid and binding obligation of the Servicer, enforceable against the Servicer in accordance with its terms, except as such enforceability may be limited by applicable Insolvency Laws and general principles of equity (whether considered in a suit at law or in equity).

     (g) Reports Accurate. All written and electronic information, exhibits, financial statements, documents, books, records or reports furnished by the Servicer to the Collateral Agent or the Collateral Custodian in connection with this Pledge Agreement are accurate, true and correct in all material respects.

     (h) Credit and Collection Policy. The Servicer has complied in all material respects with the Credit and Collection Policy with regard to the origination, underwriting and servicing of the Assets.

     10. Covenants. Each Pledgor hereby covenants and agrees, that so long as any of the Secured Obligations (other than unasserted contingent indemnity obligations that survive termination of the Secured Credit Documents pursuant to the stated terms thereof) or any Senior Secured Notes remain outstanding or any Secured Credit Document is in effect, and until all of the Commitments under the Credit Agreement shall have been terminated, as follows:

     (a) Pledgor’s Legal Status. Except for the changes described on Schedule 10(a), not without providing at least 10 Business Days (or such shorter period as the Collateral Agent may approve) prior written notice to the Collateral Agent, such Pledgor shall not change its type of organization, jurisdiction of organization or other legal structure in a manner that would affect the accuracy of any information included on the financing statement of any Pledgor.

     (b) Pledgor’s Name. Without providing at least 10 Business Days (or such shorter period as the Collateral Agent may approve) prior written notice to the Collateral Agent, such Pledgor shall not change its name.

     (c) Pledgor’s Organizational Number. Without providing at least 10 Business Days (or such shorter period as the Collateral Agent may approve) prior written notice to the Collateral Agent, such Pledgor shall not change its organizational identification number if it has one.

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     (d) Amendments to LLC Agreements. Except to the extent not permitted pursuant to the terms of any securitization or other indebtedness of a Subsidiary that is not a Credit Party set forth on Schedule 7(1) attached hereto, such Pledgor shall cause the operating agreement or limited liability company agreement of each of such Pledgor’s Material Pledged Subsidiaries that is a limited liability company, (i) the Capital Stock of which is being pledged hereunder prior to January 1, 2009 to be amended on or before January 15, 2009 and (ii) the Capital Stock of which is pledged hereunder on or after January 15, 2009 to be amended on or before the date of such pledge, in each case to include the provisions set forth in Exhibit 7(1) attached hereto. Such Pledgor shall deliver to the Administrative Agent, on or before January 15, 2009 for Subsidiaries described in clause (i) above and on or before the date of the pledge for Subsidiaries described in clause (ii) above, such amended operating or limited liability company agreement certified by a Responsible Officer (or other duly authorized officer) of such Pledgor to be true, correct and in effect as of such date.

     (e) Taxes. Such Pledgor shall pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, (subject, where applicable, to specified grace periods) all taxes, assessments, governmental charges and levies upon the Pledged Collateral of such Pledgor or incurred in connection with the Pledged Collateral of such Pledgor or in connection with this Pledge Agreement, other than such taxes, assessments, governmental charges and levies (i) currently being contested in good faith by appropriate proceedings, (ii) for which reserves in conformity with GAAP with respect thereto have been provided on the books of such Pledgor and (iii) for which no Liens have attached as security therefor.

     (f) Title to Collateral. Except for the security interest herein granted and Permitted Liens, such Pledgor shall be the owner of its Pledged Collateral free from any Lien, and such Pledgor, at its sole cost and expense, shall defend the same against all claims and demands of all Persons at any time claiming the same or any interests therein adverse to the Collateral Agent.

     (g) Preservation of Pledged Collateral. Such Pledgor shall, except for dispositions and intercompany transactions permitted under the Credit Agreement (so long as the Credit Agreement Termination Date shall not have occurred) and the Indenture, preserve and keep in full force and effect its interests in the Pledged Collateral in a manner consistent with prudent industry practice, or, where applicable, its Credit and Collection Policy, and defend, at its sole expense, the title to the Pledged Collateral and any part of the Pledged Collateral and following the occurrence and during the continuance of a Default or Event of Default to cooperate fully with the Collateral Agent’s and Collateral Custodian’s efforts to preserve the Pledged Collateral and to take such actions to preserve the Pledged Collateral as the Collateral Agent may reasonably request.

     (h) Amendments to Securitization and Other Documents. Such Pledgor shall use commercially reasonable efforts to amend, no later than January 30, 2009, the transaction documents and/or organizational documents related to each of the following Material Pledged Subsidiaries: (A) CSE QRS Funding I, LLC (“QRS I”), (B) CapitalSource Funding III, LLC (“Funding III”), (C) CS Funding VII Depositor LLC (“Funding VII”) and (D) CapitalSource Real Estate Loan LLC, 2007-A (“2007-A”) as may be necessary to (i) ensure that the Capital Stock of any Domestic Securitization Note Subsidiary does not constitute Excluded Collateral and (ii) permit the Collateral Agent or Collateral Custodian, as applicable, exercise any remedies (including, without limitation, foreclosure) specified and by law (including, without limitation, the UCC) or specified in any security documents or other transaction documents related to such Material Pledged Subsidiary.

     (i) Covered Entities. Notwithstanding anything to the contrary herein, it is hereby acknowledged that with respect to Pledged Collateral consisting of Capital Stock of any “Covered Entity” (as defined in either clause (a) or clause (b) of the definition below), the exercise of certain of its remedies

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set forth in this Pledge Agreement related to such Capital Stock (1) may require prior compliance with, or may not be permitted by, the terms of the LLC Agreement of the respective Covered Entity as in effect on December 26, 2008 and therefore exercising any such remedy could be subject to compliance with those terms and (2) would cause a default or similar event pursuant to one or more agreements in effect as of December 24, 2008 that are material to such Covered Entity to the extent that a termination event arises from the change of control and is not waived by the administrative agent or is not modified in accordance with the obligations in Section 10(h). “Covered Entity” means (a) for purposes of clause (1) above, Funding III, QRS I, CapitalSource Commercial Loan LLC, 2006-1, CapitalSource Commercial Loan LLC, 2006-2, CapitalSource Commercial Loan LLC, 2007-1, CapitalSource Commercial Loan LLC, 2007-2, Funding VII, CapitalSource Funding VIII LLC, CapitalSource Real Estate Loan LLC, 2006-A, and 2007-A, and (b) for purpose of clause (2) above, Funding VII, 2007-A and CS Capital Advisors LLC.

     (j) Voting Rights. After the occurrence and during the continuance of an Event of Default, such Pledgor shall not vote, consent, waive or ratify any action taken, that would violate or be inconsistent with any of the terms and provisions of this Pledge Agreement, or any of the other Secured Credit Documents or that would materially impair the position or interest of the Collateral Agent in the Pledged Collateral or dilute the Pledged Collateral, for its benefit and the benefit of the other Secured Parties, under this Pledge Agreement.

     (k) Distributions. After the occurrence and during the continuance of an Event of Default and upon the request of the Collateral Agent, such Pledgor shall cease to have the right to receive any dividend or distribution or other benefit with respect to the Pledged Collateral and any such dividend, distribution or other benefit received by such Pledgor shall be received in trust for the benefit of the Collateral Agent pursuant to Section 17(d)(ii). Except as provided herein or in the other Secured Credit Documents, Pledgors shall be entitled to retain all distributions received by them from time to time with respect to the Pledged Collateral.

     (l) Joinder. Such Pledgor consents to the exercise of the rights and remedies of the Collateral Agent pursuant to the terms of this Pledge Agreement and after the occurrence and during the continuance of an Event of Default, to the admission of the Collateral Agent (and its assigns or designee) as a member, partner or stockholder of any Subsidiary of such Pledgor the Pledged Collateral of which has been pledged pursuant to this Pledge Agreement upon the Collateral Agent’s acquisition of any of the Pledged Collateral pursuant to the terms of this Pledge Agreement, with all of the rights and powers of a member, partner or stockholder, as the case may be.

     (m) Amendments. Except for restrictions existing on the date hereof and actions following the date hereof that, in each case, are not prohibited by Section 5.36 of the Credit Agreement or Section 4.08 of the Indenture, such Pledgor shall not make or consent to any amendment or other modification or waiver with respect to any of the Pledged Collateral of such Pledgor or enter into any agreement or allow to exist any restriction with respect to any of the Pledged Collateral.

     (n) Compliance with Securities Laws. Except as could not reasonably be expected to result in a Material Adverse Effect, such Pledgor shall file all reports and other information now or hereafter required to be filed by such Pledgor with the United States Securities and Exchange Commission and any other state, federal or foreign agency in connection with the ownership of the Pledged Collateral of such Pledgor.

     (o) Collateral Custodian. Except as otherwise permitted by this Pledge Agreement, such Pledgor shall not cause, and shall use commercially reasonable efforts to cause the Collateral Custodian not to permit any Pledged Collateral that is or at any time becomes subject to a custodial arrangement

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with the Collateral Custodian to be held by any Person other than the Collateral Custodian or the Collateral Agent.

     (p) Schedules Update. Concurrently with the delivery to the Collateral Agent or the Note Trustee, as applicable, of any Compliance Certificate pursuant to the Credit Agreement or the Indenture, such Pledgor shall deliver to the Collateral Agent updated Schedules 2(a), 2(b) and 7(a), as applicable, reflecting any additional information since the prior date on which such Schedules were delivered to the Collateral Agent.

     (q) Joinder. The Initial Borrower and such Pledgor, as applicable, shall cause each Subsidiary which, from time to time, after the date hereof, shall be required pursuant to the provisions of the Credit Agreement or the Indenture, or for which the Initial Borrower shall determine advisable on a voluntary basis, to grant a first priority perfected security interest in any of its assets to the Collateral Agent, by promptly executing a joinder to this Pledge Agreement substantially in the form attached hereto as Exhibit 10(q) and any additional documents, instruments or agreements consistent with the requirements hereof as the Collateral Agent shall reasonably request. Upon execution and delivery of such joinder, such Subsidiary shall constitute a “Pledgor” for all purposes hereunder with the same force and effect as if originally named a Pledgor herein. The execution and delivery of such joinder agreement shall not require the consent of any Pledgor hereunder. The rights and obligations of each Pledgor hereunder shall remain in full force and effect notwithstanding the addition of any new Pledgor as a party to this Pledge Agreement.

     (r) Further Assurances. Such Pledgor will, from time to time, at its expense, promptly execute and deliver all further instruments and documents and take all further action that may be necessary, or that the Collateral Agent may request, in order to perfect and protect any security interest granted or purported to be granted hereby by such Pledgor or to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral of such Pledgor; provided, however, that so long as no Event of Default shall have occurred and be continuing, the perfection obligations with respect to Residual Collateral of the Pledgors pursuant to this Pledge Agreement shall be limited to such actions as are necessary or desirable to perfect security interests by the filing of a financing statement in the jurisdiction of each Pledgor’s location (as defined in §9-307 of the UCC).

     11. Covenants of the Collateral Custodian.

     (a) Compliance with Law. The Collateral Custodian will comply in all material respects with all Applicable Laws.

     (b) Preservation of Existence. The Collateral Custodian will preserve and maintain its existence, rights, franchises and privileges in the jurisdiction of its formation and qualify and remain qualified in good standing in each jurisdiction where failure to preserve and maintain such existence, rights, franchises, privileges and qualification has had, or could reasonably be expected to have, a material adverse effect.

     (c) Location of Required Asset Documents. The Required Asset Documents shall remain at all times in the possession of the Collateral Custodian at the address set forth herein unless notice of a different address is given in accordance with the terms hereof or unless the Collateral Agent agrees (if required hereunder) to allow certain Required Asset Documents to be released to the Servicer in connection with the servicing of such Required Asset Documents.

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     (d) Required Asset Documents. The Collateral Custodian will not dispose of any documents constituting the Required Asset Documents in any manner that is inconsistent with the performance of its obligations as the Collateral Custodian pursuant to this Agreement and will not dispose of any Collateral except as contemplated by this Agreement.

     (e) No Changes in Collateral Custodian Fee. The Collateral Custodian will not make any changes to the Collateral Custodian Fee without the prior written approval of the Collateral Agent.

     12. Covenants of Servicer.

     (a) Compliance with Law. The Servicer will comply in all material respects with all Applicable Laws, including those with respect to the Pledged Collateral or any part thereof

     (b) Obligations and Compliance with Pledged Collateral. The Servicer will duly fulfill and comply with all its obligations under this Agreement in connection with each Pledged Collateral.

     (c) Change of Name or Location of Loan Files. The Servicer shall not (x) change its name, move the location of its principal place of business and chief executive office, change the offices where it keeps records concerning the Pledged Collateral from the location referred to in Section 26, or change the jurisdiction of its formation, or (y) move, or consent to the Collateral Custodian moving, the Required Asset Documents and Asset Files from the location thereof on the date hereof, unless the Servicer has given at least thirty (30) days’ written notice to the Collateral Agent and all actions required under the UCC of each relevant jurisdiction in order to continue the first priority perfected security interest of the Collateral Agent as collateral agent for the Secured Parties in the Pledged Collateral have been taken.

     13. Power of Attorney for Perfection of Liens. Each Pledgor hereby irrevocably makes, constitutes and appoints the Collateral Agent, its nominee or any other Person whom the Collateral Agent may designate, as such Pledgor’s attorney-in-fact with full power and for the limited purpose to file any financing statements, or amendments and supplements to financing statements, continuation financing statements, notices or any similar documents which in the Collateral Agent’s discretion would be necessary or appropriate in order to perfect, maintain perfection of, preserve or protect the security interests granted hereunder, such power, being coupled with an interest, being and remaining irrevocable so long as any of the Secured Obligations or any Senior Secured Notes remain outstanding or any Secured Credit Document is in effect, and until all of the Commitments under the Credit Agreement shall have been terminated. In the event for any reason the law of any jurisdiction other than New York becomes or is applicable to the Pledged Collateral of any Pledgor or any part thereof, or to any of the Secured Obligations, such Pledgor agrees to execute and deliver all such instruments and to do all such other things as the Collateral Agent in its sole discretion reasonably deems necessary or appropriate to preserve, protect and enforce the security interests of the Collateral Agent under the law of such other jurisdiction (and, if a Pledgor shall fail to do so promptly upon the request of the Collateral Agent, then the Collateral Agent may execute any and all such requested documents on behalf of such Pledgor pursuant to the power of attorney granted hereinabove).

     14. Performance of Obligations; Advances by Collateral Agent. On failure of any Pledgor to perform any of the covenants and agreements contained herein, the Collateral Agent may with the passage of any applicable cure period, at its sole option and in its sole discretion, perform or cause to be performed the same and in so doing may expend such sums as the Collateral Agent may deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums, the payment of any taxes, a payment to obtain a release of a Lien or potential Lien, expenditures made in defending against any adverse claim and all other expenditures which the Collateral Agent may make for the protection of the security interest hereof or may be compelled to make by operation of law. All such

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sums and amounts so expended shall be repayable by the Pledgors on a joint and several basis promptly upon timely notice thereof and demand therefor, shall constitute additional Secured Obligations and shall bear interest from the date said amounts are expended at the ABR Default Rate under the Credit Agreement. No such performance of any covenant or agreement by the Collateral Agent on behalf of any Pledgor, and no such advance or expenditure therefor, shall relieve the Pledgors of any default under the terms of this Pledge Agreement or the other Secured Credit Documents. The Collateral Agent may make any payment hereby authorized in accordance with any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien, title or claim except to the extent such payment is being contested in good faith by a Pledgor in appropriate proceedings and against which adequate reserves are being maintained in accordance with GAAP.

     15. Events of Default. The occurrence of an event which under the Credit Agreement, the Indenture or the Senior Secured Notes would constitute an Event of Default shall be an event of default hereunder (an “Event of Default”).

     16. Remedies.

     (a) General Remedies. Upon the occurrence of an Event of Default and during the continuation thereof, the Collateral Agent shall have, in respect of the Pledged Collateral of any Pledgor, in addition to the rights and remedies provided herein or in the other Secured Credit Documents, or by law, the rights and remedies of a secured party under the UCC or any other applicable law.

     (b) Sale of Pledged Collateral. Upon the occurrence of an Event of Default and during the continuation thereof, without limiting the generality of this Section 16(b) and without notice, the Collateral Agent may, in its sole discretion, sell or otherwise dispose of or realize upon the Pledged Collateral, or any part thereof, in one or more parcels, at public or private sale, at any exchange or broker’s board or elsewhere, at such price or prices and on such other terms as the Collateral Agent may deem commercially reasonable, for cash, credit or for future delivery or otherwise in accordance with applicable law. Neither the Collateral Agent’s compliance with any applicable state or federal law in the conduct of such sale, nor its disclaimer of any warranties relating to the Pledged Collateral, shall be considered to adversely affect the commercial reasonableness of such sale. No demand, advertisement or notice, all of which are hereby expressly waived, shall be required in connection with any sale or other disposition of any part of the Pledged Collateral of a Pledgor that threatens to decline speedily in value or that is of a type customarily sold on a recognized market; otherwise the Collateral Agent shall give the relevant Pledgor at least ten (10) days’ prior notice of the time and place of any public sale and of the time after which any private sale or other disposition is to be made, which notice such Pledgor agrees is commercially reasonable. The Collateral Agent and the Secured Parties (other than the Initial Borrower) shall not be obligated to make any sale or other disposition of the Pledged Collateral regardless of notice having been given. To the extent permitted by law, any Secured Party (other than the Initial Borrower) may be a purchaser at any such sale. To the extent permitted by applicable law, each of the Pledgors hereby waives all of its rights of redemption with respect to any such sale. Subject to the provisions of applicable law, the Collateral Agent and the Secured Parties (other than the Initial Borrower) may postpone or cause the postponement of the sale of all or any portion of the Pledged Collateral by announcement at the time and place of such sale, and such sale may, without further notice, to the extent permitted by law, be made at the time and place to which the sale was postponed, or the Collateral Agent and the Secured Parties (other than the Initial Borrower) may further postpone such sale by announcement made at such time and place.

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     (c) Registration Rights. If the Collateral Agent shall determine to exercise its right to sell all or any of the Pledged Collateral, each Pledgor agrees that, upon request of the Collateral Agent (which request may be made by the Collateral Agent in its sole discretion), such Pledgor will, at its own expense:

     (i) execute and deliver, and use its best efforts to cause each issuer of the Pledged Collateral contemplated to be sold and the directors and officers thereof to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of the Collateral Agent, advisable to file a registration statement covering such Pledged Collateral under the provisions of the Securities Act of 1933 and to use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of the Collateral Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act of 1933 and the rules and regulations of the Securities and Exchange Commission applicable thereto;

     (ii) use its best efforts to qualify the Pledged Collateral under all applicable state securities or “Blue Sky” laws and to obtain all necessary governmental approvals for the sale of the Pledged Collateral, as requested by the Collateral Agent;

     (iii) cause each issuer to make available to its security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 17(a) of the Securities Act of 1933;

     (iv) to use its best efforts to do or cause to be done all such other acts and things as may be necessary to make such sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law; and

     (v) bear all costs and expenses, including reasonable attorneys’ fees, of carrying out its obligations under this Section 16.

     Each Pledgor further agrees that a breach of any of the covenants contained in this Section 16(c) will cause irreparable injury to the Collateral Agent, that Collateral Agent has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 16(c) shall be specifically enforceable against such Pledgor, and such Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no default has occurred giving rise to the Secured Obligations becoming due and payable prior to their stated maturities. Nothing in this Section 16(c) shall in any way alter the other rights of the Collateral Agent under this Pledge Agreement.

     In the event of any public sale described in this Section 16(c), each Pledgor (other than the SN Note Obligors with respect to the Note Obligations, but without limiting the obligation of any SN Note Obligor to provide the indemnity, pay and reimburse costs and expenses and hold harmless as required hereby with respect to the SN Intercompany Notes Obligations) agrees to indemnify and hold harmless the Collateral Agent and the Secured Parties (other than the Initial Borrower) and each of their respective directors, officers, employees and agents from and against any loss, fee, cost, expense, damage, liability or claim, joint or several, to which any such Persons may become subject or for which any of them may be liable, under the Securities Act of 1933 or otherwise, insofar as such losses, fees, costs, expenses, damages, liabilities or claims (or any litigation commenced or threatened in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, registration statement, prospectus or other such document published by or at the

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direction of a Pledgor or filed by or at the direction of a Pledgor in connection with such public sale, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading and will reimburse Collateral Agent and such other Persons for any legal or other expenses reasonably incurred by the Collateral Agent and such other Persons in connection with any litigation, of any nature whatsoever, commenced or threatened in respect thereof (including all fees, costs and expenses whatsoever reasonably incurred by the Collateral Agent and such other Persons and counsel for the Collateral Agent and such other Persons in investigating, preparing for, defending against or providing evidence, producing documents or taking any other action in respect of, any such commenced or threatened litigation or any claims asserted). This indemnity shall be in addition to any liability which any Pledgor may otherwise have and shall extend upon the same terms and conditions to each Person, if any, that controls the Collateral Agent or such persons within the meaning of the Securities Act of 1933.

     (d) Private Sale. Upon the occurrence of an Event of Default and during the continuation thereof, the Pledgors recognize that the Collateral Agent may deem it impracticable to effect a public sale of all or any part of the Pledged Collateral and that the Collateral Agent may, therefore, determine to make one or more private sales of any such Pledged Collateral to a restricted group of purchasers who will be obligated to agree, among other things, to acquire such Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sale shall be deemed to have been made in a commercially reasonable manner and that the Collateral Agent shall have no obligation to delay sale of any such Pledged Collateral for the period of time necessary to permit the issuer of such Pledged Collateral to register such Pledged Collateral for public sale under the Securities Act of 1933. Each Pledgor further acknowledges and agrees that any offer to sell such Pledged Collateral which has been (i) publicly advertised on a bona fide basis in a newspaper or other publication of general circulation in the financial community of New York, New York (to the extent that such offer may be advertised without prior registration under the Securities Act of 1933), or (ii) made privately in the manner described above shall be deemed to involve a “public sale” under the UCC, notwithstanding that such sale may not constitute a “public offering” under the Securities Act of 1933, and the Collateral Agent may, in such event, bid for the purchase of such Pledged Collateral.

     (e) Actions With Respect to Pledged Collateral. Subject to Section 36, the Secured Parties agree that this Pledge Agreement may be enforced only by the action of the Collateral Agent, acting upon the instructions of the Required Creditors, and that no other Secured Party shall have any right individually to seek to enforce or to enforce this Pledge Agreement or to realize upon the security to be granted hereby. Notwithstanding any provision of this Pledge Agreement to the contrary, to the extent any provision in this Pledge Agreement conflicts with the Intercreditor Agreement, then the Intercreditor Agreement shall prevail, other than with respect to the Collateral Custodian as set forth in Section 5 hereof.

     (f) Retention of Pledged Collateral. In addition to the rights and remedies hereunder, upon the occurrence of an Event of Default and during the continuation thereof, the Collateral Agent may, after providing the notices required by Sections 9-620 and 9-621 of the UCC (or any successor sections of the UCC) or otherwise complying with the notice requirements of applicable law of the relevant jurisdiction, accept or retain all or any portion of the Pledged Collateral in satisfaction of the Secured Obligations. Unless and until the Collateral Agent shall have provided such notices, however, the Collateral Agent shall not be deemed to have retained any Pledged Collateral in satisfaction of any Secured Obligations for any reason.

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     (g) Deficiency. In the event that the proceeds of any sale, collection or realization are insufficient to pay all amounts to which the Collateral Agent or the Secured Parties are legally entitled, the Pledgors (other than the SN Note Obligors with respect to the Note Obligations) shall be jointly and severally liable for the deficiency, together with interest thereon at the ABR Default Rate under the Credit Agreement, together with the costs of collection and the reasonable fees of any attorneys employed by the Collateral Agent to collect such deficiency. Any surplus remaining after the full payment and satisfaction of the Secured Obligations shall be returned to the Pledgors or to whomsoever a court of competent jurisdiction shall determine to be entitled thereto.

     (h) Other Security. To the extent that any of the Secured Obligations are now or hereafter secured by property other than the Pledged Collateral (including, without limitation, real and other personal property owned by a Pledgor), or by a guarantee, endorsement or property of any other Person, then the Collateral Agent shall have the right to proceed against such other property, guarantee or endorsement upon the occurrence and during the continuation of any Event of Default, and the Collateral Agent shall have the right, in its sole discretion, to determine which rights, Liens or remedies the Collateral Agent shall at any time pursue, relinquish, subordinate, modify or take with respect thereto, without in any way modifying or affecting any of them or any of the Collateral Agent’s rights or the Secured Obligations under this Pledge Agreement or under any other of the Secured Credit Documents.

     17. Rights of the Collateral Agent.

     (a) Power of Attorney. In addition to other powers of attorney contained herein and in the other Secured Credit Documents, each Pledgor hereby designates and appoints the Collateral Agent, on behalf of the Secured Parties, and each of its designees or agents as attorney-in-fact of such Pledgor, irrevocably and with power of substitution, with authority to take any or all of the following actions upon the occurrence and during the continuation of an Event of Default:

     (i) to demand, collect, settle, compromise, adjust and give discharges and releases concerning the Pledged Collateral of such Pledgor, all as the Collateral Agent may reasonably determine in respect of such Pledged Collateral;

     (ii) to commence and prosecute any actions at any court for the purposes of collecting any of the Pledged Collateral and enforcing any other right in respect thereof;

     (iii) to defend, settle, adjust or compromise any action, suit or proceeding brought with respect to the Pledged Collateral and, in connection therewith, give such discharge or release as the Collateral Agent may deem reasonably appropriate;

     (iv) to pay or discharge taxes or Liens levied or placed on or threatened against the Pledged Collateral;

     (v) to direct any parties liable for any payment under any of the Pledged Collateral to make payment of any and all monies due and to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct;

     (vi) to receive payment of and receipt for any and all monies, claims, and other amounts due and to become due at any time in respect of or arising out of any Pledged Collateral of such Pledgor;

     (vii) to sign and endorse any drafts, assignments, proxies, stock powers, verifications, notices and other documents relating to the Pledged Collateral of such Pledgor;

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     (viii) to execute and deliver and/or file all assignments, conveyances, statements, financing statements, continuation statements, pledge agreements, affidavits, notices and other agreements, instruments and documents that the Collateral Agent may determine necessary in order to perfect and maintain the security interests and Liens granted in this Pledge Agreement and in order to fully consummate all of the transactions contemplated herein;

     (ix) to exchange any of the Pledged Collateral of such Pledgor or other property upon any merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof and, in connection therewith, deposit any of the Pledged Collateral of such Pledgor with any committee, depository, transfer agent, registrar or other designated agency upon such terms as the Collateral Agent may determine;

     (x) to vote for a shareholder, partner or member resolution, or to sign an instrument in writing, authorizing the transfer of any or all of the Pledged Collateral of such Pledgor into the name of the Collateral Agent or into the name of any transferee to whom the Pledged Collateral of such Pledgor or any part thereof may be sold pursuant to Section 16 hereof; and

     (xi) to do and perform all such other acts and things as the Collateral Agent may deem to be necessary, proper or convenient in connection with the Pledged Collateral of such Pledgor.

     This power of attorney is a power coupled with an interest and shall be irrevocable for so long as any of the Secured Obligations (other than unasserted contingent indemnity obligations that survive the termination of the Secured Credit Documents pursuant to the stated terms thereof) or any Senior Secured Notes remain outstanding or any Secured Credit Document is in effect, and until all of the Commitments under the Credit Agreement shall have been terminated. The Collateral Agent shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to the Collateral Agent in this Pledge Agreement, and shall not be liable for any failure to do so or any delay in doing so. The Collateral Agent shall not be liable for any act or omission or for any error of judgment or any mistake of fact or law in its individual capacity or its capacity as attorney-in-fact except acts or omissions resulting from its gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction. This power of attorney is conferred on the Collateral Agent solely to protect, preserve and realize upon its security interest in the Pledged Collateral.

     (b) The Collateral Agent’s Duty of Care. Other than the exercise of reasonable care to assure the safe custody of the Pledged Collateral while being held by the Collateral Agent hereunder, which shall include the selection of an appropriate collateral custodian, the Collateral Agent shall have no duty or liability to preserve rights pertaining thereto, it being understood and agreed that Pledgors shall be responsible for preservation of all rights in the Pledged Collateral of such Pledgor, and the Collateral Agent shall be relieved of all responsibility for Pledged Collateral upon surrendering it or tendering the surrender of it to the Pledgors. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral if such Pledged Collateral is in the possession of the Collateral Custodian or with respect to Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which the Collateral Agent accords its own property, it being understood that the Collateral Agent shall not have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not the Collateral Agent has or is deemed to have knowledge of such matters; or (ii) taking any necessary steps to preserve rights against any parties with respect to any Pledged Collateral.

     (c) Voting Rights in Respect of the Pledged Collateral.

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     (i) So long as no Default or Event of Default shall have occurred and is continuing, to the extent permitted by law, each Pledgor may exercise any and all voting and other consensual rights pertaining to the Pledged Collateral of such Pledgor or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement, the Credit Agreement or the Indenture.

     (ii) Subject to subsection (d) of this Section 17 and any consent required by regulations of the Federal Deposit Insurance Corporation or the California Department of Financial Institutions in the case of any Capital Stock of a CapitalSource Bank Entity, upon the occurrence and during the continuance of a Default or Event of Default, all rights of a Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to paragraph (i) of this subsection (c) shall cease and all such rights shall thereupon become vested in the Collateral Agent which shall then have the right to exercise such voting and other consensual rights.

     (d) Dividend and Distribution Rights in Respect of the Pledged Collateral.

     (i) So long as no Default or Event of Default has occurred and is continuing, each Pledgor may receive and retain any and all dividends (other than dividends payable in the form of Capital Stock and other dividends constituting Pledged Collateral which are required to be delivered to the Collateral Agent or Collateral Custodian, as applicable, pursuant to Section 4 above), distributions or interest paid in respect of the Pledged Collateral to the extent they are allowed under the Credit Agreement and the Indenture.

     (ii) Upon the occurrence and during the continuance of a Default or Event of Default:

     (A) all rights of a Pledgor to receive the dividends, distributions and interest payments which it would otherwise be authorized to receive and retain pursuant to paragraph (i) of this subsection (d) shall cease and all such rights shall thereupon be vested in the Collateral Agent, which shall then have the right to receive and hold as Pledged Collateral such dividends, distributions and interest payments; and

     (B) all dividends, distributions and interest payments which are received by a Pledgor contrary to the provisions of clause (A) of this subsection (ii) shall be received in trust for the benefit of the Collateral Agent, shall be segregated from other property or funds of such Pledgor, and shall be forthwith paid over to the Collateral Agent as Pledged Collateral in the exact form received, to be held by the Collateral Agent, as Pledged Collateral and as further collateral security for the Secured Obligations.

     (e) Release of Pledged Collateral. The Collateral Agent may, in accordance with the Credit Agreement and the Indenture, release any of the Pledged Collateral from this Pledge Agreement or may substitute any of the Pledged Collateral for other Pledged Collateral without altering, varying or diminishing in any way the force, effect, or Lien of this Pledge Agreement as to any Pledged Collateral not expressly released or substituted, and this Pledge Agreement shall continue as a first priority Lien on all Pledged Collateral not expressly released or substituted; provided that Custodian Pledged Collateral shall be released from the Lien of this Pledge Agreement in accordance with Section 5 of this Pledge Agreement; provided further that all Pledged Collateral (including Custodian Pledged Collateral) shall be released from the Lien of this Pledge Agreement in accordance with Section 8.11 of the Credit Agreement and Sections 10.03 and 10.10 of the Indenture or as otherwise permitted under the Indenture. In connection with any such release, the Collateral Agent agrees to promptly deliver, at the Pledgors’ cost

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and expense, any portion of the Pledged Collateral in the possession of the Collateral Agent or its agent to the Servicer or the related Pledgor.

     (f) THE COLLATERAL AGENT SHALL NOT BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO ANY SECURED CREDIT DOCUMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF ANY TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

     (g) Resignation and Other Matters. Notwithstanding anything to the contrary in this Agreement, the Collateral Agent may resign at any time as Collateral Agent under this Pledge Agreement (and shall be discharged from its duties and obligations hereunder) as provided in Section 4.06 of the Intercreditor Agreement. Sections 4.03, 4.04 and 4.05 of the Intercreditor Agreement shall be applicable to this Pledge Agreement as set forth herein mutatis mutandis.

     18. The Collateral Agent’s Duties of Reasonable Care. To the extent that applicable law imposes duties on the Collateral Agent to exercise remedies in a commercially reasonable manner, each Pledgor acknowledges and agrees that it is not commercially unreasonable for the Collateral Agent (i) to advertise dispositions of Pledged Collateral of such Pledgor through publications or media of general circulation; (ii) to contact other persons, whether or not in the same business as such Pledgor, for expressions of interest in acquiring all or any portion of the Pledged Collateral of such Pledgor; (iii) to hire one or more professional auctioneers to assist in the disposition of Pledged Collateral of such Pledgor; (iv) to disclaim disposition warranties; or (v) to the extent deemed appropriate by the Collateral Agent, to obtain the services of brokers, consultants and other professionals to assist the Collateral Agent in the disposition of any of the Pledged Collateral of such Pledgor. Each Pledgor acknowledges that the purpose of this Section 18 is to provide non-exhaustive indications of what actions or omissions by the Collateral Agent would not be commercially unreasonable in the Collateral Agent’s exercise of remedies against the Pledged Collateral of such Pledgor and that other actions or omissions by the Collateral Agent shall not be deemed commercially unreasonable solely on account of not being indicated in this Section 18. Without limiting the foregoing, nothing contained in this Section 18 shall be construed to grant any rights to any Pledgor or to impose any duties on the Collateral Agent that would not have been granted or imposed by this Pledge Agreement or by applicable law in the absence of this Section 18. Such Pledgor waives any restriction or obligation imposed on the Collateral Agent under Sections 9-207(c)(1) and 9-207(c)(2) of the UCC.

     19. Marshalling. The Collateral Agent shall not be required to marshal any present or future collateral security (including but not limited to this Pledge Agreement and the Pledged Collateral) for, or other assurances of payment of, the Secured Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order, and all of its rights hereunder and in respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights, however existing or arising. To the extent that it lawfully may, each Pledgor hereby agrees that it shall not invoke any law relating to the marshalling of collateral that might cause delay in or impede the enforcement of the Collateral Agent’s rights under this Pledge Agreement or under any other instrument creating or evidencing any of the Secured Obligations or under which any of the Secured Obligations is outstanding or by which any of the Secured Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, such Pledgor hereby irrevocably waives the benefits of all such laws.

     20. Application of Proceeds.

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     (a) All moneys or other proceeds collected by the Collateral Agent upon any sale or other disposition of or realization upon the Pledged Collateral after an Event of Default pursuant to the terms of this Pledge Agreement, together with all other moneys or other proceeds received by the Collateral Agent hereunder, shall be applied to the payment of the Secured Obligations secured by such Pledged Collateral, moneys or proceeds as follows:

     (i) first, to the payment of all Secured Obligations owing to the Collateral Agent or the Collateral Custodian, as the case may be, of the type described in clauses (e), (f) and (g) of Section 3 of this Pledge Agreement;

     (ii) second, to the extent moneys remain after the application pursuant to the preceding clause (i), in accordance with Section 2.01 of the Intercreditor Agreement; and

     (iii) third, to the extent moneys remain after the application pursuant to the preceding clauses (i) and (ii), and following termination of this Pledge Agreement pursuant to Section 22(a) hereof, to the relevant Pledgor or to whomever may be lawfully entitled to receive such surplus.

     (b) All payments required to be made hereunder shall be made (x) if to the Credit Agreement Secured Parties, to the Administrative Agent for the account of the Credit Agreement Secured Parties and (y) if to the Notes Secured Parties (including as a result of any payments made in respect of the SN Intercompany Notes Obligations), to the Note Trustee for the account of the Notes Secured Parties.

     (c) For purposes of applying payments received in accordance with this Section 20, the Collateral Agent shall be entitled to rely upon (i) the Administrative Agent, as Authorized Representative under the Credit Agreement, and (ii) the Note Trustee, as Authorized Representative under the Indenture, for a determination (which the Administrative Agent, the Note Trustee and the Secured Parties agree to provide upon request of the Collateral Agent), of the outstanding Secured Obligations owed to the respective Secured Parties.

     (d) Each Pledgor irrevocably waives the right to direct the application of such payments and proceeds and acknowledges and agrees that the Collateral Agent shall have the continuing and exclusive right to apply and reapply any and all such proceeds in the Collateral Agent’s sole discretion, notwithstanding any entry to the contrary upon any of its books and records.

     21. Certain Costs.

     (a) In addition to the provisions of Section 9.5 of the Credit Agreement and Section 7.07 of the Indenture if at any time hereafter, whether upon the occurrence of an Event of Default or not, the Collateral Agent (i) employs counsel to prepare or consider amendments, waivers or consents with respect to this Pledge Agreement, or to take action or make a response in or with respect to any legal or arbitral proceeding relating to this Pledge Agreement or relating to the Pledged Collateral, then the Pledgors agree to promptly pay any and all reasonable costs and expenses of the Collateral Agent or (ii) employs counsel or any other Person to protect the Pledged Collateral or exercise any rights or remedies under this Pledge Agreement or with respect to the Pledged Collateral, then the Pledgors (other than the SN Note Obligors with respect to the Note Obligations, but without limiting the obligation of any SN Note Obligor to pay any amounts, costs and expenses required hereby with respect to the SN Intercompany Notes Obligations) agree to promptly pay upon demand any and all such costs and expenses of the Collateral Agent or the Secured Parties, all of which such costs and expenses set forth in clauses (i) and (ii) shall constitute Secured Obligations hereunder.

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     (b) The Pledgors (other than the SN Note Obligors with respect to the Note Obligations, but without limiting the obligation of any SN Note Obligor to pay any amounts, costs and expenses required hereby with respect to the SN Intercompany Notes Obligations) shall pay on demand to the Collateral Agent, the Collateral Custodian and each of the Secured Parties all costs and expenses incurred by the Collateral Agent, the Collateral Custodian or any such Secured Party, including, but not limited to, reasonable attorneys’ fees and court costs, in obtaining or liquidating the Pledged Collateral, in enforcing payment of the Secured Obligations, or in the prosecution or defense of any action or proceeding by or against the Collateral Agent, the Collateral Custodian or the Secured Parties or the Pledgors concerning any matter arising out of or connected with this Pledge Agreement, any Pledged Collateral or the Secured Obligations, including, without limitation, any of the foregoing arising in, arising under or related to a case under the Bankruptcy Code.

     (c) For the avoidance of doubt, all of the costs and expenses owed or payable under this Section 21 shall constitute Secured Obligations hereunder.

     22. Continuing Agreement.

     (a) This Pledge Agreement shall be a continuing agreement in every respect and shall remain in full force and effect so long as any of the Secured Obligations (other than unasserted contingent indemnity obligations that survive termination of the Secured Credit Documents pursuant to the stated terms thereof) or any Senior Secured Notes remain outstanding or any Secured Credit Document is in effect, and until all of the Commitments under the Credit Agreement shall have been terminated. Upon such payment and termination, this Pledge Agreement shall be automatically terminated and the Collateral Agent and the Secured Parties (and the Collateral Custodian, in accordance with Section 5) shall, upon the request and at the expense of the Pledgors, forthwith release all of the Liens and security interests granted hereunder and shall deliver all documents evidencing the Pledged Collateral, all UCC termination statements and/or other documents reasonably requested by the Pledgors evidencing such termination. Notwithstanding the foregoing, all releases and indemnities provided hereunder shall survive termination of this Pledge Agreement.

     (b) This Pledge Agreement shall continue to be effective or be automatically reinstated, as the case may be, if at any time payment, in whole or in part, of any of the Secured Obligations is rescinded or must otherwise be restored or returned by the Collateral Agent or any Secured Party as a preference, fraudulent conveyance or otherwise under any bankruptcy, insolvency or similar law, all as though such payment had not been made; provided that in the event payment of all or any part of the Secured Obligations is rescinded or must be restored or returned, all reasonable costs and expenses (including without limitation any legal fees and disbursements) incurred by the Collateral Agent or any Secured Party in defending and enforcing such reinstatement shall be deemed to be included as a part of the Secured Obligations.

     23. Amendments; Waivers; Modifications. This Pledge Agreement and the provisions hereof may not be amended, waived, modified, changed, discharged or terminated unless in writing duly signed by each of the Pledgors directly affected thereby and the Collateral Agent (acting at the direction of the Authorized Representative for the Required Creditors (as defined in the Intercreditor Agreement but without the proviso in Clause (i) of the definition thereof)); provided, that (i) Sections 5, 8 and 11 shall not be amended without the written consent of the Collateral Custodian and (ii) Sections 5, 9 and 12 shall not be amended without the written consent of the Servicer(s); provided, further, that any amendment, waiver, modification, change, discharge or termination (w) affecting the rights or benefits of the Secured Parties of a single Series of Secured Obligations (and not all Secured Parties in a like or similar manner) shall require the written consent of the Requisite Holders or the Authorized Representative (acting at the direction of the applicable Requisite Holder or otherwise pursuant to its authority under the Credit

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Agreement or the Indenture) of such affected Series of Secured Obligations, (x) adversely affecting the rights or benefits of a single Secured Party (and not all Secured Parties of the same Series in a like or similar manner) shall require the written consent of the Secured Party so affected, (y) that is material and adverse to the interests of any Series of Secured Obligations shall require the written consent of the Requisite Holders or an Authorized Representative (acting at the direction of the applicable Requisite Holder or otherwise pursuant to its authority under the Credit Agreement or the Indenture) of such affected Series of Secured Obligations and (z) releasing all or substantially all, or any substantial portion of, the Pledged Collateral shall require the prior written consent of all of the Lenders and all of the Holders (except as expressly permitted under the Credit Agreement and the Indenture).

     24. Successors in Interest. This Pledge Agreement shall create a continuing security interest in the Pledged Collateral and shall be binding upon each Pledgor, its successors and assigns and shall inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of the Collateral Agent and the Secured Parties and their successors and permitted assigns; provided, however, that none of the Pledgors may assign its rights or delegate its duties hereunder without the prior written consent of the Collateral Agent and the Requisite Holders or the Authorized Representative (acting at the direction of the applicable Requisite Holders or otherwise pursuant to its authority under the Credit Agreement or the Indenture). Without limitation of the foregoing, the Initial Borrower’s rights under the SN Intercompany Notes arising under this Pledge Agreement shall be collaterally assigned to the Note Trustee for the benefit of the Holders pursuant to the Pledge and Assignment. To the fullest extent permitted by law, each Pledgor hereby releases the Collateral Agent and each Secured Party (other than the Initial Borrower), each of their respective officers, employees and agents and each of their respective successors and assigns, from any liability for any act or omission relating to this Pledge Agreement or the Pledged Collateral, except for any liability arising from the gross negligence or willful misconduct of the Collateral Agent or such Secured Party or their respective officers, employees and agents, in each case as finally determined by a court of competent jurisdiction.

     25. Intentionally Omitted.

     26. Notices. All notices required or permitted to be given under this Pledge Agreement shall be in conformance with Section 5.01 of the Intercreditor Agreement and with respect to notices to be given to the Pledgors, Section 9.2 of the Credit Agreement; provided that any notices to the Servicer(s) and the Collateral Custodian shall be addressed as set forth below:

Servicer:

CapitalSource Finance LLC
4445 Willard Avenue
Chevy Chase, MD 20815
Attn: Chief Financial Officer
Fax: 301-272-3414

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Collateral Custodian:

Wells Fargo Bank, National Association
ABS Custody Vault
1055 10^th Avenue SE
MAC N9401-011
Minneapolis, MN 55414
Attn: Corporate Trust Services — Asset-Backed Securities Vault
Tel: 612-667-8058
Fax: 612-667-1080

     27. Counterparts. This Pledge Agreement may be executed in any number of counterparts, each of which where so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Pledge Agreement to produce or account for more than one such counterpart.

     28. Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning, construction or interpretation of any provision of this Pledge Agreement.

     29. Governing Law. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

     30. Waiver of Jury Trial. THE PLEDGORS, THE COLLATERAL AGENT, THE COLLATERAL CUSTODIAN AND THE SERVICER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS PLEDGE AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. The Pledgors, the Collateral Agent, the Collateral Custodian and the Servicer agree not to assert any claim against any other party to this Pledge Agreement or any of their respective directors, officers, employees, attorneys, Affiliates or agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to any of the transactions contemplated herein.

     31. Consent to Jurisdiction and Service of Process. Any legal action or proceeding with respect to this Pledge Agreement shall be brought in the courts of the State of New York in New York County or of the United States for the Southern District of New York, and, by execution and delivery of this Pledge Agreement, each of the Pledgors, the Collateral Agent, the Collateral Custodian and the Servicer accepts, for itself and in connection with its Properties, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and irrevocably agrees to be bound by any final judgment rendered thereby in connection with this Pledge Agreement from which no appeal has been taken or is available. Each of the Pledgors, the Collateral Agent, the Collateral Custodian and the Servicer irrevocably agrees that all service of process in any such proceedings in any such court may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid and return receipt requested, to it at its address set forth in Section 5.01 of the Intercreditor Agreement, with respect to notices to the Servicer or the Collateral Custodian, at its address set forth in Section 26 of this Pledge Agreement, and with respect to notices to any Pledgor, at its address set forth in Section 9.2 of the Credit Agreement, or at such other address of which the Collateral Agent shall have been notified pursuant thereto, such service being hereby acknowledged by such Pledgor to be effective and binding service in every respect. Each of the Pledgors, the Collateral Agent, the Collateral Custodian and the Servicer irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter

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have to the bringing of any such action or proceeding in any such jurisdiction. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Secured Party to bring proceedings against any Pledgor in the court of any other jurisdiction.

     32. Severability. If any provision of this Pledge Agreement is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions.

     33. Entirety. This Pledge Agreement and the other Secured Credit Documents represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements (including the Original Pledge Agreement) and understandings, oral or written, if any, including any commitment letters or correspondence relating to this Pledge Agreement, the other Secured Credit Documents, or the transactions contemplated herein and therein.

     34. Survival. All representations and warranties of the Pledgors hereunder shall survive the execution and delivery of this Pledge Agreement and the other Secured Credit Documents and the issuance of the Senior Secured Notes.

     35. Joint and Several Obligations of Pledgors.

     (a) Each of the Pledgors (other than the SN Note Obligors with respect to the Note Obligations) is accepting joint and several liability hereunder in consideration of the financial accommodations to be provided by the Lenders under the Credit Agreement and the Senior Secured Notes, for the mutual benefit, directly and indirectly, of each of the Pledgors and in consideration of the undertakings of each of the Pledgors (other than the SN Note Obligors with respect to the Note Obligations) to accept joint and several liability for the obligations of each of them.

     (b) Each of the Pledgors (other than the SN Note Obligors with respect to the Note Obligations) jointly and severally hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Pledgors (other than the SN Note Obligors with respect to the Note Obligations) with respect to the payment and performance of all of the Secured Obligations (other than the SN Note Obligators with respect to the Note Obligations) arising under this Pledge Agreement and the other Secured Credit Documents, it being the intention of the parties hereto that all the Secured Obligations shall be the joint and several obligations of each of the Pledgors (other than the SN Note Obligors with respect to the Note Obligations) without preferences or distinction among them.

     (c) Notwithstanding any provision to the contrary contained herein or in any other of the Secured Credit Documents, to the extent the obligations of a Pledgor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of such Pledgor hereunder shall be limited to the maximum amount that is permissible under applicable law (whether federal or state and including, without limitation, the U.S. Bankruptcy Code).

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     36. Rights of Required Creditors. All rights of the Collateral Agent hereunder, if not exercised by the Collateral Agent, may be exercised by the Required Creditors.

     37. Servicing of REO Assets.

     (a) If, in the reasonable business judgment of the Servicer, it becomes necessary to convert any Loan that is secured by a Mortgage or real property and included in the Pledged Collateral into an REO Asset, the Servicer shall first cause the Pledgor that owns the Loan to transfer and assign such Loan (or the portion thereof owned by such entity) to a special purpose vehicle (the “ REO Asset Owner”) using a contribution agreement substantially in the form of Exhibit 37(a). All Capital Stock of the REO Asset Owner acquired by the applicable Pledgor shall immediately become a part of the Pledged Collateral and be subject to the grant of a security interest under Section 2(a). The REO Asset Owner shall be formed and operated pursuant to a limited liability company operating agreement substantially in the form as Exhibit 37(b), with any alterations thereto as reasonably agreed to by the Servicer and the Collateral Agent. After execution thereof, the Servicer shall prevent the REO Asset Owner from agreeing to any amendment or other modification of the REO Asset Owner’s limited liability company operating agreement without first obtaining the written consent of the Collateral Agent. The Servicer shall cause each REO Asset to be serviced (i) in accordance with Applicable Laws, (ii) with reasonable care and diligence, (iii) in accordance with the applicable REO Asset Owner’s limited liability company operating agreement, (iv) in accordance with the Credit and Collection Policy and (v) with a view toward maximizing recoveries on such REO Asset (collectively, the “ REO Servicing Standard”). Any “Distributable Cash” (as defined in the respective REO Asset Owner’s limited liability company operating agreement) and any other recoveries with respect to the applicable REO Asset or REO Asset Owner that are attributable to any Pledgor shall be promptly distributed to such Pledgor in accordance with the REO Asset Owner’s limited liability company operating agreement and shall immediately become a part of the Pledged Collateral. At all times prior to the “Threshold Date” (as defined in the applicable REO Asset Owner limited liability company operating agreement), the Servicer shall not permit the REO Asset Owner to undertake any of the activities set forth in Section 9.4(c) (or comparable section) of such REO Asset Owner’s limited liability company operating agreement.

     (b) In the event that title to any Related Property is acquired on behalf of the REO Asset Owner for the benefit of its members in foreclosure, by deed in lieu of foreclosure or upon abandonment or reclamation from bankruptcy, the deed or certificate of sale shall be taken in the name of a REO Asset Owner. The Servicer shall cause the REO Asset Owner to manage, conserve, protect and operate each REO Asset for its members solely for the purpose of its prompt disposition and sale.

     (c) Notwithstanding any provision to the contrary contained in this Pledge Agreement, the Servicer shall not (and shall not permit the REO Asset Owner to) obtain title to any Related Property as a result of or in lieu of foreclosure or otherwise, obtain title to any direct or indirect partnership interest in any Obligor under the Loans pledged pursuant to a pledge agreement and thereby be the beneficial owner of Related Property, have a receiver of rents appointed with respect to, and shall not otherwise acquire possession of, or take any other action with respect to, any Related Property if, as a result of any such action, the REO Asset Owner would be considered to hold title to, to be a “mortgagee-in-possession” of, or to be an “owner” or “operator” of, such Related Property within the meaning of CERCLA or any comparable state or local environmental law, unless the Servicer has previously determined in accordance with the REO Servicing Standard, based on an updated Phase I environmental assessment report generally prepared in accordance with the ASTM Phase I Environmental Site Assessment Standard E 1527-05, as may be amended or, with respect to residential property, a property inspection and title report, that:

     (i) such Related Property is in compliance in all material respects with applicable environmental laws or, if not, after consultation with an environmental consultant, that it would

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be in the best economic interest of the Pledgors and the REO Asset Owner to take such actions as are necessary to bring such Related Property in compliance therewith, and

     (ii) there are no circumstances present at such Related Property relating to the use, management or disposal of any hazardous materials for which investigation, testing, monitoring, containment, clean-up or remediation would reasonably be expected to be required by the owner, occupier or operator of the Related Property under applicable federal, state or local law or regulation, or that, if any such hazardous materials are present for which such action would reasonably be expected to be required, after consultation with an environmental consultant, it would be in the best economic interest of the Pledgors and the REO Asset Owner to take such actions with respect to the affected Related Property.

In the event that the Phase I or other environmental assessment first obtained by the Servicer with respect to Related Property indicates that such Related Property may not be in compliance with applicable environmental laws or that hazardous materials may be present but does not definitively establish such fact, the Servicer shall cause such further environmental assessment activities to be conducted by an independent third-party who regularly conducts such assessments as the Servicer shall deem prudent to protect the interests of the Pledgors and the REO Asset Owner. Any such assessments shall be deemed part of the environmental assessment obtained by the Servicer for purposes of this Section 37(c).

     38. Refinancings. Notwithstanding anything in this Pledge Agreement to the contrary, the Secured Obligations of any Series may be Refinanced, in whole or in part, in each case, without notice to, or the consent of any Pledgor, all without affecting the Liens provided for herein or the other provisions hereof; provided that the Authorized Representative of the holders of any such Refinancing indebtedness shall have executed (1) a Joinder Agreement to the Intercreditor Agreement on behalf of the holders of such Refinancing indebtedness and a joinder to this Pledge Agreement (to the extent such indebtedness is intended to be secured hereunder), and (2) in the case of a successor Collateral Agent appointed in accordance with Section 4.06 of the Intercreditor Agreement, a supplement to this Pledge Agreement agreeing to and acknowledging the terms set forth herein. Following any such Refinancing and execution of such joinder agreements or supplements, each lender, note holder, administrative agent, collateral agent, trustee, custodian, issuing bank or other similar creditor or agent party to the Series (or portion thereof) Refinanced shall be automatically deemed to be a Secured Party for all purposes hereof.

     39. Indemnification and Expenses.

     (a) The Collateral Agent shall not in any way be responsible for the performance or discharge of, and the Collateral Agent does not hereby undertake to perform or discharge, any obligation, duty, responsibility, or liability of any Pledgor in connection with the Pledged Collateral or otherwise. The Pledgors (other than the SN Note Obligors with respect to the Note Obligations, but without limiting the obligation of any SN Note Obligor to provide the indemnity, pay and reimburse costs and expenses and hold harmless as required hereby with respect to the SN Intercompany Notes Obligations), jointly and severally, agree (i) to indemnify the Collateral Agent and any Secured Party (other than the Initial Borrower) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time be imposed on, incurred by or asserted against the Collateral Agent or such Secured Party in any way relating to or arising out of the Pledge Agreement, any other Secured Credit Document, the Intercreditor Agreement, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Collateral Agent under or in connection with any of the foregoing, (ii) to pay or reimburse the Collateral Agent for all reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation, negotiation and execution of, and any amendment, supplement or modification to, this Pledge Agreement, any other

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Secured Credit Documents, the Intercreditor Agreement and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, together with the reasonable fees and disbursements of counsel to the Collateral Agent, (iii) to pay or reimburse the Collateral Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Pledge Agreement or any other Secured Credit Document or the Intercreditor Agreement, including, without limitation, the fees and disbursements of counsel to the Collateral Agent (including reasonable allocated costs of in-house legal counsel of Collateral Agent), (iv) on demand, to pay, indemnify, and hold the Collateral Agent harmless from, any and all recording and filing fees payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Pledge Agreement, any other Secured Credit Documents, the Intercreditor Agreement, or any document related thereto, and (v) to pay, indemnify, and hold the Collateral Agent and its affiliates, employees, officers and directors harmless from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever to the extent arising from third party claims with respect to the execution, delivery, enforcement, performance and administration of this Pledge Agreement, any other Secured Credit Document, the Intercreditor Agreement, or any other documents related thereto; provided, however, that no Pledgor shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the gross negligence or willful misconduct of the Collateral Agent or such Secured Party, as determined by a court of competent jurisdiction pursuant to a final, non-appealable order. The agreements in this Section 39(a) shall survive the termination of this Pledge Agreement, the other Secured Credit Documents, the Intercreditor Agreement and payment in full of the Credit Agreement Obligations, the Note Obligations, the Senior Secured Notes, and all other amounts payable hereunder or under any of the other Secured Credit Documents and the Intercreditor Agreement.

     (b) Each Lender and each Directing Holder agrees to indemnify the Collateral Agent, in its capacity as such, and its Affiliates (to the extent not reimbursed by the Pledgors and without limiting the obligation of the Pledgors to do so), ratably according to the outstanding amount of the Secured Obligations owing to the Lenders and the Directing Holders on the date on which indemnification is sought under this Section 39(b), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation following the Discharge of the Secured Obligations or the termination of this Pledge Agreement) be imposed on, incurred by or asserted against the Collateral Agent in any way relating to or arising out of this Pledge Agreement, any other First Lien Security Documents or the Pledge and Assignment or any action taken or omitted by the Collateral Agent under or in connection with any of the foregoing; provided that no Lender or Directing Holder shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the gross negligence or willful misconduct of the Collateral Agent, as determined by a court of competent jurisdiction in a final, non-appealable order. The agreements in this Section 39(b) shall survive the termination of this Pledge Agreement and the repayment of the Secured Obligations.

     (c) A Holder may constitute a portion of the Required Creditors for purposes of pursuing a remedy (or directing the Collateral Agent) with respect to this Pledge Agreement or any other First Lien Security Document (whether such Holder pursues such remedy (or gives such direction) directly, to the extent permitted, or indirectly by instructing the Trustee) only if such Holder first offers to the Collateral Agent and, if requested by the Collateral Agent, agrees to be a “Directing Holder” for the purposes of Section 39(b) and the other provisions of this Pledge Agreement. A Holder so agreeing shall be a “Directing Holder” for purposes of Section 39(b).

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     (d) The Collateral Agent may refuse to follow any direction that conflicts with law or this Pledge Agreement that the Collateral Agent determines may be prejudicial to the rights of other Secured Parties or that may involve the Collateral Agent in personal liability.

     40. Appointment and Authority. The Initial Borrower hereby irrevocably appoints Wachovia Bank, National Association, to act on its behalf as the Collateral Agent hereunder and authorizes the Collateral Agent to take such actions on its behalf and to exercise such powers as are delegated to the Collateral Agent by the terms hereof, including for purposes of acquiring, holding and enforcing any and all Liens on the Specified Collateral granted by any SN Note Obligor to secure any of the SN Intercompany Notes Obligations, together with such powers and discretion as are reasonably incidental thereto, provided, however, that in no event shall the Collateral Agent be required to take any such action (except to the extent set forth in the Intercreditor Agreement or for purposes of acquiring and holding any and all Liens on the Specified Collateral granted by any SN Note Obligor to secure any of the SN Intercompany Notes Obligations), and any such action taken by the Collateral Agent shall be subject to the Intercreditor Agreement (including, without limitation, Sections 5.12 and 5.13 thereof).

[Remainder of Page Intentionally Left Blank]

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COMPOSITE VERSION:
reflects all amendments through November 5, 2009

     IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Pledge Agreement to be duly executed and delivered as of the date first above written.

PLEDGORS	CAPITALSOURCE INC., a Delaware corporation
	By:	/S/ JEFFREY A. LIPSON
		Name:	Jeffrey A. Lipson
		Title:	Senior Vice President and Treasurer
	CAPITALSOURCE FINANCE LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
		Name:	Jeffrey A. Lipson
		Title:	Senior Vice President and Treasurer
	CAPITALSOURCE TRS LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
		Name:	Jeffrey A. Lipson
		Title:	Senior Vice President and Treasurer
	CSE MORTGAGE LLC, a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
		Name:	Jeffrey A. Lipson
		Title:	Senior Vice President and Treasurer
	CAPITALSOURCE SF TRS LLC a Delaware limited liability company
	By:	/S/ JEFFREY A. LIPSON
		Name:	Jeffrey A. Lipson
		Title:	Senior Vice President and Treasurer

CAPITALSOURCE CF LLC a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CAPITALSOURCE FINANCE II LLC a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CAPITALSOURCE INTERNATIONAL INC. a Delaware corporation
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CSE CHR HOLDINGS LLC a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CSE CHR HOLDCO LLC a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CS FUNDING IX DEPOSITOR LLC a Delaware limited liability company
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer

     Accepted and agreed to as of the date first above written.

WACHOVIA BANK, NATIONAL ASSOCIATION, as Collateral Agent
By:	/S/ RAJ SHAH
	Name:	Raj Shah
	Title:	Managing Director

EX-10.14.1

Exhibit 10.14.1

AMENDMENT NO. 2 TO SALE AND SERVICING AGREEMENT

     This AMENDMENT NO. 2 TO SALE AND SERVICING AGREEMENT (this “Amendment”), is dated as of February 24, 2010, among CSE QRS Funding I LLC, as a seller (together with its successors and assigns in such capacity, the “QRS Seller”), CapitalSource Funding III LLC, as a seller (together with its successors and assigns in such capacity, the “CSIII Seller”, together with the QRS Seller, the “Sellers” and each individually, a “Seller”), CSE Mortgage LLC, as the originator for the QRS Seller (together with its successors and assigns in such capacity, the “QRS Originator”), CapitalSource Finance LLC, as the originator for the CSIII Seller (together with its successors and assigns in such capacity, the “CSIII Originator”, together with the QRS Originator, the “Originators” and each individually, an “Originator”), and as the servicer (together with its successors and assigns in such capacity, the “Servicer”), CS Europe Finance Limited, as a guarantor (together with its successors and assigns in such capacity, the “Europe Guarantor”), CS UK Finance Limited, as a guarantor (together with its successors and assigns in such capacity, the “UK Guarantor”, together with the Europe Guarantor, the “Guarantors” and each individually, a “Guarantor”), each of the conduit purchasers and the institutional purchasers from time to time party thereto, each of the purchaser agents from time to time party thereto, Wells Fargo Securities, LLC (f/k/a Wachovia Capital Markets, LLC), as the administrative agent (together with its successors and assigns, in such capacity, the “Administrative Agent”) and as the purchaser agent for WBNA (together with its successors and assigns, in such capacity, “WBNA Agent”), and Wells Fargo Bank, National Association, not in its individual capacity but as the backup servicer (together with its successors and assigns, in such capacity, the “Backup Servicer”) and not in its individual capacity but as the collateral custodian (together with its successors and assigns, in such capacity, the “Collateral Custodian”). Capitalized terms used but not defined herein have the meanings provided in the Sale and Servicing Agreement (as defined below).

R E C I T A L S

     WHEREAS, the above-named parties have entered into the Sale and Servicing Agreement, dated as of May 29, 2009 (such agreement as amended, modified, supplemented or restated from time to time, the “Sale and Servicing Agreement”); and

     WHEREAS, pursuant to and in accordance with Section 13.1 of the Sale and Servicing Agreement, the parties hereto (other than the Guarantors) desire to provide for certain amendments to the Sale and Servicing Agreement as provided for herein;

     NOW, THEREFORE, based upon the above Recitals, the mutual premises and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

     SECTION 1. AMENDMENTS

     (a) The definition of “Consolidated Tangible Net Worth” in Section 1.1 of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:

     ““Consolidated Tangible Net Worth”: As of any date of determination, with respect to CapitalSource Inc., (A) to the extent the Credit Agreement is in effect, the definition of “Consolidated Tangible Net Worth” as set forth in such Credit Agreement, and (B) in all other cases, the GAAP assets less the liabilities of CapitalSource Inc., its Consolidated Subsidiaries, the CapitalSource Bank Entities and each Healthcare REIT Consolidated Subsidiary, less intangible assets (including goodwill), less loans or advances to stockholders, directors, officers or employees.”

     (b) The definition of “Transaction Documents” in Section 1.1 of the Sale and Servicing Agreement is hereby amended by inserting the phrase “the CS Europe Financing” immediately prior to the word “and” in the sixth line.

     (c) Section 2.10(a)(v) of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:

     “(v) FIFTH, to each Purchaser Agent, pro rata in accordance with the amount of Advances Outstanding hereunder for the account of the applicable Purchaser, in an amount necessary to reduce the Advances Outstanding and Aggregate Unpaids (other than with respect to clause (i) of the definition thereof) to zero, for the payment thereof;”

     (d) Section 2.10(a)(viii) of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:

     “(viii) EIGHTH, to Wachovia Bank, National Association, as the “Security Trustee,” on account of any due and payable “Obligations,” each under and as defined in the CS Europe Financing; and”

     (e) Section 6.15(j) of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:

     “(j) CapitalSource Inc.’s Consolidated Tangible Net Worth is less than (i) $1,725,000,000, plus (ii) 70% of the cumulative Net Proceeds of Capital Stock/Conversion of Debt received at any time after February 24, 2010;”

     (f) The parties hereto agree that as of the date hereof the above-referenced amendments set forth in clause (a) and clause (e) shall be deemed to be in effect for all purposes under the Sale and Servicing Agreement as of December 31, 2009.

     SECTION 2. AGREEMENT IN FULL FORCE AND EFFECT AS AMENDED.

     Except as specifically amended hereby, all provisions of the Sale and Servicing Agreement shall remain in full force and effect. After this Amendment becomes effective, all references to the Sale and Servicing Agreement, and corresponding references thereto or therein such as “hereof,” “herein,” or words of similar effect referring to the Sale and Servicing Agreement shall be deemed to mean the Sale and Servicing Agreement as amended hereby. This Amendment shall not constitute a novation of the Sale and Servicing Agreement, but shall constitute an amendment thereof. This Amendment shall not be deemed to expressly or

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impliedly waive, amend or supplement any provision of the Sale and Servicing Agreement other than as expressly set forth herein.

     SECTION 3. REPRESENTATIONS.

     Each of the Originators, the Servicer and the Sellers, severally for itself only, represents and warrants as of the date of this Amendment as follows:

     (i) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization;

     (ii) the execution, delivery and performance by it of this Amendment and the Sale and Servicing Agreement as amended hereby are within its powers, have been duly authorized, and do not contravene (A) its charter, by-laws, or other organizational documents, or (B) any Applicable Law;

     (iii) no consent, license, permit, approval or authorization of, or registration, filing or declaration with any governmental authority, is required in connection with the execution, delivery, performance, validity or enforceability of this Amendment and the Sale and Servicing Agreement as amended hereby by or against it;

     (iv) this Amendment has been duly executed and delivered by it;

     (v) each of this Amendment and the Sale and Servicing Agreement as amended hereby constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity; and

     (vi) upon giving effect to this Amendment, there is no Termination Event or Unmatured Termination Event.

     SECTION 4. CONDITIONS TO EFFECTIVENESS.

     The effectiveness of this Amendment is conditioned upon: (i) payment of the outstanding fees and disbursements of Dechert LLP, as counsel to the Administrative Agent and the Purchasers; (ii) delivery of executed signature pages by all parties hereto to the Administrative Agent; and (iii) execution of any amendment to the Credit Agreement (as defined in the Sale and Servicing Agreement) that sets forth a corresponding change to the definition of “Consolidated Tangible Net Worth” in such Credit Agreement.

     SECTION 5. MISCELLANEOUS.

     (a) Without in any way limiting any other obligation hereunder or under the Transaction Documents, the Sellers agree to provide, from time to time, any additional documentation and to execute additional acknowledgements, amendments, instruments or other agreements as may be reasonably requested and required by the Administrative Agent to effectuate the foregoing.

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     (b) This Amendment may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.

     (c) The descriptive headings of the various sections of this Amendment are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.

     (d) This Amendment may not be amended or otherwise modified except as provided in the Sale and Servicing Agreement.

     (e) The failure or unenforceability of any provision hereof shall not affect the other provisions of this Amendment.

     (f) Whenever the context and construction so require, all words used in the singular number herein shall be deemed to have been used in the plural number, and vice versa, and the masculine gender shall include the feminine and neuter and the neuter shall include the masculine and feminine.

     (g) This Amendment and the Sale and Servicing Agreement represent the final agreement among the parties with respect to the matters set forth therein and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements among the parties. There are no unwritten oral agreements among the parties with respect to such matters.

     (h) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE CHOICE OF LAW PROVISIONS SET FORTH IN THE SALE AND SERVICING AGREEMENT AND SHALL BE SUBJECT TO THE WAIVER OF JURY TRIAL AND NOTICE PROVISIONS SET FORTH IN THE SALE AND SERVICING AGREEMENT.

[Remainder of Page Intentionally Left Blank]

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     IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written.

CAPITALSOURCE FUNDING III LLC, as a Seller
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CSE QRS FUNDING I LLC, as a Seller
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer

[SIGNATURES CONTINUED ON FOLLOWING PAGE]

CAPITALSOURCE FINANCE LLC, as an Originator and as the Servicer
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
CSE MORTGAGE LLC, as an Originator
By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer

[SIGNATURES CONTINUED ON FOLLOWING PAGE]

WACHOVIA BANK, NATIONAL ASSOCIATION, as a Purchaser
By:	/s/ Raj Shah
	Name:	Raj Shah
	Title:	Managing Director
WELLS FARGO SECURITIES, LLC (f/k/a Wachovia Capital Markets, LLC), as the Administrative Agent and as the WBNA Agent
By:	/s/ Raj Shah
	Name:	Raj Shah
	Title	Managing Director

[SIGNATURES CONTINUED ON FOLLOWING PAGE]

WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as the Backup Servicer and as the Collateral Custodian
By:	/s/ Jeanine C. Casey
	Name: Jeanine C. Casey
	Title: Vice President

EX-10.15.1

Exhibit 10.15.1

     THIRD AMENDMENT, dated as of February 26, 2010 (this “Amendment”), to the Second Amended and Restated Sale and Servicing Agreement dated as of June 16, 2009 (as amended by that certain First Amendment and Consent dated as of July 14, 2009, that certain Second Amendment and Waiver dated as of August 28, 2009, and as further amended, restated, supplemented or otherwise modified from time to time, the “Agreement”), by and among CS Funding VII Depositor LLC, as the seller (the “Seller”), CapitalSource Finance LLC, as the originator (the “Originator”), and as the servicer (the “Servicer”), each of the Issuers from time to time party thereto (collectively, the “Issuers”), each of the Liquidity Banks from time to time party thereto (collectively, the “Liquidity Banks”), Citicorp North America, Inc., as the administrative agent for the Issuers and Liquidity Banks thereunder (the “Administrative Agent”), and Wells Fargo Bank, National Association, not in its individual capacity but as the backup servicer (the “Backup Servicer”), and not in its individual capacity but as the collateral custodian (the “Collateral Custodian”). Terms not otherwise defined in this Amendment shall have the meanings set forth in the Agreement.

     The parties hereto desire to amend certain provisions of the Agreement in the manner provided herein.

     Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows:

     Section 1. Amendments to the Agreement. Effective as of the Effective Date, the Agreement is hereby amended as follows:

     (i) the definition of “Consolidated Tangible Net Worth” in Section 1.1 thereof is deleted and replaced with the following:

“Consolidated Tangible Net Worth”: As of any date of determination, the GAAP assets less the liabilities of CapitalSource Inc., its Consolidated Subsidiaries, the CapitalSource Bank Entities and each Healthcare REIT Consolidated Subsidiary, less intangible assets (including goodwill), less loans or advances to stockholders, directors, officers or employees.

     (ii) the definition of “TNW Test Level” in Section 1.1 thereof is deleted and replaced with the following:

“TNW Test Level”: The greater of (A) sum of (i) $1,725,000,000, plus (ii) 70% of the cumulative Net Proceeds of Capital Stock/Conversion of Debt received at any time after February 24, 2010, and (B) the covenant level for “Minimum Consolidated Tangible Net Worth” set forth under any of the Other CapitalSource Facilities, including Section 5.32(c) of the Credit Agreement (or any replacement provision thereunder).

     (iii) Clause (c)(i) of the definition of “Revolving Period” in Section 1.1 thereof is amended by replacing the percentage “10.00%” appearing therein with the percentage “12.00%”.

     (iv) Section 10.1(c)(ii) thereof is amended by replacing the percentage “10.00%” appearing therein with the percentage “12.00%”.

     Section 2. Representations and Warranties of the Seller and the Servicer.

     Each of the Seller and the Servicer, jointly and severally, hereby represents and warrants as of the date hereof as follows (which representations and warranties shall survive the execution and delivery of this Amendment):

     (i) The representations and warranties of each of the Seller and the Servicer set forth in the Agreement are true and correct on and as of such date, after giving effect to this Amendment, as though made on and as of such date;

     (ii) Following the effectiveness of this Amendment, no event has occurred and is continuing which constitutes a Termination Event or Unmatured Termination Event;

     (iii) Each of the Seller and the Servicer is in compliance with each of its covenants and agreements set forth in the Transaction Documents; and

     (iv) This Amendment has been duly executed and delivered by the Seller and the Servicer and constitutes the legal, valid and binding obligation of the Seller and Servicer, and is enforceable in accordance with its terms subject (x) as to enforcement of remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforcement of creditors’ rights generally, from time to time in effect, and (y) to general principles of equity.

     Section 3. Effective Date; Continued Effectiveness; Governing Law; Counterparts.

     (a) This Amendment shall become effective as of the time and date (the “Effective Date”) when:

     (i) the Administrative Agent shall have received a counterpart of this Amendment, duly executed and delivered on behalf of each of the parties hereto; and

     (ii) the Originator shall have paid all outstanding fees and expenses of counsel to the Administrative Agent.

     (b) Nothing herein shall be deemed to be a waiver of any covenant, or agreement contained in, or any Termination Event or Unmatured Termination Event under the Agreement and each of the parties hereto agrees that all other covenants and agreements and other provisions contained in the Agreement and the other Transaction Documents as modified by this Amendment shall remain in full force and effect from and after the date of this Amendment.

     (c) THIS AMENDMENT, AND THE AGREEMENT AS AMENDED BY THE AMENDMENT, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW PROVISIONS THEREOF (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK).

     (d) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts (including by facsimile or by electronic mail in portable document format (pdf)), each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement.

[Remainder of Page Intentionally Left Blank.]

2

     IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written.

THE SELLER:	CS FUNDING VII DEPOSITOR LLC
	By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
THE ORIGINATOR AND SERVICER:	CAPITALSOURCE FINANCE LLC
	By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer

[Signatures Continued on the Following Page]

ISSUER:	CHARTA, LLC, in its capacity as an Issuer
	By: Citibank, N.A., as Attorney-in-Fact
	By:	/s/ GERALD F. KEEFE
	Name:	Gerald F. Keefe
	Title:	Authorized Signatory
ISSUER:	CAFCO, LLC, in its capacity as an Issuer
	By: Citibank, N.A., as Attorney-in-Fact
	By:	/s/ GERALD F. KEEFE
	Name:	Gerald F. Keefe
	Title:	Authorized Signatory

[Signatures Continued on the Following Page]

LIQUIDITY BANK:	CITIBANK, N.A., in its capacity as a Liquidity Bank
	By:	/s/ GERALD F. KEEFE
	Name:	Gerald F. Keefe
	Title:	Authorized Signatory
THE ADMINISTRATIVE AGENT	CITICORP NORTH AMERICA, INC.
	By:	/s/ GERALD F. KEEFE
	Name:	Gerald F. Keefe
	Title:	Authorized Signatory

EX-10.17.1

Exhibit 10.17.1

24 February 2010

CS EUROPE FINANCE LIMITED and CS UK FINANCE LIMITED
as the Borrowers

EACH OF THE INSTITUTIONAL LENDERS
PARTY HERETO AS LENDERS,
as the Lenders

EACH OF THE LENDER AGENTS
PARTY HERETO AS LENDER AGENTS,
as the Lender Agents

EACH OF THE SWINGLINE LENDER AGENTS
PARTY HERETO AS SWINGLINE LENDER AGENTS
as the Swingline Lender Agents

EACH OF THE INSTITUTIONAL LENDERS
PARTY HERETO AS SWINGLINE LENDERS,
as the Swingline Lenders

CAPITALSOURCE FINANCE LLC
as Servicer

CAPITALSOURCE EUROPE LIMITED
as Subservicer and Parent

CAPITALSOURCE (UK) LIMITED
as Parent

WACHOVIA BANK, N.A.
as the Administrative Agent and the Security Trustee

and

WACHOVIA SECURITIES INTERNATIONAL LTD.,
as Lead Arranger and Sole Bookrunner

DEED OF AMENDMENT RELATING TO THE
SERVICING AGREEMENT

THIS DEED OF AMENDMENT (this “Deed”) is dated 24 February 2010 and made among:

(1)	CS EUROPE FINANCE LIMITED (“CSEF”), a wholly-owned subsidiary of CapitalSource Europe Limited. incorporated in England and Wales under registered number 6340019 and CS UK FINANCE LIMITED (“CSUF”), a wholly-owned subsidiary of CapitalSource UK Limited incorporated in England and Wales under registered number 6340034, each as a borrower and guarantor (each, a “Borrower” and together the “Borrowers”);
(2)	EACH OF THE INSTITUTIONAL LENDERS party hereto and as defined in the Facility Agreement referenced below as an institutional lender, (each a “Lender”, together the “Lenders”);
(3)	EACH OF THE LENDER AGENTS party hereto and as defined in the Facility Agreement referenced below as a lender agent (each a “Lender Agent” and together the “Lender Agents”);
(4)	EACH OF THE INSTITUTION LENDERS party hereto and as defined in the Facility Agreement referenced below as a swingline lender, (each, a “Swingline Lender” and together the “Swingline Lenders”);
(5)	EACH OF THE SWINGLINE LENDER AGENTS party hereto and as defined in the Facility Agreement referenced below as a swingline lender agent, (each a “Swingline Lender Agent” and together the “Swingline Lender Agents”);
(6)	CAPITALSOURCE FINANCE LLC, as the servicer (the “Servicer”);
(7)	CAPITALSOURCE EUROPE LIMITED (“CSEL”), a company incorporated in England and Wales, as a Subservicer (together with its successors and assigns in such capacity, a “Subservicer”) as the parent company of CS Europe Finance Limited, in such capacity, a “Parent”) and as the Original Subordinated Creditor;
(8)	CAPITALSOURCE (UK) LIMITED, a company incorporated in England and Wales, as parent company of CS UK Finance Limited (in such capacity, a “Parent”);
(9)	WACHOVIA BANK, N.A., as the administrative agent, (the “Administrative Agent”) and as the security trustee to the Secured Parties (together with its successors and assigns in such capacity, the “Security Trustee”); and
(10)	WACHOVIA SECURITIES INTERNATION LTD., as lead arranger (the “Lead Arranger”) and sole bookrunner (the “Sole Bookrunner”).

WHEREAS,

(A) Pursuant to the terms of a multicurrency facility agreement dated 3 October 2007, as amended on 24 September 2008, 10 February 2009 and 29 May 2009, the Lenders have agreed to provide a €250,000,000 credit facility to the Borrowers (the “Facility Agreement”).

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(B)	Pursuant to the terms of a servicing agreement dated 3 October 2007 as amended on 24 September 2008 and 29 May 2009 (the “Servicing Agreement”), the Borrowers have appointed CapitalSource Finance LLC as Servicer to service the Loans and to enforce the Borrowers’ rights and interests in and under each Loan.
(C)	The parties hereto agree to amend the Servicing Agreement on the terms and subject to the conditions set forth herein.

IT IS AGREED as follows:

1.	DEFINITIONS AND INTERPRETATION
1.1	Definitions
	In this Deed:
	“Deemed Effective Date” means 31 December 2009.
	“Effective Date” means 24 February 2010.
1.2	Defined terms
	Terms defined in the Facility Agreement and the Servicing Agreement shall have the same meaning in this Deed.
1.3	Incorporation of Clauses 1.2 to 1.3 (inclusive) of the Facility Agreement.
	Clauses 1.2 to 1.3 (inclusive) of the Facility Agreement shall be incorporated by reference into this Deed and shall apply as if expressly set out herein.
1.4	Conduit Lender
	It is noted that as at this date, there is no Conduit Lender which is party to the Amended Servicing Agreement. Given that the Amended Servicing Agreement is being amended by all the current parties thereto, the amendments shall be binding on any future party which adheres to this document in the future (including any future Conduit Lender).
1.5	Effective Date and Deemed Effective Date
	This Deed shall come into effect on the Effective Date but the parties acknowledge and agree that the amendment to the Servicing Agreement shall be deemed to have taken effect as of the Deemed Effective Date.
2.	AMENDMENTS
2.1	Amendment to the Servicing Agreement:
	The parties to this Deed acknowledge and agree that the Servicing Agreement shall be deemed to have been amended as follows as from the Deemed Effective Date:

(a) the definition of “Consolidated Tangible Net Worth” shall be deleted in its entirety and replaced by the following:

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	““Consolidated Tangible Net Worth” means, as of any date of determination, with respect to CapitalSource Inc., (A) to the extent the Credit Agreement is in effect, the definition of “Consolidated Tangible Net Worth” as set forth in such Credit Agreement, and (B) in all other cases, the assets less the liabilities of CapitalSource Inc. and its Consolidated Subsidiaries, the CapitalSource Bank Entities and each Healthcare REIT Consolidated Subsidiary, less intangible assets (including goodwill), less loans or advances to stockholders, directors, officers or employees, all determined in accordance with GAAP.”
(b)	the definition of “Minimum Consolidated Tangible Net Worth” shall be deleted in its entirety and replaced by the following:
	““Minimum Consolidated Tangible Net Worth” means (i) $1,725,000,000, plus (ii) 70% of the cumulative Net Proceeds of Capital Stock/Conversion of Debt received at any time after 24 February 2010.”

2.2	Clause 1.2.1(j) of the Facility Agreement shall be incorporated by reference into this Deed such that any references to the Servicing Agreement therein shall include the amendments made thereto in this Deed.
3.	REPRESENTATIONS
3.1	The representations and warranties set out in Clause 16.1 (Representations and Warranties) in the Facility Agreement as amended on this date are deemed to be repeated by the Borrower on the Effective Date.
3.2	The representations and warranties set out in Clause 9 (Representations, Warranties and Undertakings of the Servicer and Parents) in the Servicing Agreement as amended on this date are deemed to be repeated by the Servicer and by each Parent on the Effective Date.
4.	CONTINUITY AND FURTHER ASSURANCE
4.1	Continuing obligations
	The provisions of the Servicing Agreement shall, save as amended by this Deed, continue in full force and effect.
4.2	Further assurance
	Each Borrower shall, at the request of the Administrative Agent and at its own expense, do all such acts and things necessary or desirable to give effect to the amendments effected or to be effected pursuant to this Deed.
5.	FEES, COSTS AND EXPENSES
	The Borrowers shall promptly on demand pay the Administrative Agent the amount of all costs and expenses (including legal fees) reasonably incurred by it in connection with the negotiation, preparation, printing and execution of this Deed and any other documents referred to in this Deed.

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6. MISCELLANEOUS
6.1	Incorporation of terms
	The provisions of Clause 29 (Notices), Clause 32 (Partial Invalidity), Clause 33 (Remedies and waivers), Clause 37 (Enforcement), and Clause 38 (Service of Process) of the Facility Agreement shall be incorporated into this Deed amended as if set out in full in this Deed.
6.2	Counterparts
	This Deed may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of this Deed.
7. GOVERNING LAW
	This Deed is governed by English law.
8. COUNTERPARTS
	This Deed may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of the Deed.

- 5 -

IN WITNESS whereof this Deed has been executed and delivered on the date shown at the top of this document.

The Borrowers
EXECUTED AND DELIVERED as a DEED		)
For and on behalf of CS EUROPE FINANCE		)
LIMITED by its duly appointed		)
Attorney
By:	/s/ Giles Coates
Name: Giles Coates
Title: Authorized Signatory
In the presence of:
Signature of Witness: /s/ Rosanne Willging
Name of Witness: Rosanne Willging 4445 Willard Avenue, 12th F1 Chevy Chase, MARYLAND 20815
EXECUTED AND DELIVERED as a DEED		)
For and on behalf of CS UK FINANCE LIMITED		)
by it’s duly appointed Attorney		)
By:	/s/ Giles Coates
Name: Giles Coates
Title: Authorized Signatory
In the presence of:
Signature of Witnes: /s/ Rosanne Willging
Name of Witness: Rosanne Willging 4445 Willard Avenue, 12th F1 Chevy Chase, MARYLAND 20815

- 6 -

The Administrative Agent and the Security Trustee
Executed and delivered as a Deed by:		)
		)
/s/ Raj Shah		)
		)
Name:	Raj Shah, Managing Director	)
Director/Authorised Signatory for and on behalf of		)
WACHOVIA BANK, N.A. in the presence of:		)
		)
		)
Signature of Witness: /s/ Matt Jensen
Name of Witness: Matt Jensen 301 S. College Street Charlotte, NC 28288
The Institutional Lender
Executed and delivered as a Deed by:		)
/s/ Raj Shah		)
		)
Name: Raj Shah, Managing Director		)
Director/Authorised Signatory for and on behalf of		)
WACHOVIA BANK, N.A. in the presence of:		)
		)
		)
		)
Signature of Witness: /s/ Matt Jensen
Name of Witness: Matt Jensen 301 S. College Street Charlotte, NC 28288
The Swingline Lender
Executed and delivered as a Deed by:		)
/s/ Raj Shah		)
		)
Name: Raj Shah, Managing Director		)
Director/Authorised Signatory for and on behalf of		)
WACHOVIA BANK, N.A., LONDON		)
BRANCH in the presence of:		)
BRANCH in the presence of:		)
Signature of Witness: /s/ Matt Jensen
Name of Witness: Matt Jensen 301 S. College Street Charlotte, NC 28288

- 7 -

Lender Agent
Executed and delivered as a Deed by:		)
		)
/s/ Raj Shah		)
		)
Name:	Raj Shah, Managing Director	)
Director/Authorised Signatory for and on behalf of		)
WACHOVIA BANK, N.A. in the presence of:		)
		)
		)
Signature of Witness: /s/ Matt Jensen
Name of Witness: Matt Jensen 301 S. College Street Charlotte, NC 28288
Swingline Lender Agent		)
Executed and delivered as a Deed by:		)
/s/ Raj Shah		)
		)
Name:	Raj Shah, Managing Director	)
Director/Authorised Signatory for and on behalf of		)
WACHOVIA BANK, N.A. in the presence of:		)
		)
		)
Signature of Witness: /s/ Matt Jensen
Name of Witness: Matt Jensen 301 S. College Street Charlotte, NC 28288
Lead Arranger and Sole Bookrunner
Executed and delivered as a Deed by:		)
/s/ Walter Dolhare		)
		)
Name:	Walter Dolhare	)
		)
Director/Authorised Signatory for and on behalf of		)
WACHOVIA SECURITIES		)
INTERNATIONAL LTD in the presence of:		)
Signature of Witness: /s/ Matt Jensen
Name of Witness: Matt Jensen 301 S. College Street Charlotte, NC 28288

- 8 -

The Parent and Subservicer
EXECUTED AND DELIVERED as a DEED		)
For and on behalf of CAPITALSOURCE		)
EUROPE LIMITED by its duly appointed Attorney		)
By:	/s/ Giles Coates
Name: Giles Coates
Title: Authorized Signatory
In the presence of:
Signature of Witness: /s/ Rosanne Willging
Name of Witness: Rosanne Willging 4445 Willard Avenue, 12th Floor Chevy Chase, Maryland 20815
The Servicer
EXECUTED AND DELIVERED as a DEED		)
For and on behalf of CAPITALSOURCE		)
FINANCE LLC by its duly appointed Attorney		)
By:	/s/ Giles Coates
Name: Giles Coates
Title: Authorized Signatory
In the presence of:
Signature of Witness: /s/ Rosanne Willging
Name of Witness: Rosanne Willging 4445 Willard Avenue, 12th Floor Chevy Chase, Maryland 20815
The Parent
EXECUTED AND DELIVERED as a DEED		)
For and on behalf of CAPITALSOURCE (UK)		)
LIMITED by its duly appointed Attorney		)
By:	/s/ Giles Coates
Name: Giles Coates
Title: Authorized Signatory
In the presence of:
Signature of Witness: /s/ Rosanne Willging
Name of Witness: Rosanne Willging 4445 Willard Avenue, 12th Floor Chevy Chase, Maryland 20815

- 9 -

EX-10.22.1

'

Exhibit 10.22.1

     THIRD AMENDMENT, dated as of February 26, 2010 (this “Amendment”), to the Fourth Amended and Restated Sale and Servicing Agreement dated as of June 16, 2009 (as amended by that certain First Amendment dated as of July 14, 2009, that certain Second Amendment and Waiver dated as of August 28, 2009, and as further amended, restated, supplemented or otherwise modified from time to time, the “Agreement”), by and among CapitalSource Real Estate Loan LLC, 2007-A, as the seller (the “Seller”), CSE Mortgage LLC, as the originator (the “Originator”), and as the servicer (the “Servicer”), each of the Issuers from time to time party thereto (collectively, the “Issuers”), each of the Liquidity Banks from time to time party thereto (collectively, the “Liquidity Banks”), Citicorp North America, Inc., as the administrative agent for the Issuers and Liquidity Banks thereunder (the “Administrative Agent”), and Wells Fargo Bank, National Association, not in its individual capacity but as the backup servicer (the “Backup Servicer”), and not in its individual capacity but as the collateral custodian (the “Collateral Custodian”). Terms not otherwise defined in this Amendment shall have the meanings set forth in the Agreement.

     The parties hereto desire to amend certain provisions of the Agreement in the manner provided herein.

     Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows:

     Section 1. Amendments to the Agreement. Effective as of the Effective Date, the Agreement is hereby amended as follows:

     (i) the following new definitions are added to Section 1.1 thereof in proper alphabetical order:

“CapitalSource Convertible Bonds”: The 3.5% Senior Convertible Debentures due 2034 and the 4.0% Senior Subordinated Convertible Debentures due 2034 issued by CapitalSource Inc., including any refinancing or reissuance thereof.

“CapitalSource Convertible Bond Put Date”: The earlier of (i) the maturity date (as such may be accelerated) of either of the CapitalSource Convertible Bonds (provided, that this clause (i) shall not be triggered as a result of an exchange offer, tender offer, purchase on the open market or other refinancing with respect to either of the CapitalSource Convertible Bonds) or (ii) the date on which any of the holders of either of the CapitalSource Convertible Bonds may require CapitalSource Inc. to repurchase, retire or redeem all or any portion of either of the CapitalSource Convertible Bonds.

“Third Amendment Effective Date”: February 26, 2010.

     (ii) the definition of “Consolidated Tangible Net Worth” in Section 1.1 thereof is deleted and replaced with the following:

“Consolidated Tangible Net Worth”: As of any date of determination, the GAAP assets less the liabilities of CapitalSource Inc., its Consolidated Subsidiaries, the CapitalSource Bank Entities and each Healthcare REIT Consolidated Subsidiary, less intangible assets (including goodwill), less loans or advances to stockholders, directors, officers or employees.

     (iii) the definition of “Maximum Advance Rate” in Section 1.1 thereof is deleted and replaced with the following:

“Maximum Advance Rate” As of (i) the Payment Date occurring in May 2010, after giving effect to all amounts applied on such date, equals 27.2% of the Aggregate Outstanding Asset Balance on such date, (ii) the Payment Date occurring in August 2010, after giving effect to all amounts applied on such date, equals 23.6% of the Aggregate Outstanding Asset Balance on such date, (iii) the

Payment Date occurring in November 2010, after giving effect to all amounts applied on such date, equals 19.8% of the Aggregate Outstanding Asset Balance on such date and (iv) the Payment Date occurring in February 2011, after giving effect to all amounts applied on such date, equals 18.4% of the Aggregate Outstanding Asset Balance on such date.

     (iv) the definition of “Termination Event” in Section 1.1 thereof is amended by replacing the text “10.1(y) or 10.1(z)” appearing therein with the text “10.1(y), 10.1(z) or 10.1(aa)”.

     (v) the definition of “TNW Test Level” in Section 1.1 thereof is deleted and replaced with the following:

“TNW Test Level”: The greater of (A) sum of (i) $1,725,000,000, plus (ii) 70% of the cumulative Net Proceeds of Capital Stock/Conversion of Debt received at any time after February 24, 2010, and (B) the covenant level for “Minimum Consolidated Tangible Net Worth” set forth under any of the Other CapitalSource Facilities, including Section 5.32(c) of the Credit Agreement (or any replacement provision thereunder).

     (vi) Section 2.13 thereof is deleted and replaced with the following:

“On the first Payment Date following the Termination Date when the Class A Advances Outstanding is less than 5% of the Class A Advances Outstanding as of the Termination Date (the “5% Date”), the Seller shall notify the Administrative Agent in writing of its intention to purchase all remaining Collateral. On the earlier of (a) the Payment Date next succeeding the 5% Date or (b) the date (such date being June 30, 2011 as of the Third Amendment Effective Date) that is ten (10) Business Days prior to the CapitalSource Convertible Bond Put Date, the Seller shall (i) terminate all Hedge Transactions in accordance with their terms and (ii) purchase all remaining Collateral for a price equal to the Aggregate Unpaids and the proceeds of such purchase will be deposited into the Collection Account and paid in accordance with Section 2.10.”

     (vii) Section 10.1 thereof is amended by (i) changing the designation of clause “(z)” to “(aa)” and (ii) inserting the following new clause “(z)”:

“(z) as of any Payment Date specified in the definition of Maximum Advance Rate, the ratio (expressed as a percentage) of the aggregate amount of Advances Outstanding divided by the Aggregate Outstanding Asset Balance (in each case, after giving effect to all amounts applied on such date) exceeds the Maximum Advance Rate and the same continues unremedied for two Business Days; or”.

     Section 2. Representations and Warranties of the Seller and the Servicer.

     Each of the Seller and the Servicer, jointly and severally, hereby represents and warrants as of the date hereof as follows (which representations and warranties shall survive the execution and delivery of this Amendment):

     (i) The representations and warranties of each of the Seller and the Servicer set forth in the Agreement are true and correct on and as of such date, after giving effect to this Amendment, as though made on and as of such date;

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     (ii) Following the effectiveness of this Amendment, no event has occurred and is continuing which constitutes a Termination Event or Unmatured Termination Event;

     (iii) Each of the Seller and the Servicer is in compliance with each of its covenants and agreements set forth in the Transaction Documents; and

     (iv) This Amendment has been duly executed and delivered by the Seller and the Servicer and constitutes the legal, valid and binding obligation of the Seller and Servicer, and is enforceable in accordance with its terms subject (x) as to enforcement of remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforcement of creditors’ rights generally, from time to time in effect, and (y) to general principles of equity.

     Section 3. Effective Date; Continued Effectiveness; Governing Law; Counterparts.

     (a) This Amendment shall become effective as of the time and date (the “Effective Date”) when:

     (i) the Administrative Agent shall have received a counterpart of this Amendment, duly executed and delivered on behalf of each of the parties hereto;

     (ii) the Administrative Agent shall have received (i) duly executed counterparts of the fee letter dated as of the date hereof among the parties hereto regarding the payment of certain amendment fees on the date hereof (the “Fee Letter”) and (ii) payment of the Amendment Fee (as defined in the Fee Letter);

     (iii) the Advances Outstanding shall have been reduced to an amount equal to or less than $123,470,625; and

     (iv) the Originator shall have paid all outstanding fees and expenses of counsel to the Administrative Agent.

     (b) Nothing herein shall be deemed to be a waiver of any covenant, or agreement contained in, or any Termination Event or Unmatured Termination Event under the Agreement and each of the parties hereto agrees that all other covenants and agreements and other provisions contained in the Agreement and the other Transaction Documents as modified by this Amendment shall remain in full force and effect from and after the date of this Amendment.

     (c) THIS AMENDMENT, AND THE AGREEMENT AS AMENDED BY THE AMENDMENT, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW PROVISIONS THEREOF (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK).

     (d) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts (including by facsimile or by electronic mail in portable document format (pdf)), each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement.

[Remainder of Page Intentionally Left Blank.]

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     IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written.

THE SELLER:	CAPITALSOURCE REAL ESTATE LOAN LLC, 2007-A
	By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer
THE ORIGINATOR AND SERVICER:	CSE MORTGAGE LLC
	By:	/S/ JEFFREY A. LIPSON
	Name:	Jeffrey A. Lipson
	Title:	Senior Vice President and Treasurer

[Signatures Continued on the Following Page]

ISSUER:	CHARTA, LLC, in its capacity as an Issuer
	By: Citibank, N.A., as Attorney-in-Fact
	By:	/s/ GERALD F. KEEFE
	Name:	Gerald F. Keefe
	Title:	Authorized Signatory
ISSUER:	CAFCO, LLC, in its capacity as an Issuer
	By: Citibank, N.A., as Attorney-in-Fact
	By:	/s/ GERALD F. KEEFE
	Name:	Gerald F. Keefe
	Title:	Authorized Signatory

[Signatures Continued on the Following Page]

LIQUIDITY BANK:	CITIBANK, N.A., in its capacity as a Liquidity Bank
	By:	/s/ GERALD F. KEEFE
	Name:	Gerald F. Keefe
	Title:	Authorized Signatory
THE ADMINISTRATIVE AGENT	CITICORP NORTH AMERICA, INC.
	By:	/s/ GERALD F. KEEFE
	Name:	Gerald F. Keefe
	Title:	Authorized Signatory

EX-10.32.4

Exhibit 10.32.4

NOTICE OF GRANT OF STOCK OPTIONS	CapitalSource Inc.
	ID: 35-2206895
	4445 Willard Avenue
	Twelfth Floor
	Chevy Chase, MD 20815

[Name]	Option Number:
[Address]	Plan:           Y2KB ID:

Effective [DATE], you have been granted a Non-Qualified Stock Option (the “Option”) to buy [NUMBER] shares of CapitalSource Inc. (the “Company”) common stock at [PRICE] per share (the “Option Price”).

The Option shall vest as follows:

Shares Vest Type Vest Date Expiration

By your signature and the Company’s signature below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the attached Option Agreement and the Company’s Third Amended and Restated Equity Incentive Plan, as amended, all of which are available on the Company’s intranet and on DocServer, the Company’s internal document management system in the System View named Equity Incentive Plan.

CapitalSource Inc.	Date
[NAME]	Date

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN
NON-QUALIFIED OPTION AGREEMENT

Non-qualified Option	This Agreement evidences an award of a Stock Option exercisable for that number of shares of Stock set forth on your Notice of Grant of Stock Options to which this Agreement is attached (“Grant Notice”) and subject to the vesting and other conditions set forth herein, in the Plan and on the Grant Notice. This option is not intended to be an incentive option under Section 422 of the Internal Revenue Code and will be interpreted accordingly.
Transfer of Stock Option	During your lifetime, only you (or, in the event of your legal incapacity or incompetency, your guardian or legal representative) may exercise the Stock Option. The Stock Option may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Stock Option be made subject to execution, attachment or similar process.
	If you attempt to do any of these things, this Stock Option will immediately become forfeited.
	Notwithstanding these restrictions on transfer, the Board or the Committee may authorize, in its sole discretion, the transfer of a vested Stock Option (in whole or in part) to a member of your immediate family or a trust for the benefit of your immediate family.
Vesting	Your Stock Option shall vest in accordance with the vesting schedule shown in the Grant Notice so long as you continue in Service on the vesting dates set forth on the Grant Notice, and is exercisable only as to its vested portion.
	Notwithstanding your vesting schedule, your the Stock Option will become 100% vested upon your termination of Service due to your death or Disability if you have provided Services to the Company for at least one (1) year at the time your Service terminates.
Forfeiture of Unvested Stock Options / Term	Unless the termination of your Service triggers accelerated vesting of your Stock Option pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company those portions of the Stock Option that have not yet vested in the event your Service terminates for any reason.
Expiration of Vested Options After Service	If your Service terminates for any reason, other than death, Disability or Cause, then the vested portion of your Stock Option will expire at the close of business at Company headquarters on the 90th day after

2

Terminates	your termination date.
	If your Service terminates because of your death or Disability, or if you die during the 90 day period after your termination for any reason (other than Cause), then the vested portion of your Stock Option will expire at the close of business at Company headquarters on the date twelve (12) months after the date of your death or termination for Disability. During that twelve (12) month period, your estate or heirs may exercise the vested portion of your Stock Option.
	If your Service is terminated for Cause, then you shall immediately forfeit all rights to your entire Stock Option and the Stock Option shall immediately expire.
	In all events, your Stock Option will expire on the Expiration Date shown on the Grant Notice. Your Stock Option will expire earlier if your Service terminates, as described herein.
Forfeiture of Rights	If you should take actions in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof, the Company has the right to cause an immediate forfeiture of your rights to this Stock Option awarded under this Agreement, and the Stock Option shall immediately expire. In such circumstances, if you have exercised any of this Stock Option during the two year period prior to your actions, you will owe the Company a cash payment (or forfeiture of shares) in an amount determined as follows: (1) for any Shares that you have sold prior to receiving notice from the Company, the amount will be the proceeds received from the sale(s), less the option exercise price for such shares, and (2) for any Shares that you still own, the amount will be the number of Shares owned times the Fair Market Value of the Shares on the date you receive notice from the Company, less the option exercise price for such shares (provided, that the Company may require you to satisfy your payment obligations hereunder either by forfeiting and returning to the Company the shares or any other Shares or making a cash payment or a combination of these methods as determined by the Company in its sole discretion).
Leaves of Absence	For purposes of this Agreement, your Service does not terminate when you go on a bona fide employee leave of absence that was approved by the Company in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. Your Service terminates in any event when the approved leave ends unless you immediately return to active employee work.

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	The Company determines, in its sole discretion, which leaves count for this purpose, and when your Service terminates for all purposes under the Plan.
Notice of Exercise	The Stock Option may be exercised, in whole or in part, to purchase a whole number of vested shares of Stock of not less than 100 shares, unless the number of vested shares purchased is the total number available for purchase under the option, by following the procedures set forth in the Plan and in this Agreement.
	When you wish to exercise this Stock Option, you must exercise in a manner required or permitted by the Company.
	If someone else wants to exercise this Stock Option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.
Form of Payment	When you exercise your Stock Option, you must include payment of the Option Price indicated on the Grant Notice for the shares you are purchasing. Payment may be made in one (or a combination) of the following forms:
	•    Cash, your personal check, a cashier’s check, a money order or another cash equivalent acceptable to the Company.
	•    Shares of Stock which have already been owned by you for more than six months and which are surrendered to the Company. The Fair Market Value of the shares as of the effective date of the option exercise will be applied to the Option Price.
	•    To the extent a public market exists for the shares of Stock as determined by the Company, delivery (in a form prescribed or accepted by the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell shares subject to the Stock Option and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Option Price and any withholding taxes.
Evidence of Issuance	The issuance of the shares upon exercise of this Stock Option shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more share certificates. You will have no further rights with regard to a Stock Option once the share of Stock related to such Stock Option has been issued.
Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Stock Option exercise or sale of Stock acquired under this Stock Option. In the event that the Company determines

4

	that any federal, state, local or foreign tax or withholding payment is required relating to the exercise of this Stock Option or sale of Stock arising from this Stock Option, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and this Stock Option do not give you the right to be retained by the Company (or any Affiliate) in any capacity. Unless otherwise specified in an employment or other written agreement between the Company (or any Affiliate) and you, the Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Stockholder Rights	You, or your estate or heirs, have no rights as a shareholder of the Company until the Stock has been issued upon exercise of your Stock Option and either a certificate evidencing your Stock has been issued or an appropriate entry has been made on the Company’s books. No adjustments are made for dividends, distributions or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.
	Your Stock Option shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference.
	Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
	This Agreement, the associated Grant Notice and the Plan constitute the entire understanding between you and the Company regarding this Stock Option. Any agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate), whether entered into before or after this Agreement’s effective date, shall supersede this Agreement with respect to its subject matter unless otherwise provided herein, provided that no such superseding shall result in a failure to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.

5

Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the Grant Notice and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company. For purposes of this Award, a termination of Service only occurs upon an event that would be a Separation from Service within the meaning of Section 409A.

By signing the Grant Notice, you agree to all of the terms and conditions described above and in the Plan.

6

EX-10.33.4

Exhibit 10.33.4

NOTICE OF GRANT OF STOCK OPTIONS	CapitalSource Inc.
	ID: 35-2206895
	4445 Willard Avenue
	Twelfth Floor
	Chevy Chase, MD 20815

[name]	Option Number:
[address]	Plan:           Y2KB
	ID:

Effective [     ], you have been granted a Non-Qualified Stock Option (the “Option”) to purchase [     ] shares of CapitalSource Inc. (the “Company”) common stock at $[     ] per share (the “Option Price”).

The Option shall vest as follows:

Shares Vest Type Vest Date Expiration

By your signature and the Company’s signature below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the attached Option Agreement and the Company’s Third Amended and Restated Equity Incentive Plan, as amended, which is also attached.

CapitalSource Inc.	Date
[name]	Date

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

NON-QUALIFIED OPTION AGREEMENT
FOR DIRECTORS

Non-qualified Option	This Agreement evidences an award of a Stock Option exercisable for that number of shares of Stock set forth on your Notice of Grant of Stock Options to which this Agreement is attached (“Grant Notice”) and subject to the vesting and other conditions set forth herein, in the Plan and on the Grant Notice. This option is not intended to be an incentive option under Section 422 of the Internal Revenue Code and will be interpreted accordingly.
Transfer of Stock Option	During your lifetime, only you (or, in the event of your legal incapacity or incompetency, your guardian or legal representative) may exercise the Stock Option. The Stock Option may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Stock Option be made subject to execution, attachment or similar process.
	If you attempt to do any of these things, this Stock Option will immediately become forfeited.
	Notwithstanding these restrictions on transfer, the Board or the Committee may authorize, in its sole discretion, the transfer of a vested Stock Option (in whole or in part) to a member of your immediate family or a trust for the benefit of your immediate family.
Vesting	Your Stock Option shall vest in accordance with the vesting schedule shown in the Grant Notice so long as you continue in Service on the vesting dates set forth on the Grant Notice, and is exercisable only as to its vested portion.
	Notwithstanding your vesting schedule, the Stock Option will become 100% vested upon your termination of Service due to your death or Disability if you have provided Services to the Company for at least one (1) year at the time your Service terminates.
Forfeiture of Unvested Stock Options / Term	Unless the termination of your Service triggers accelerated vesting of your Stock Option pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company those portions of the Stock Option that have not yet vested in the event your Service terminates for any reason.
Expiration of Vested Options After Service	If your Service terminates for any reason, other than for Cause, then the vested portion of your Stock Option will expire at the close of

2

Terminates	business at Company headquarters on the earlier of the Expiration Date or the third anniversary of your termination date. If your Service is terminated for Cause, then you shall immediately forfeit all rights to your entire Stock Option and the Stock Option shall immediately expire.
	In all events, your Stock Option will expire on the Expiration Date shown on the Grant Notice. Your Stock Option will expire earlier if your Service terminates, as described herein.
Notice of Exercise	The Stock Option may be exercised, in whole or in part, to purchase a whole number of vested shares of Stock of not less than 100 shares, unless the number of vested shares purchased is the total number available for purchase under the option, by following the procedures set forth in the Plan and in this Agreement.
	When you wish to exercise this Stock Option, you must exercise in a manner required or permitted by the Company.
	If someone else wants to exercise this Stock Option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.
Form of Payment	When you exercise your Stock Option, you must include payment of the Option Price indicated on the Grant Notice for the shares you are purchasing. Payment may be made in one (or a combination) of the following forms:
	•    Cash, your personal check, a cashier’s check, a money order or another cash equivalent acceptable to the Company.
	•    Shares of Stock which have already been owned by you for more than six months and which are surrendered to the Company. The Fair Market Value of the shares as of the effective date of the option exercise will be applied to the Option Price.
	•    To the extent a public market exists for the shares of Stock as determined by the Company, delivery (in a form prescribed or accepted by the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell shares subject to the Stock Option and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Option Price and any withholding taxes.
Evidence of Issuance	The issuance of the shares upon exercise of this Stock Option shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more share certificates. You will have no further rights with regard to a Stock Option once the share of

3

	Stock related to such Stock Option has been issued.
Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Stock Option exercise or sale of Stock acquired under this Stock Option. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the exercise of this Stock Option or sale of Stock arising from this Stock Option, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and this Stock Option do not give you the right to be retained by the Company (or any Affiliate) in any capacity. Unless otherwise specified in an employment or other written agreement between the Company (or any Affiliate) and you, the Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Stockholder Rights	You, or your estate or heirs, have no rights as a shareholder of the Company until the Stock has been issued upon exercise of your Stock Option and either a certificate evidencing your Stock has been issued or an appropriate entry has been made on the Company’s books. No adjustments are made for dividends, distributions or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.
	Your Stock Option shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference.
	Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
	This Agreement, the associated Grant Notice and the Plan constitute the entire understanding between you and the Company regarding this Stock Option. Any agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate), whether entered into before or after this Agreement’s

4

	effective date, shall supersede this Agreement with respect to its subject matter unless otherwise provided herein, provided that no such superseding shall result in a failure to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the Grant Notice and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company. For purposes of this Award, a termination of Service only occurs upon an event that would be a Separation from Service within the meaning of Section 409A.

By signing the Grant Notice, you agree to all of the terms and conditions described above and in the Plan.

5

EX-10.34.5

Exhibit 10.34.5

Grant No.:

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

     CapitalSource Inc., a Delaware corporation (the “Company”), hereby grants shares of its common stock (“Stock”) to the Grantee named below, subject to the vesting and other conditions set forth below. Additional terms and conditions of the grant are set forth in the attached Restricted Stock Agreement (the “Agreement”) and in the Company’s Third Amended and Restated Equity Incentive Plan (as amended from time to time, the “Plan”).

Name of Grantee:

Grantee’s Social Security Number:

Number of shares of Restricted Stock:

Grant Date:

Vest Base Date:

Vesting Schedule:

     By your signature below, you agree to all of the terms and conditions described herein, in the attached Agreement and in the Plan, a copy of which is available on the Company’s intranet and on DocServer, the Company’s internal document management system in the System View named Equity Incentive Plan. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this cover sheet or Agreement should appear to be inconsistent.

	Date:
Grantee
	Date:
CapitalSource Inc. Title:

Attachment

     This is not a stock certificate or a negotiable instrument.

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

Restricted Stock	This Agreement evidences an award of shares of Stock in the number set forth on the cover sheet and subject to the vesting and other conditions set forth herein, in the Plan and on the cover sheet (the “Restricted Stock”).
Transfer of Restricted Stock	Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Restricted Stock be made subject to execution, attachment or similar process. If you attempt to do any of these things, the Restricted Stock will immediately become forfeited.
Issuance and Vesting	The Company will issue your Restricted Stock in the name set forth on the cover sheet.
	Your right to the Stock under this Restricted Stock grant and this Agreement shall vest in accordance with the vesting schedule set forth on the cover sheet so long as you continue in Service on the vesting dates set forth on the cover sheet.
	Notwithstanding your vesting schedule, the Restricted Stock will become 100% vested upon your termination of Service due to your death or Disability if you have provided Services to the Company for at least one (1) year at the time your Service terminates.

Evidence of Issuance	The issuance of the Stock under the grant of Restricted Stock evidenced by this Agreement shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more Stock certificates, with any unvested Restricted Stock bearing the appropriate restrictions imposed by this Agreement. As your interest in the Restricted Stock vests, the recordation of the number of shares of Restricted Stock attributable to you will be appropriately modified if necessary. In so far as any share certificates are issued for unvested Restricted Stock, such certificates shall be held in escrow and shall contain an appropriate legend. If the Company utilizes book-entry form, appropriate restrictions will be noted in the Company records.
Forfeiture of Unvested Restricted Stock	Unless the termination of your Service triggers accelerated vesting of your Restricted Stock pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company all of the unvested shares of Restricted Stock in the event your Service terminates for any reason.
Forfeiture of Rights	If you should take actions in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof, then the Company has the right to cause an immediate forfeiture of your rights to the Restricted Stock awarded under this Agreement, and the Restricted Stock shall immediately expire.
	In such circumstances, if you have vested in Shares of Restricted Stock awarded under this Agreement during the two year period prior to your actions, you will owe the Company a cash payment (or forfeiture of

	shares) in an amount determined as follows: (1) for any such Shares that you have sold prior to receiving notice from the Company, the amount will be the proceeds received from the sale(s), and (2) for any such Shares that you still own, the amount will be the number of such Shares owned times the Fair Market Value of the Shares on the date you receive notice from the Company (provided, that the Company may require you to satisfy your payment obligations hereunder either by forfeiting and returning to the Company the Shares or any other shares or making a cash payment or a combination of these methods as determined by the Company in its sole discretion).
Leaves of Absence	For purposes of this Agreement, your Service does not terminate when you go on a bona fide employee leave of absence that was approved by the Company in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. Your Service terminates in any event when the approved leave ends unless you immediately return to active employee work.
	The Company determines, in its sole discretion, which leaves count for this purpose, and when your Service terminates for all purposes under the Plan.
Section 83(b) Election	Under Section 83 of the Internal Revenue Code of 1986, as amended (the “Code”), the difference between the purchase price paid for these shares of Stock and their Fair Market Value on the date any forfeiture restrictions applicable to such shares lapse will be reportable as ordinary income at that time. For this purpose, “forfeiture restrictions” include the forfeiture of unvested Stock described above. You may elect to be taxed at the time these shares in restricted form are acquired rather than when such shares cease to be subject to such forfeiture restrictions by filing an election under Section 83(b) of the Code with the Internal Revenue Service within thirty (30) days after the Grant Date. You will have to make a tax payment to the extent of the Fair Market Value of these shares on the Grant Date. The form for making this election is attached as Exhibit A hereto. Failure to make this filing within the thirty (30) day period will result in the recognition of ordinary income by you (in the event the Fair Market Value of the shares increases after the date of purchase) as the forfeiture restrictions lapse.
	YOU ACKNOWLEDGE THAT IT IS YOUR SOLE DECISION AND RESPONSIBILITY, AND NOT THE COMPANY’S, TO FILE A TIMELY ELECTION UNDER SECTION 83(b). YOU ALSO ACKNOWLEDGE THAT YOUR SECTION 83(b) ELECTION IS NOT REVOCABLE AND THAT YOU WILL NOT BE ABLE TO RECOUP OR RECOVER ANY TAXES PAID IN CONNECTION WITH THE SECTION 83(b) ELECTION FOR ANY REASON,

	INCLUDING ON FORFEITURE OF THE UNVESTED SHARES OF STOCK IN CONNECTION WITH ANY TERMINATION OF SERVICE WITH THE COMPANY. YOU ALSO ACKNOWLEDGE THAT THESE SHARES OF STOCK ARE STILL SUBJECT TO FORFEITURE RESTRICTIONS WHICH WILL NOT LAPSE BY VIRTUE OF YOUR SECTION 83(b) ELECTION OR PAYMENT OF TAXES IN CONNECTION WITH SUCH ELECTION AND THAT YOU WILL FORFEIT ANY UNVESTED SHARES AT THE TIME OF YOUR TERMINATION OF SERVICE EVEN THOUGH YOU HAVE ALREADY MADE A SECTION 83(b) ELECTION AND PAID THE TAXES ON SUCH UNVESTED SHARES IN CONNECTION WITH SUCH ELECTION. THE COMPANY AND ITS REPRESENTATIVES WILL NOT MAKE THIS FILING ON YOUR BEHALF. YOU ARE RELYING SOLELY ON YOUR OWN ADVISORS WITH RESPECT TO THE DECISION AS TO WHETHER OR NOT TO FILE ANY 83(b) ELECTION, INCLUDING WITH RESPECT TO THE RISKS INVOLVED IF THE FAIR MARKET VALUE OF THESE SHARES OF STOCK FALLS AFTER THE GRANT DATE.
Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting or receipt of the Restricted Stock. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting or receipt of Stock arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company (or any Affiliate) in any capacity. Unless otherwise specified in an employment or other written agreement between the Company (or any Affiliate) and you, the Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Stockholder Rights	You will be entitled to receive, upon the Company’s payment of a cash dividend on outstanding shares of Stock, an amount of cash, Restricted Stock or Restricted Stock Units (as determined by the Company from time to time) equal to the per-share dividend paid on the shares of Restricted Stock that you hold as of the record date for such dividend, which shall be subject to the same vesting, forfeiture and other conditions as the associated Restricted Stock. No adjustments are made for dividends, distributions or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book

	entry is made), except as described in the Plan.
	Your grant shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Legends	If and to the extent that the shares of Stock are represented by certificates rather than book entry, all certificates representing the Stock issued under this grant shall, where applicable, have endorsed thereon the following legends:
	“THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN VESTING, FORFEITURE AND OTHER RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE.”
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference.
	Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
	This Agreement, the associated cover sheet, and the Plan constitute the entire understanding between you and the Company regarding this grant. Any agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate), whether entered into before or after this Agreement’s effective date, shall supersede this Agreement with respect to its subject matter unless otherwise provided herein, provided that no such superseding shall result in a failure to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the cover sheet hereto and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to

	facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company. For purposes of this Award, a termination of Service only occurs upon an event that would be a Separation from Service within the meaning of Section 409A.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan.

EX-10.35.4

Exhibit 10.35.4

Grant No.:

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT
FOR DIRECTORS

     CapitalSource Inc., a Delaware corporation (the “Company”), hereby grants shares of its common stock (“Stock”) to the Grantee named below, subject to the vesting and other conditions set forth below. Additional terms and conditions of the grant are set forth in the attached Restricted Stock Agreement (the “Agreement”) and in the Company’s Third Amended and Restated Equity Incentive Plan (as amended from time to time, the “Plan”).

Name of Grantee:

Grantee’s Social Security Number:

Number of shares of Restricted Stock:

Grant Date:

Vest Base Date:

Vesting Schedule:

     By your signature below, you agree to all of the terms and conditions described herein, in the attached Agreement and in the Plan, a copy of which is also attached. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this cover sheet or Agreement should appear to be inconsistent.

	Date:
Grantee
	Date:
CapitalSource Inc.
Title:

Attachment

     This is not a stock certificate or a negotiable instrument.

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT
FOR DIRECTORS

Restricted Stock	This Agreement evidences an award of shares of Stock in the number set forth on the cover sheet and subject to the vesting and other conditions set forth herein, in the Plan and on the cover sheet (the “Restricted Stock”).
Transfer of Restricted Stock	Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Restricted Stock be made subject to execution, attachment or similar process. If you attempt to do any of these things, the Restricted Stock will immediately become forfeited.
Issuance and Vesting	The Company will issue your Restricted Stock in the name set forth on the cover sheet.
	Your right to the Stock under this Restricted Stock grant and this Agreement shall vest in accordance with the vesting schedule set forth on the cover sheet so long as you continue in Service on the vesting dates set forth on the cover sheet.
	Notwithstanding your vesting schedule, the Restricted Stock will become 100% vested upon your termination of Service due to your death or Disability if you have provided Services to the Company for at least one (1) year at the time your Service terminates.

Evidence of Issuance	The issuance of the Stock under the grant of Restricted Stock evidenced by this Agreement shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more Stock certificates, with any unvested Restricted Stock bearing the appropriate restrictions imposed by this Agreement. As your interest in the Restricted Stock vests, the recordation of the number of shares of Restricted Stock attributable to you will be appropriately modified if necessary. In so far as any share certificates are issued for unvested Restricted Stock, such certificates shall be held in escrow and shall contain an appropriate legend. If the Company utilizes book-entry form, appropriate restrictions will be noted in the Company records.
Forfeiture of Unvested Restricted Stock	Unless the termination of your Service triggers accelerated vesting of your Restricted Stock pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company all of the unvested shares of Restricted Stock in the event your Service terminates for any reason.
Section 83(b) Election	Under Section 83 of the Internal Revenue Code of 1986, as amended (the “Code”), the difference between the purchase price paid for these shares of Stock and their Fair Market Value on the date any forfeiture restrictions applicable to such shares lapse will be reportable as ordinary income at that time. For this purpose, "forfeiture restrictions” include the forfeiture of unvested Stock described above. You may elect to be taxed at the time these shares in restricted form are acquired rather than when such shares cease to be subject to such forfeiture restrictions by filing an election under Section 83(b) of the Code with the Internal Revenue Service within thirty (30) days after the Grant Date. You will have to make a tax payment to the extent of the Fair Market Value of these shares on the Grant Date. The form for making this election is attached as Exhibit A hereto. Failure to make this filing within the thirty (30) day period will result in the recognition of ordinary income by you (in the event the Fair Market Value of the shares increases after the date of purchase) as the forfeiture restrictions lapse.
	YOU ACKNOWLEDGE THAT IT IS YOUR SOLE DECISION AND RESPONSIBILITY, AND NOT THE COMPANY’S, TO FILE A TIMELY ELECTION UNDER SECTION 83(b). YOU ALSO ACKNOWLEDGE THAT YOUR SECTION 83(b) ELECTION IS NOT REVOCABLE AND THAT YOU WILL NOT BE ABLE TO RECOUP OR RECOVER ANY TAXES PAID IN CONNECTION

	WITH THE SECTION 83(b) ELECTION FOR ANY REASON, INCLUDING ON FORFEITURE OF THE UNVESTED SHARES OF STOCK IN CONNECTION WITH ANY TERMINATION OF SERVICE WITH THE COMPANY. YOU ALSO ACKNOWLEDGE THAT THESE SHARES OF STOCK ARE STILL SUBJECT TO FORFEITURE RESTRICTIONS WHICH WILL NOT LAPSE BY VIRTUE OF YOUR SECTION 83(b) ELECTION OR PAYMENT OF TAXES IN CONNECTION WITH SUCH ELECTION AND THAT YOU WILL FORFEIT ANY UNVESTED SHARES AT THE TIME OF YOUR TERMINATION OF SERVICE EVEN THOUGH YOU HAVE ALREADY MADE A SECTION 83(b) ELECTION AND PAID THE TAXES ON SUCH UNVESTED SHARES IN CONNECTION WITH SUCH ELECTION. THE COMPANY AND ITS REPRESENTATIVES WILL NOT MAKE THIS FILING ON YOUR BEHALF. YOU ARE RELYING SOLELY ON YOUR OWN ADVISORS WITH RESPECT TO THE DECISION AS TO WHETHER OR NOT TO FILE ANY 83(b) ELECTION, INCLUDING WITH RESPECT TO THE RISKS INVOLVED IF THE FAIR MARKET VALUE OF THESE SHARES OF STOCK FALLS AFTER THE GRANT DATE.
Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting or receipt of the Restricted Stock. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting or receipt of Stock arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company (or any Affiliate) in any capacity. Unless otherwise specified in an employment or other written agreement between the Company (or any Affiliate) and you, the Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Stockholder Rights	You will be entitled to receive, upon the Company’s payment of a cash dividend on outstanding shares of Stock, an amount of cash, Restricted Stock or Restricted Stock Units (as determined by the Company from time to time) equal to the per-share dividend paid on the shares of Restricted Stock that you hold as of the record date for such dividend, which shall be subject to the same vesting, forfeiture and other conditions as the associated Restricted Stock. No adjustments are made for dividends, distributions or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book

	entry is made), except as described in the Plan.
	Your grant shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Legends	If and to the extent that the shares of Stock are represented by certificates rather than book entry, all certificates representing the Stock issued under this grant shall, where applicable, have endorsed thereon the following legends:
	“THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN VESTING, FORFEITURE AND OTHER RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE.”
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference.
	Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
	This Agreement, the associated cover sheet, and the Plan constitute the entire understanding between you and the Company regarding this grant. Any agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate), whether entered into before or after this Agreement’s effective date, shall supersede this Agreement with respect to its subject matter unless otherwise provided herein, provided that no such superseding shall result in a failure to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the cover sheet hereto and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to

	facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company. For purposes of this Award, a termination of Service only occurs upon an event that would be a Separation from Service within the meaning of Section 409A.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan.

EX-10.36.4

Exhibit 10.36.4

Grant No.:

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

     CapitalSource Inc., a Delaware corporation (the “Company”), hereby grants restricted stock units (“Restricted Stock Units”) for shares of its common stock (“Stock”) to the Grantee named below, subject to the vesting and other conditions set forth below. Additional terms and conditions of the grant are set forth in the attached Restricted Unit Agreement (the “Agreement”) and in the Company’s Third Amended and Restated Equity Incentive Plan (as amended from time to time, the “Plan”).

Name of Grantee:

Grantee’s Social Security Number:

Number of Restricted Stock Units:

Grant Date:

Vest Base Date:

Vesting Schedule:

     By your signature below, you agree to all of the terms and conditions described herein, in the attached Agreement and in the Plan, a copy of which is available on the Company’s intranet and on DocServer, the Company’s internal document management system in the System View named Equity Incentive Plan. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this cover sheet or Agreement should appear to be inconsistent.

	Date:
Grantee
	Date:
CapitalSource Inc.

Title:

Attachment

     This is not a stock certificate or a negotiable instrument.

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

Restricted Stock Units	This Agreement evidences an award of restricted stock units in the number set forth on the cover sheet and subject to the vesting and other conditions set forth herein, in the Plan and on the cover sheet (the “Restricted Stock Units”).
Transfer of Restricted Stock Units	Restricted Stock Units may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Restricted Stock Units be made subject to execution, attachment or similar process. If you attempt to do any of these things, the Restricted Stock Unit will immediately become forfeited.
Vesting	The Company will issue your Restricted Stock Units in the name set forth on the cover sheet.
	Your Restricted Stock Units shall vest in accordance with the vesting schedule set forth on the cover sheet so long as you continue in Service on the vesting dates set forth on the cover sheet.
	Notwithstanding your vesting schedule, the Restricted Stock Units will become 100% vested upon your termination of Service due to your death or Disability if you have provided Services to the Company for at least one (1) year at the time your Service terminates.

Delivery	As your Restricted Stock Units vest, the Company will issue the shares of Stock to which the then vested Restricted Stock Units relate.
Evidence of Issuance	The issuance of the Stock under the grant of Restricted Stock Units evidenced by this Agreement shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more Stock certificates. You will have no further rights with regard to a Restricted Stock Unit once the share of Stock related to such Restricted Stock Unit has been issued.
Forfeiture of Unvested Restricted Stock Units	Unless the termination of your Service triggers accelerated vesting of your Restricted Stock Units pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company all of the unvested shares of the Restricted Stock Units in the event your Service terminates for any reason.
Forfeiture of Rights	If you should take actions in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof, the Company has the right to cause an immediate forfeiture of your rights to these Restricted Stock Units awarded under this Agreement, and these Restricted Stock Units shall immediately expire.
	In such circumstances, if you have received Shares in connection with any of these Restricted Stock Units or have vested in any of these Restricted Stock Units during the two year period prior to your actions, you will owe the Company a cash payment (or forfeiture of shares or Restricted Stock Units, as applicable) in an amount determined as follows: (1) for any such Shares that you have sold prior to receiving notice from the Company, the amount will be the proceeds received

	from the sale(s), and (2) for any such Shares or such vested Restricted Stock Units that you still own, the amount will be the number of such Shares or such vested Restricted Stock Units owned times the Fair Market Value of the Shares on the date you receive notice from the Company (provided, that the Company may require you to satisfy your payment obligations hereunder either by forfeiting and returning to the Company such Shares or such vested Restricted Stock Units or any other Restricted Stock Units or shares or making a cash payment or a combination of these methods as determined by the Company in its sole discretion).
Leaves of Absence	For purposes of this Agreement, your Service does not terminate when you go on a bona fide employee leave of absence that was approved by the Company in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. Your Service terminates in any event when the approved leave ends unless you immediately return to active employee work.
	The Company determines, in its sole discretion, which leaves count for this purpose, and when your Service terminates for all purposes under the Plan.
Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting or receipt of the Restricted Stock Units or the Stock. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting of the Restricted Stock Units or receipt of Stock arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company (or any Affiliate) in any capacity. Unless otherwise specified in an employment or other written agreement between the Company (or any Affiliate) and you, the Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Stockholder Rights	You, or your estate or heirs, do not have any of the rights of a shareholder with respect to any vested or unvested Restricted Stock Units until the Stock has been issued to you and either a certificate evidencing your Stock has been issued or an appropriate entry has been made on the Company’s books.
	You will, however, be entitled to receive, upon the Company’s

	payment of a cash dividend on outstanding shares of Stock, an amount of cash, or Restricted Stock Units (as determined by the Company from time to time) equal to the per-share dividend paid on the shares underlying the Restricted Stock Units that you hold as of the record date for such dividend, which shall be subject to the same vesting, delivery, forfeiture and other conditions as the associated Restricted Stock Units. No adjustments are made for dividends, distributions or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.
	Your grant shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan	The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
	This Agreement, the associated cover sheet and the Plan constitute the entire understanding between you and the Company regarding this grant. Any agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate), whether entered into before or after this Agreement’s effective date, shall supersede this Agreement with respect to its subject matter, unless otherwise provided herein, provided that no such superseding shall result in a failure to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the cover sheet hereto and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that

the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company. For purposes of this Award, a termination of Service only occurs upon an event that would be a Separation from Service within the meaning of Section 409A.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan.

EX-10.37.3

Exhibit 10.37.3

Grant No.:

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT
FOR DIRECTORS

     CapitalSource Inc., a Delaware corporation (the “Company”), hereby grants restricted stock units (“Restricted Stock Units”) for shares of its common stock (“Stock”) to the Grantee named below, subject to the vesting and other conditions set forth below. Additional terms and conditions of the grant are set forth in the attached Restricted Unit Agreement (the “Agreement”) and in the Company’s Third Amended and Restated Equity Incentive Plan (as amended from time to time, the “Plan”).

Name of Grantee:

Grantee’s Social Security Number:

Number of Restricted Stock Units:

Grant Date:

Vest Base Date:

Vesting Schedule:

     By your signature below, you agree to all of the terms and conditions described herein, in the attached Agreement and in the Plan, a copy of which is also attached. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this cover sheet or Agreement should appear to be inconsistent.

	Date:
Grantee
	Date:
CapitalSource Inc.
Title:
Attachment

     This is not a stock certificate or a negotiable instrument.

CAPITALSOURCE INC.
THIRD AMENDED AND RESTATED EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT
FOR DIRECTORS

Restricted Stock Units	This Agreement evidences an award of restricted stock units in the number set forth on the cover sheet and subject to the vesting and other conditions set forth herein, in the Plan and on the cover sheet (the “Restricted Stock Units”).
Transfer of Restricted Stock Units	Restricted Stock Units may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Restricted Stock Units be made subject to execution, attachment or similar process. If you attempt to do any of these things, the Restricted Stock Unit will immediately become forfeited.
Vesting	The Company will issue your Restricted Stock Units in the name set forth on the cover sheet.
	Your Restricted Stock Units shall vest in accordance with the vesting schedule set forth on the cover sheet so long as you continue in Service on the vesting dates set forth on the cover sheet.
	Notwithstanding your vesting schedule, your Restricted Stock Units will become 100% vested upon your termination of Service due to your death or Disability if you have provided Services to the Company for at least one (1) year at the time your Service terminates.

Delivery	Upon your termination of Service or such other time as you have properly elected under the CapitalSource Inc. Amended and Restated Deferred Compensation Plan (as amended from time to time, the “Deferred Compensation Plan”), the Company will issue the shares of Stock to which the then vested Restricted Stock Units relate.
Evidence of Issuance	The issuance of the Stock under the grant of Restricted Stock Units evidenced by this Agreement shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more Stock certificates. You will have no further rights with regard to a Restricted Stock Unit once the share of Stock related to such Restricted Stock Unit has been issued.
Forfeiture of Unvested Restricted Stock Units	Unless the termination of your Service triggers accelerated vesting of your Restricted Stock Units pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company (or any Affiliate) and you, you will automatically forfeit to the Company all of the unvested Restricted Stock Units in the event your Service terminates for any reason.
Withholding Taxes	You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting or receipt of the Restricted Stock Units or the Stock. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting of the Restricted Stock Units or receipt of Stock arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested shares of Stock otherwise deliverable under this Agreement).
Retention Rights	This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company (or any Affiliate) in any capacity. Unless otherwise specified in an employment or other written agreement between the Company (or any Affiliate) and you, the Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Stockholder Rights	You, or your estate or heirs, do not have any of the rights of a shareholder with respect to any vested or unvested Restricted Stock Units until the Stock has been issued to you and either a certificate evidencing your Stock has been issued or an appropriate entry has been

	made on the Company’s books.
	You will, however, be entitled to receive, upon the Company’s payment of a cash dividend on outstanding shares of Stock, an amount of cash or Restricted Stock Units (as determined by the Company from time to time) equal to the per-share dividend paid on the shares underlying the Restricted Stock Units that you hold as of the record date for such dividend, which shall be subject to the same vesting, delivery, forfeiture and other conditions as the associated Restricted Stock Units. No adjustments are made for dividends, distributions or other rights if the applicable record date occurs before your certificate is issued (or an appropriate book entry is made), except as described in the Plan.
	Your grant shall be subject to the terms of any applicable agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
The Plan/Deferred Compensation Plan	The text of the Plan is incorporated in this Agreement by reference.
	Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
	Your Restricted Stock Units and this Agreement are also subject to the terms of the Deferred Compensation Plan.
	This Agreement, the associated cover sheet, the Deferred Compensation Plan and the Plan constitute the entire understanding between you and the Company regarding this grant. Any agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition and/or severance agreement between you and the Company (or any Affiliate), whether entered into before or after this Agreement’s effective date, shall supersede this Agreement with respect to its subject matter unless otherwise provided herein, provided that no such superseding shall result in a failure to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement or the cover sheet hereto and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other

	information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting this grant, you give explicit consent to the Company to process any such personal data.
Code Section 409A	It is intended that this Award comply with Section 409A of the Code (“Section 409A”) or an exemption to Section 409A. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company. For purposes of this Award, a termination of Service only occurs upon an event that would be a Separation from Service within the meaning of Section 409A.

By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above, in the Plan and the Deferred Compensation Plan.

EX-10.40

Exhibit 10.40

CapitalSource Bank
Compensation for Non-Employee Directors

     The compensation program for directors of CapitalSource Bank (the “Bank”) who are not employees of the Bank, CapitalSource Inc. (the “Company”) or any of their respective affiliates (“Non-employee Directors”) consists of an annual retainer and an initial long-term equity award of the Company’s common stock. To the extent any of the compensation is payable in the form of the Company’s equity, the grant of such equity is subject to appropriate action by the Company’s Board of Directors or a committee thereof.

     Annual Retainer

• For service as Bank directors, including on committees of the Bank Board and attendance at Board and committee meetings, the Bank pays Non-employee Directors an annual retainer of $75,000 payable in four quarterly installments of $18,750 on the last business day of each calendar quarter for service relating to such completed calendar quarter.

• With respect to directors who begin service in the middle of a calendar quarter, the retainer for that quarter will be pro-rated based on the number of days from the time service begins to the end of the calendar quarter.

• Directors may elect to receive retainer payments in whole or in part in the form of cash or fully vested shares of the Company’s common stock and/or immediately exercisable options to purchase shares of the Company’s common stock.

• Stock is valued based on the closing market price of the Company’s common stock on the grant date, and options are valued in an amount equal to five times the number of shares that would have been payable had the director elected to receive payment in the form of the Company’s common stock.

• Options have a ten-year term and an exercise price equal to the closing market price of the Company’s common stock on the grant date.

• The grant date for retainer payments made in the form of equity will be the last trading day of each quarter.

     Long-Term Equity Award

• Each Non-employee Director joining the Board of Directors receives a one-time long-term equity award of $50,000, payable, at the election of each such director, in whole or in part, in restricted shares of the Company’s common stock and/or stock options calculated in the same manner as described above.

• Unlike retainer payments, restricted stock and options granted as long-term equity awards will vest or become exercisable, as applicable, in three equal installments on the first, second and third anniversaries of the director’s first day of service as a Bank director if the director is still serving as a Bank director on such anniversary dates.

• The grant date for long-term equity awards will be the last trading day of the quarter during which the joining director begins his or her service as a Bank director (e.g., last trading day of the month of December for service beginning at any time between October 1 and December 31).

• Cash dividends, if any, paid during the vesting periods on unvested restricted stock are credited in the form of additional shares of unvested restricted stock with the same vesting dates as the restricted stock to which they relate.

• Unexercised options do not get any cash dividends and are not adjusted in any way for the payment of cash dividends. Options have a ten-year term and an exercise price equal to the closing market price of the Company’s common stock on the grant date.

     Deferring Compensation

• Pursuant to CapitalSource Inc.’s Amended and Restated Deferred Compensation Plan, as amended from time to time (the “DCP”) and applicable rules and regulations under the Internal Revenue Code, Non-employee Directors may be eligible to defer retainer payments and long-term equity awards into restricted stock units. A restricted stock unit is an unfunded right to receive one share of the Company’s common stock at a future date.

• Restricted stock units will be vested or unvested to the extent that the payment or award that is being deferred into restricted stock units would have been vested or unvested.

• Restricted stock units are credited with dividend equivalents in the form of additional restricted stock units that have the same vesting and conversion features as the restricted stock units to which they relate.

• Restricted stock units are payable in the form of the Company’s common stock at the earlier of a future date selected by the director (which must be no earlier than the later of (A) the year following the year (i) for which compensation has been deferred if no vesting is applicable, or (ii) in which the restricted stock units vest, and (B) the termination of the director’s service as a Bank director).

     Form and Election of Non-Cash Awards

• All non-cash awards (i.e., payments in the forms of the Company’s common stock, options or restricted stock units) will be evidenced by the form agreements adopted from time to time by the CapitalSource Inc. Board of Directors or a committee thereof, and shall be subject in all respects to the terms of the Company’s Third Amended and Restated Equity Incentive Plan and the DCP, as applicable, in each case as amended from time to time.

• All elections of the form of payment of retainers and long-term equity awards must be made prior to each calendar year in which the compensation is earned. Each director’s election as to the form of payment in effect as of December 31 of each year shall be effective for all compensation earned by such director during the next calendar year. There may be certain exceptions to these rules for directors who commence service in the middle of a calendar year.

     Expenses

• No Bank directors (whether they are Non-employee Directors or otherwise) shall receive any perquisites or above-market nonqualified deferred compensation plan earnings.

• Directors are reimbursed for their reasonable expenses incurred in connection with performing their duties as directors of the Bank, i.e., attending Board and committee meetings, attending Bank-approved educational seminars, and other activities approved by the Bank.

EX-10.48

Exhibit 10.48

EMPLOYMENT AGREEMENT

     This EMPLOYMENT AGREEMENT (the “Agreement”) is entered into as of this 25th day of July, 2008 (the “Effective Date”), by and between CapitalSource Bank (the “Employer”) and Douglas Hayes Lowrey (the “Executive”).

     WHEREAS, the Employer desires to employ Executive as Chief Executive Officer for the Employer; and

     WHEREAS, on or prior to the Effective Date, CapitalSource TRS Inc. purchased certain bank assets and deposit liabilities from Fremont Investment and Loan to be used in the operation of the Employer as an industrial bank in California;

     WHEREAS, the Employer and the Executive desire to enter into this Agreement to set out the terms and conditions for the employment relationship of the Executive with the Employer.

     NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows:

     1. Employment Agreement. On the terms and conditions set forth in this Agreement, the Employer agrees to employ the Executive and the Executive agrees to be employed by the Employer. Terms used herein with initial capitalization not otherwise defined are defined in Section 23.

     2. Term. The term of employment under this Agreement shall be for a three-year period commencing on the Effective Date (the “Initial Term”). The term of employment shall be automatically extended for an additional consecutive 12-month period (the “Extended Term”) on the third anniversary of the Effective Date and each subsequent anniversary of the Effective Date unless and until the Employer or the Executive provides written notice to the other party not less than sixty (60) days before such anniversary date that such party is electing not to extend the term of employment under this Agreement (“Non-Renewal”). Notwithstanding anything to the contrary in this Section 2, either the Employer or the Executive may terminate the Executive’s employment at any time in accordance with Section 9. The period of such Initial Term and any Extended Terms through the Date of Termination is referred to as the “Employment Period.”

     3. Position and Responsibilities.

          (a) Position. The Executive shall serve as Chief Executive Officer, reporting to the Employer’s Board of Directors. The Executive’s responsibilities shall include those set forth below and may include such other duties as designated by the Employer. Employee’s principal responsibilities and duties as CEO shall include the following:

               (i) Pursuing superior financial performance of the Employer;

               (ii) Establishing a strong culture for ethical business practice and compliance with appropriate laws and regulations;

               (iii) Developing and directing strategies, goals and objectives consistent with meeting the needs of customers, shareholders, communities, regulators and employees;

               (iv) Directing the development and operation of the Employer to ensure sound future growth, and communicating the Employer’s strategic goals to key constituencies, including the Board of Directors, shareholders, employees and regulators;

               (v) Overseeing the development and implementation of the Employer’s strategic and business plans;

               (vi) Advising and reporting to the Board of Directors on the Employer’s progress against strategic and business goals;

               (vii) Ensuring that the Employer has an appropriate body of policies and standards;

               (viii) Reviewing and approving key credit exceptions consistent with the Employer’s credit policy;

               (ix) Selecting senior executives for the Employer and establishing an organizational structure and management processes capable of meeting the Employer’s objectives;

               (x) Setting goals and objectives and evaluating performance of senior executives; and

               (xi) Fostering and maintaining effective regulatory relationships.

          (b) Best Efforts. The Executive shall devote the Executive’s reasonable best efforts and full business time to the performance of the Executive’s duties hereunder and the advancement of the business and affairs of the Employer and the Company Affiliates; provided that the Executive shall be entitled to serve as a member of the board of directors (or board of managers or trustee, as appropriate) of (i) a reasonable number of civic, charitable, educational, religious, public interest or public service non-profit boards, (ii) the Federal Home Loan Bank of San Francisco, the University of LaVerne, Three Sixty Advisory Group, LLC, and Pasadena Playhouse State Theatre of California, and (iii) such other for-profit boards for which Executive obtains consent from the Chairman of the Board of Directors of Employer, in each case to the extent such activities do not materially interfere with the performance of the Executive’s duties and responsibilities hereunder.

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     4. Place of Performance. During the Employment Period, the Executive shall be based primarily at an office of the Employer designated by the Employer (currently Brea, California but expected to move to another location in the downtown Los Angeles region), except for reasonable travel on the Employer’s business consistent with the Executive’s position.

     5. Compliance with Employer’s Policies. The Executive agrees to enter into or acknowledge the Employer’s handbook and standard agreements on confidentiality, insider trading, corporate governance and other similar agreements of the Employer within ten (10) days of the Effective Date, and to observe and comply with all policies and rules of the Employer unless such compliance is inconsistent with the terms of this Agreement.

     6. Compensation; Benefits; Restricted Stock Grant.

          (a) Base Salary. During the Employment Period, the Employer shall pay to the Executive a base salary (the “Base Salary”), and the annualized rate shall be at least $450,000. The Base Salary shall be reviewed by the Employer no less frequently than annually and shall be increased in the discretion of the Employer, and any such increased Base Salary shall constitute the “Base Salary” for purposes of this Agreement. The Base Salary shall be paid in substantially equal installments in accordance with the Employer’s regular payroll procedures.

          (b) Annual Bonus. For each calendar year that ends during the Employment Period (including calendar year 2008), the Executive shall be eligible for an annual cash bonus in an amount determined by and in the sole discretion of the Employer based upon such factors as the Employer’s overall performance and the performance of the Executive. The target bonus amount shall be 100% of the Executive’s Base Salary each year. The Executive must be employed by the Employer on December 31 of the calendar year to be eligible for an annual bonus for that particular calendar year. The annual bonus, if any, shall be paid no later than March 15 in the calendar year following the calendar year in which the annual bonus is earned.

          (c) Benefits. During the Employment Period, the Executive shall be eligible for perquisites on the terms as such perquisites are made available to the Employer’s executives. In addition, during the Employment Period and subject to the terms and conditions of such plans, the Executive shall be eligible to participate in the medical insurance and other welfare benefits plans that the Employer, in its sole discretion, may make available to its executives. Nothing in this Agreement shall affect the Employer’s right to change insurance carriers and to adopt, amend, terminate or modify such plans and arrangements at any time. Executive agrees that any paid time off taken during his employment shall be subject to and take into account applicable banking laws and regulations, with no more than two (2) weeks scheduled consecutively.

          (d) Restricted Stock Grant. In consideration for entering into this Agreement. and granted in accordance with the corporate approvals obtained from the Compensation Committee of CapitalSource Inc., the Executive shall be granted 65,000 shares of CapitalSource Inc.’s common stock, par value $0.01 (“Stock”), 20% of which shall vest and become freely transferable on the first anniversary of the Effective Date and on each of the second, third, fourth, and fifth anniversaries of the Effective Date. Unvested shares of Stock granted under this Section 6(d) or otherwise granted to the Executive shall be forfeited by the Executive if the

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Executive’s employment with the Employer is terminated by the Executive without Good Reason or is terminated by the Employer for Cause, in each case, before the date on which such shares of Stock would otherwise vest hereunder. Upon (i) the termination of Executive’s employment with the Employer for any other reason (including death or Disability), or (ii) the Change in Control of the Employer, any unvested shares of Stock granted under Section 6(d) or otherwise granted to the Executive shall immediately vest. Except as expressly set forth in this Agreement, including, without limitation, provisions of Section 9(b), the grant of Stock contemplated by this Section 6(d) shall be governed by and be subject to the terms and conditions set forth in the CapitalSource Inc. Third Amended and Restated Equity Incentive Plan, as amended from time to time (the “Plan”), and shall be documented and evidenced by an award agreement under the Plan to be executed by CapitalSource Inc. and the Executive.

          (e) Withholding: Employer Compensation Plans. All compensation provided to the Executive pursuant to Section 6 shall be (1) in accordance with the Employer’s compensation plans and policies, and (2) less applicable deductions and withholding as determined by the Employer.

     7. Expenses. The Executive is authorized to incur reasonable and necessary expenses in the performance of the Executive’s duties hereunder. The Employer shall reimburse the Executive for all such expenses reasonably and actually incurred in accordance with policies which may be adopted from time to time by the Employer upon periodic presentation by the Executive of an itemized account, including reasonable substantiation, of such expenses.

     8. Confidentiality, Non-Disclosure and Non-Solicitation Agreement. The Employer and the Executive acknowledge and agree that during the Executive’s employment with the Employer, the Executive has had access to, will have access to, and may assist in developing Company Confidential Information. The Employer and the Executive further acknowledge and agree that the Executive will occupy a position of trust and confidence with respect to the Employer’s affairs and business and the affairs and business of the Company Affiliates. The Executive agrees that the following obligations are necessary to preserve the confidential and proprietary nature of Company Confidential Information and to protect the Employer and the Company Affiliates against harmful solicitation of employees and customers and other actions by the Executive that would result in serious adverse consequences for the Employer and the Company Affiliates:

          (a) Non-Disclosure. During and after the Executive’s employment with the Employer, the Executive will not disclose or transfer to any person or entity or use for the Executive’s or any other person’s or entity’s benefit any Company Confidential Information other than as authorized in writing by the Employer or within the scope of the Executive’s duties with the Employer. Anything herein to the contrary notwithstanding, the provisions of this Section 8(a) shall not apply (1) when disclosure is required by law or by any court, arbitrator, or administrative or legislative body (including any committee thereof) with actual or apparent jurisdiction to order the Executive to disclose or make accessible any information; or (2) when disclosure is necessary to enforce this Agreement. In the event the Executive is required or compelled by legal process to disclose any Company Confidential Information, he will first give fifteen (15) days advance written notice (or, in the event that it is not possible to provide fifteen

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(15) days written notice, as much written notice as is possible under the circumstances) to the Employer so that the Employer may present and preserve any objections that it may have to such disclosure and/or seek an appropriate protective order.

          (b) Materials. The Executive will not remove any Company Confidential Information or any other property of the Employer or any Company Affiliate from the Employer’s premises or make copies of such materials except for normal and customary use in the Employer’s business. The Employer acknowledges that the Executive, in the ordinary course of the Executive’s duties, may use and store Company Confidential Information at home and other locations. The Executive will return to the Employer or destroy (at Employer’s election) all Company Confidential Information and copies thereof and all other property of the Employer or any Company Affiliate at any time upon the request of the Employer and in any event immediately upon termination of the Executive’s employment for any reason. Anything to the contrary notwithstanding, nothing in Section 8(b) shall prevent the Executive from retaining papers and other materials of a personal nature, including information relating to compensation or reimbursement of expenses, information that is necessary for tax purposes, and copies of plans, programs and agreements relating to the Executive’s employment.

          (c) No Solicitation of Employees. During the Non-Solicit Period, the Executive shall not anywhere, directly or indirectly, other than as an employee of and for the benefit of the Employer, solicit, entice, persuade or induce any individual who is employed by the Employer or a Company Affiliate (or who was so employed within six (6) months prior to the Executive’s action) (collectively, “Company’s Employees”) to: (1) terminate or refrain from continuing such employment, or (2) become employed by or enter into contractual relations with any individual or entity other than the Employer or a Company Affiliate.

          (d) Non-Solicitation. During the Non-Solicit Period, the Executive shall not anywhere in the United States, directly or indirectly, other than as an employee of and for the benefit of the Employer:

               (i) solicit or encourage any client or customer of the Employer or a Company Affiliate, or any person or entity who was a client or customer of the Employer or a Company Affiliate within six (6) months prior to the Executive’s action, to: (A) terminate, reduce or alter in a manner adverse to the Employer or the Company Affiliate any existing business arrangements with it or them, or (B) transfer existing business from the Employer or the Company Affiliate to any other person or entity;

               (ii) own an interest in any entity that competes with the Employer by engaging in any business engaged in by the Employer; provided, however, that the Executive may own, as a passive investor, securities of any such entity that has outstanding publicly traded securities so long as the Executive’s direct holdings in any such entity shall not in the aggregate constitute more than 5% of the voting power of such entity.

For purposes of this Section 8(d), a “client or customer” shall include any actual borrower of the Employer (as set forth in the Employer’s asset management or substantially similar successor or related technology system such as CAM) and any other entity in the “term sheet issued,” “term

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sheet executed” or “credit committee approved” categories listed in the Employer’s deal tracking or substantially similar successor or related system such as DealTracker. The Executive agrees that, before providing services, whether as an employee or consultant, to any entity during the Non-Solicit Period, the Executive will provide a copy of this Agreement to such entity, and such entity shall acknowledge to the Employer in writing that it has read this Agreement.

          (e) Ownership on Intellectual Property or Intangibles. All Company Confidential Information, all work performed, and all other ideas, discoveries, inventions, designs, processes, methods and improvements, conceived, developed, or otherwise made by Executive, during his employment with the Employer, alone or with others, and in any way relating to the Employer’s and/or any of its affiliates’ present or planned businesses or products, whether or not patentable or subject to copyright protection and whether or not reduced to tangible form or reduced to practice during the period of Executive’s employment with the Employer (“Developments”) shall be the sole property of the Employer, provided, however, that such Developments do not include any invention or development that qualifies fully under the provisions of California Labor Code Section 2870 (the text of which is attached hereto as Exhibit A). Executive further agrees to disclose all Developments promptly, fully and in writing to the Employer promptly after development of the same, and at any time upon request. Executive agrees to, and hereby does assign to the Employer all of Executive’s right, title and interest throughout the world in and to all Developments. Executive agrees that each of the Developments shall constitute a “work made for hire,” as defined in 17 U.S .C. § 101, and hereby irrevocably assigns to the Employer all copyrights, patents and any other proprietary rights Executive may have in any Developments without any obligation on the part of the Employer to pay royalties or any other consideration to Executive in respect of such Developments. Executive hereby grants to the Employer an irrevocable power of attorney to perform any and all acts and execute any and all documents and instruments on behalf of Executive as the Employer may deem appropriate in order to perfect or enforce the rights defined in this Section 8(e). Executive agrees to assist the Employer (without charge, but at no cost to Executive) to obtain and maintain for itself such rights, and agrees that such obligation to assist the Employer shall continue after the termination of this Agreement. The provisions of this Section 8(e) are in addition to any other written agreements on this subject that Executive may have with the Employer and/or any of its affiliates, and are not meant to and do not excuse any additional obligations that Executive may have under such agreements.

          (f) Publicity. During the Employment Period, the Executive hereby grants to the Employer the right to use, in a reasonable and appropriate manner, the Executive’s name and likeness, without additional consideration, on, in and in connection with technical, marketing or disclosure materials, or any combination thereof, published by or for the Employer or any Company Affiliate.

          (g) Non-Disparagement. After the Executive’s employment with the Employer, the Executive will not make to any person or entity, including without limitation the media, any false, disparaging, or derogatory statements or comments about the Employer, any Company Affiliate, its or their business affairs, or any of its or their current or former employees.

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          (h) Acknowledgment. The Executive acknowledges that the covenants in Section 8 have a unique, very substantial and immeasurable value to the Employer, that the Executive has sufficient assets and skills to provide a livelihood for the Executive and the Executive’s family for the full duration of these covenants, and that, as a result of the foregoing, if the Executive breaches any such covenant, monetary damages would be an insufficient remedy for the Employer and equitable enforcement of such covenant would be proper.

          (i) Enforcement. The Executive acknowledges that in the event of any breach or threatened breach by the Executive of any of the covenants in Section 8, the business interests of the Employer will be irreparably injured, the full extent of the damages to the Employer will be impossible to ascertain, monetary damages may not be an adequate remedy for the Employer, and the Employer will be entitled to enforce such covenants by temporary, preliminary, or permanent injunctive relief or other equitable relief, without the necessity of posting bond or security, which the Executive expressly waives.

          (j) Modification; Severability. If any of the restrictions contained in Section 8 are determined by any court of competent jurisdiction or other adjudicator to be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, then the Executive and the Employer agree that the court or adjudicator shall interpret and modify such restriction(s) to be effective for the maximum period of time for which it/they may be enforceable and over the maximum geographical area as to which it/they may be enforceable and to the maximum extent in all other respects as to which it/they may be enforceable. The Executive and the Employer further agree that such modified restriction(s) shall be enforced by the court or adjudicator. In the event that modification is not possible, then the Executive and the Employer agree that, because each of the Executive’s obligations in Section 8 is a separate and independent covenant, any unenforceable obligation shall be severed and all remaining obligations shall be enforced.

          (k) Conflicting Obligations and Rights. The Executive agrees to inform the Employer of any apparent conflicts between the Executive’s work for the Employer and any obligations the Executive may have to preserve the confidentiality of another’s proprietary information or related materials before using the same on the Employer’s behalf. The Employer shall receive such disclosures in confidence and consistent with the objectives of avoiding any conflict of obligations and rights or the appearance of any conflict of interest.

     9. Termination of Employment.

          (a) Permitted Terminations. The Executive’s employment hereunder may be terminated for any reason, including the following.

               (i) Death. The Executive’s employment shall terminate upon death without any further notice or action required by the Employer or the Executive’s legal representatives.

               (ii) By the Employer. The Employer may terminate the Executive’s employment in the following circumstances:

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                    (A) Disability. If the Executive shall have been substantially unable to perform the Executive’s material duties hereunder by reason of illness, physical or mental disability or other similar incapacity, which inability shall continue for at least ninety (90) consecutive days or more than one hundred and twenty (120) days in any 12-month period (a “Disability”); provided, that until such termination, the Executive shall continue to receive the Executive’s compensation and benefits hereunder, reduced by benefits payable, if any, under any disability insurance policy or plan; or

                    (B) Cause. For Cause or without Cause.

               (iii) By the Executive. The Executive may terminate the Executive’s employment for any reason (including Good Reason) or for no reason. If the Executive terminates employment without Good Reason, then the Executive shall provide written notice to the Employer at least sixty (60) days prior to the Date of Termination.

          (b) Termination. Any termination of the Executive’s employment by the Employer or the Executive pursuant to Sections 9(a)(ii) or (iii) shall be communicated by a Notice of Termination to the other party. “Notice of Termination” shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon. The Executive agrees, in the event of any dispute under Section 9(a)(ii)(A) as to whether a Disability exists and if requested by the Employer, to submit to a physical examination by a licensed physician selected by mutual agreement between the Employer and the Executive, the cost of such examination to be paid by the Employer. The written medical opinion of such physician shall be conclusive and binding upon the parties as to whether a Disability exists and the date when such Disability arose. Section 9 shall be interpreted and applied so as to comply with the provisions of the Americans with Disabilities Act (to the extent that it is applicable) and any applicable state or local laws.

     10. Compensation Upon Termination.

          (a) Death. If the Executive’s employment ends as a result of death, the Employer shall pay to the Executive’s legal representative or estate, as applicable: (1) the Accrued Benefits, if any; and (2) a lump sum amount equal to twelve (12) months of the Executive’s Base Salary as of the Date of Termination, less any amounts or payments to the Executive’s beneficiaries or estate paid or to be paid on account of any life insurance plan or policy provided by the Employer, by March 15 of the year after the year in which Executive’s death occurs.

          (b) Termination by the Employer for Cause or Disability or by the Executive without Good Reason; Expiration of Term. If the Employer terminates the Executive’s employment for Cause or Disability, if the Executive terminates the Executive’s employment without Good Reason, or the term of employment set forth in Section 2 expires because of Non-Renewal, the Employer shall pay to the Executive the Accrued Benefits, if any.

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          (c) Termination by the Employer without Cause or by the Executive for Good Reason. If the Employer terminates the Executive’s employment other than for Cause or Disability or if the Executive terminates the Executive’s employment for Good Reason, then the Employer shall: (1) pay the Executive the Accrued Benefits, if any; (2) pay the Executive an amount equal to (A) two times the Executive’s Base Salary as of the Date of Termination, and (B) two times the average of the annual cash bonuses paid by the Employer to the Executive during the prior two calendar years, or if the Executive has been employed by the Employer for less than two years, two times the Executive’s Base Salary (in lieu of average bonuses); and (3) pay for the Executive and the Executive’s covered dependents to continue to participate, on the same terms and conditions as applicable immediately prior to the Executive’s Date of Termination, in such medical and dental insurance plans through COBRA (to the extent to the extent the Executive and the Executive’s eligible dependents were participating in such plans immediately prior to the Date of Termination) until the earlier of (x) the Executive obtaining new employment, and (y) 12 months from the Date of Termination.

          (d) Termination of the Executive in Connection with a Change in Control of the Employer. If the Executive’s employment terminates as a result of a Change in Control of the Employer, or if the Employer terminates the Executive’s employment other than for Cause or Disability within 12 months of a Change in Control of the Employer, or if the Executive terminates the Executive’s employment for Good Reason within 12 months of a Change in Control of the Employer, then the Employer shall (in lieu of making payments pursuant to Section 10(c) above): (1) pay the Executive the Accrued Benefits, if any; (2) pay the Executive an amount equal to (A) three (3) times the Executive’s Base Salary as of the Date of Termination, and (B) three (3) times the average of the annual cash bonuses paid by the Employer to the Executive during the prior two calendar years, or if the Executive has been employed by the Employer for less than two years, three (3) times the Executive’s Base Salary (in lieu of average bonuses); and (3) pay for the Executive and the Executive’s covered dependents to continue to participate, on the same terms and conditions as applicable immediately prior to the Executive’s Date of Termination, in such medical and dental insurance plans through COBRA (to the extent to the extent the Executive and the Executive’s eligible dependents were participating in such plans immediately prior to the Date of Termination) until the earlier of (x) the Executive obtaining new employment, and (y) twelve (12) months from the Date of Termination.

          (e) Deductions/Withholding. Any payments to the Executive pursuant to Section 10 shall be less applicable deductions and withholding as determined by the Employer.

          (f) Timing of Payment of Accrued Benefits. The Employer shall pay to the Executive (or to the Executive’s legal representative or estate if termination is because of death) the Executive’s Accrued Benefits at the time such payments would otherwise be due under the Employer’s normal payroll practices, applicable Employer policies or plans, or as provided by applicable law.

          (g) Liquidated Damages. The Employer and the Executive acknowledge and agree that damages which will result to the Executive for termination by the Employer of the Executive’s employment without Cause or by the Executive for Good Reason shall be extremely

9

difficult or impossible to establish or prove, and agree that the payments and benefits set forth in Sections 9(c)(2) and (3) and 10(c)(2) and (3) (collectively, the “Severance Payment”) shall constitute liquidated damages for any such termination. The Executive agrees that, except for such other payments and benefits to which the Executive may be entitled as expressly provided by the terms of this Agreement or any other applicable benefit plan, such liquidated damages shall be in lieu of all other claims arising from this Agreement that the Executive may make by reason of any such termination of employment.

          (h) Requirement of General Release. The Executive agrees that, as a condition to receiving the Severance Payment, the Executive will execute a general release of claims substantially in the form attached hereto as Exhibit B. Within five (5) business days of the Date of Termination, the Employer shall deliver to the Executive the release, and such release shall be signed within twenty-one (21) days of the receipt of the release by Executive. The Severance Payment shall be made within ten (10) business days following the later of the Employer’s receipt of the executed general release of claims or the expiration of the revocation period (to the extent that there is a revocation period) without the general release of claims being revoked by the Executive.

          (i) Section 409A.

               (i) With respect to payments under this Agreement for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), each severance payment and COBRA continuation reimbursement payment will be considered one of a series of separate payments;

               (ii) The Executive will be deemed to have a Date of Termination for purposes of determining the timing of any payments that are classified as deferred compensation only upon a “separation from service” within the meaning of Section 409A.

               (iii) If at the time of Executive’s separation from service, (i) Executive is a specified employee (within the meaning of Section 409A and using the identification methodology selected by the Company from time to time, and (ii) the Company makes a good faith determination that an amount payable hereunder constitutes deferred compensation (within the meaning of Section 409A) the payment of which is required to be delayed pursuant to the six-month delay rule set forth in Section 409A in order to avoid taxes or penalties under Section 409A, then the Company will not pay such amount on the otherwise scheduled payment date but will instead pay it in a lump sum on the first business day after such six-month period together with interest for the period of delay, compounded annually, equal to the prime rate (as published in the Wall Street Journal) in effect as of the dates the payments should otherwise have been provided.

               (iv) Any amount that Executive is entitled to be reimbursed under this Agreement will be reimbursed to Executive as promptly as practical and in any event not later than the last day of the calendar year after the calendar year in which the expenses are incurred. and the amount of the expenses eligible for reimbursement during any calendar year will not affect the amount of expenses eligible for reimbursement in any other calendar year.

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               (v) To the extent the Executive would be subject to the additional 20% tax imposed on certain deferred compensation arrangements pursuant to Section 409A of the Code as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such tax and the parties shall promptly execute any amendment reasonably necessary to implement this Section 1 0(i)(v). The Executive and the Employer agree to cooperate to make such amendments to the terms of this Agreement as may be necessary to avoid the imposition of penalties and additional taxes under Section 409A of the Code to the extent possible; provided, however, that the Employer agrees that any such amendment shall provide the Executive with economically equivalent payments and benefits, and the Executive agrees that any such amendment will not materially increase the cost to, or liability of, the Employer with respect to any payments.

          (j) Offset. Any payments to the Executive pursuant to Section 6 or 10 (not including the Accrued Benefits) shall, at the Employer’s discretion, be offset and less any amounts owed by the Executive to the Employer as of the Date of Termination, including without limitation, any denied expense reimbursements, any personal expenses, any unpaid loan balances, the value of any negative leave balances, any repayment obligations for the signing bonus, and any other amounts owing to the Employer. The Executive hereby consents to and authorizes such offsets.

          (k) Regulatory Limitations. Each obligation to make a payment under this Agreement that is subject to the limits of 12 C.F.R. 359 shall be subject to the prior approval of the FDIC, together with each payment under any such obligation.

          (1) No Further Obligations. Except as set forth in this Agreement, the Employer shall have no further obligation to the Executive under this Agreement upon the termination of the Executive’s employment.

     11. Indemnification. During the Employment Period and thereafter, the Employer shall provide the Executive with coverage under its current directors’ and officers’ liability policy to the same extent that it provides such coverage to other similarly situated executives.

     12. Attorney’s Fees. In the event of any dispute relating to or arising from this Agreement, the prevailing party in such dispute shall be entitled to recover from the non- prevailing party any and all costs and expenses (including without limitation attorneys’ fees and other charges of counsel) incurred in connection with litigating such dispute.

     13. Severability. The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect.

     14. Survival. It is the express intention and agreement of the parties hereto that certain provisions in this Agreement shall survive according to their terms the termination of the Executive’s employment.

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     15. Assignment. The rights and obligations of the parties to this agreement shall not be assignable or delegable, except that (1) in the event of the Executive’s death, the personal representative or legatees or distributees of the Executive’s estate, as the case may be, shall have the right to receive any amount owing and unpaid to the Executive hereunder and (2) the rights and obligations of the Employer hereunder shall be assignable and delegable to any Company Affiliate or in connection with any subsequent merger, consolidation, sale of all or substantially all of the assets or equity interests of the Employer or similar transaction involving the Employer or a successor corporation. The Employer shall require any successor to the Employer to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place.

     16. Binding Effect. Subject to any provisions in this Agreement restricting assignment, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties and their respective heirs, devisees, executors, administrators, legal representatives. successors and assigns.

     17. Amendment Waiver. This Agreement shall not be amended, altered or modified except by an instrument in writing duly executed by the party against whom enforcement is sought. Neither the waiver by either of the parties hereto of a breach of or a default under any of the provisions of this Agreement, nor the failure of either of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights or privileges hereunder.

     18. Headings. Section and subsection headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof.

     19. Governing Law. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the laws of the State of California (but not including any choice of law rule thereof that would cause the laws of another jurisdiction to apply). The parties hereby consent to the exclusive jurisdiction of, and venue in, any federal or state court of competent jurisdiction located in Los Angeles County, California for the purposes of adjudicating any and all claims, demands, causes of action, disputes, controversies, and other matters arising out of or relating to this Agreement, any of its provisions, or the relationship between the parties created by this Agreement.

     20. Entire Agreement. This Agreement constitutes the entire agreement between the parties respecting the subject matter herein, there being no representations, warranties or commitments except as set forth herein.

     21. Counterparts. This Agreement may be executed in two counterparts, each of which shall be an original and all of which shall be deemed to constitute one and the same instrument.

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     22. Notice. All notices, demands, requests or other communications which may be or are required to be given or made by any party to any other party pursuant to this Agreement shall be in writing and shall be hand-delivered, mailed by first class registered or certified mail, return receipt requested, postage prepaid, delivered by overnight air courier, or transmitted by facsimile transmission addressed as follows:

(a) If to the Employer:

CapitalSource Bank
Attn: Steven A. Museles, Chief Legal Officer
c/o CapitalSource
4445 Willard Avenue
12^th Floor
Chevy Chase, MD 20815
Tel: (301) 841-2732
Fax: (301)841-2380

(b) If to the Executive:

D. Tad Lowrey
569 Woodland Road
Pasadena, CA 91106
Tel: (626) 844-0243
Fax:

Each party may designate by notice in writing a new address to which any notice, demand. request or communication may thereafter be so given, served or sent. Each notice, demand, request or communication that shall be given or made in the manner described above shall be deemed sufficiently given or made for all purposes at such time as it is delivered to the addressee (with the return receipt, delivery receipt, confirmation of facsimile transmission, or the affidavit of messenger being deemed conclusive but not exclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation.

     23. Definitions.

          “Accrued Benefits” mean (i) any Base Salary through the Date of Termination not yet paid; (ii) any compensation deferred by the Executive prior to the Date of Termination and not paid by the Employer or otherwise specifically addressed by this Agreement; (iii) any amounts or benefits owing to the Executive or to the Executive’s beneficiaries under the then applicable benefit plans of the Employer; and (iv) any amounts owing to the Executive for reimbursement of expenses properly incurred by the Executive prior to the Date of Termination and which are reimbursable in accordance with Section 7.

          “Cause” means any one of the following events: (i) the Executive’s knowing violation of law in the course of performance of the duties of Executive’s employment with the

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Company or any Company Affiliate, and/or the Executive’s conviction of, or plea of nolo contendere to, a felony or any crime involving dishonesty, disloyalty, or fraud with respect to the Employer; (ii) the Executive’s material breach of any obligation in this Agreement; (iii) the Executive’s engaging in conduct constituting a material breach of any fiduciary duty to the Employer, willful and material misconduct, or gross negligence; (iv) any act of dishonesty, fraud, misrepresentation, or embezzlement by the Executive that harms or injures the Employer or a Company Affiliate; (v) the Executive’s failure to retain regulatory approval from the Federal Deposit Insurance Corporation, the California Department of Financial Institutions, or any other state or federal regulatory body with oversight or authority over banking or the Employer (a “Regulator”) as CEO or for any other position he maintains with Employer; (vi) Employer’s termination of Executive’s employment arising out of or in connection with any direct or indirect order, request, mandate or other instruction of any Regulator or a finding by any such Regulator that Executive’s performance threatens the safety or soundness of the Employer or any of its subsidiaries; (vii) the Executive’s failure to furnish all information or take any other steps necessary to enable Employer to maintain fidelity bond coverage (in an amount and with a surety company selected by Employer in its sole discretion) of Executive during the term of his employment; or (viii) the Executive’s continued failure to competently perform the Executive’s duties after receiving written notice from the Employer identifying the manner in which the Executive has failed to perform competently and being given thirty (30) days to cure such failure.

          “Change in Control” means the occurrence of one or more of the following events: (i) any person (other than a Company Affiliate) is or becomes the record owner of more than 50% of the Voting Stock of the Employer; (ii) the Employer adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iii) the Employer transfers all or substantially all of its assets or business (unless the shareholder of the Employer immediately prior to such transaction beneficially owns, directly or indirectly, more than 50% of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Employer); or (iv) any merger, reorganization or consolidation of the Employer unless, immediately after consummation of such transaction, the shareholder of the Employer immediately prior to the transaction beneficially owns, directly or indirectly, more than 50% of the Voting Stock of the Employer. For purposes of this Change in Control definition, the “Employer” shall include any entity that succeeds to all or substantially all of the business of the Employer and “Voting Stock” shall mean securities of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation.

          “Company Affiliate” means any entity controlled by, in control of, or under common control with, the Employer.

          “Company Confidential Information” means information known to the Executive to constitute trade secrets or proprietary information belonging to the Employer, CapitalSource Inc. or any Company Affiliate or other confidential financial information, operating budgets, strategic plans or research methods, personnel data, projects or plans, or non-public information regarding the terms of any existing or pending lending transaction between the Employer or Company Affiliate and an existing or pending client or customer (as the phrase “client or

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customer” is defined in Section 8(d), in each case, received by the Executive in the course of the Executive’s employment by the Employer or in connection with the Executive’s duties with the Employer. Notwithstanding anything to the contrary contained herein, the general skills, knowledge and experience gained during the Executive’s employment with the Employer, information publicly available or generally known within the industry or trade in which the Employer competes and information or knowledge possessed by the Executive prior to the Executive’s employment by the Employer, shall not be considered Company Confidential Information.

          “Date of Termination” means (i) if the Executive’s employment is terminated by the Executive’s death, the date of the Executive’s death; (ii) if the Executive’s employment is terminated by the Employer or the Executive, the date specified in the Notice of Termination; or (iii) if the Executive’s employment ends because of Non-Renewal, the date on which the Initial Term or the Extended Term, as the case may be, expires. Notwithstanding the foregoing the Executive’s Date of Termination shall mean the date of the Executive’s separation from service as defined in Section 409A.

          “Good Reason” means any one of the following events: (i) the Employer’s failure to pay compensation to the Executive due and payable pursuant to Section 6; (ii) a change in Executive’s title below the level of Chief Executive Officer or a material diminution by the Employer in the Executive’s authority, responsibilities or duties (not including, by itself, removal of authority or responsibility for any aspect of Executive’s position); (iii) the Employer’s willful and material breach of any obligation in this Agreement; or (iv) a relocation of the Executive’s primary place of employment to a location that increases the Executive’s then current commute (the distance between the Executive’s primary residence and primary place of employment prior to the relocation) by more than 25 miles. The Executive understands and agrees that none of the foregoing events shall constitute Good Reason if the Executive consents in writing to such event. The Executive further understands and agrees that none of the foregoing events shall constitute Good Reason unless and until the Executive provides written notice to the Employer identifying the asserted grounds for Good Reason, such notice is provided to the Employer within 45 days of such event, and the Employer fails to cure such asserted grounds for Good Reason within 60 days of its receipt of such notice from the Executive. A Good Reason termination shall not exist unless the Executive resigns within 150 days from the date of the initial existence of one of the foregoing conditions.

          “Non-Solicit Period” means the period commencing on the Effective Date and ending 12 months after the Executive’s Date of Termination.

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     IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement, or have caused this Agreement to be duly executed and delivered on their behalf.

Douglas Hayes Lowrey
/s/ Douglas Hayes Lowrey
Date: 9/8/08
CapitalSource Bank
By:	/s/ Steven A. Museles
	Name:	Steven A Museles
	Title:	Executive Vice President
	Date 9/8/08

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EX-12.1

Computation of Ratio of Earnings to Fixed Charges

	Years Ended December 31,
	2009			2008			2007			2006			2005
	($ in thousands)
Fixed charges (1):
Total interest expense.	$	437,713		$	693,357		$	859,180		$	621,666		$	199,805
Interest capitalized		—			—			357			414			932
Interest portion of rental expense		3,250			1,994			1,697			1,327			1,244
Total fixed charges	$	440,963		$	695,351		$	861,234		$	623,407		$	201,981
Earnings:
Net (loss) income before noncontrolling interests and income taxes	$	(757,997	)	$	(450,674	)	$	216,607		$	335,808		$	255,202
Fixed charges		440,963			695,351			861,234			623,407			201,981
Less: Interest capitalized		—			—			(357	)		(414	)		(932	)
Total earnings before fixed charges	$	(317,034	)	$	244,677		$	1,077,484		$	958,801		$	456,251
Ratio of earnings to fixed charges (2)		-0.7x			0.4x			1.3x			1.5x			2.3x

(1)	Excludes interest related to the application of accounting for uncertain tax positions in accordance with the Income Taxes Topic of the Accounting Standards Codification.
(2)	The earnings for the years ended December 31, 2009 and 2008 were inadequate to cover fixed charges. The coverage deficiency for total fixed charges for the years ended December 31, 2009 and 2008 were $758.0 million and $450.7 million, respectively.

EX-21.1

Exhibit 21.1

CAPITALSOURCE INC. SUBSDIARIES
as of 2/23/10

Name of Subsidiary	State of Incorporation
Alpha Packaging Associates I, LLC	Delaware
Boulder City LLC	Delaware
CapitalSource (UK) Limited	England
CapitalSource Analytics LLC	Delaware
CapitalSource Bahamas LLC	Delaware
CapitalSource Bank	California
CapitalSource CF LLC	Delaware
CapitalSource Commercial Loan LLC, 2006-1	Delaware
CapitalSource Commercial Loan LLC, 2007-1	Delaware
CapitalSource Commercial Loan LLC, 2007-2	Delaware
CapitalSource Commercial Loan Trust 2006-1	Delaware
CapitalSource Commercial Loan Trust 2006-2	Delaware
CapitalSource Commercial Loan Trust 2007-1	Delaware
CapitalSource Commercial Loan Trust 2007-2	Delaware
CapitalSource Commercial Loan LLC, 2006-2	Delaware
CapitalSource Europe Limited	England
CapitalSource Finance II LLC	Delaware
CapitalSource Finance LLC	Delaware
CapitalSource Funding III LLC	Delaware
CapitalSource Funding LLC	Delaware
CapitalSource Healthcare REIT	Maryland
CapitalSource International Inc.	Delaware
CapitalSource Limited	England
CapitalSource Real Estate Loan LLC, 2006-A	Delaware
CapitalSource Real Estate Loan LLC, 2007-A	Delaware
CapitalSource Real Estate Loan Trust 2006-A	Delaware
CapitalSource Servicing LLC	Delaware
CapitalSource SF Equity LLC	Delaware
CapitalSource SF Finance LLC	Delaware
CapitalSource SF TRS LLC	Delaware
CapitalSource TRS LLC	Delaware
CapitalSource Trust Preferred Securities 2005-1	Delaware
CapitalSource Trust Preferred Securities 2005-2	Delaware
CapitalSource Trust Preferred Securities 2006-1	Delaware
CapitalSource Trust Preferred Securities 2006-2	Delaware
CapitalSource Trust Preferred Securities 2006-3	Delaware
CapitalSource Trust Preferred Securities 2006-4	Delaware
CapitalSource Trust Preferred Securities 2006-5	Delaware
CapitalSource Trust Preferred Securities 2007-2	Delaware

Name of Subsidiary	State of Incorporation
CapitalSource Utah	Utah
Cheron Holdings LLC (f/k/a Five Points Realty LLC)	Delaware
CHR Bartow LLC	Delaware
CHR Boca Raton LLC CHR Bradenton LLC	Delaware Delaware
CHR Cape Coral LLC	Delaware
CHR Clearwater Highland LLC	Delaware
CHR Clearwater LLC	Delaware
CHR Deland East LLC	Delaware
CHR Deland West LLC	Delaware
CHR Fort Myers LLC	Delaware
CHR Fort Walton Beach LLC	Delaware
CHR Gulfport LLC	Delaware
CHR HUD Borrower LLC (fka CSE SNF Holding II LLC)	Delaware
CHR Hudson LLC	Delaware
CHR Lake Wales LLC	Delaware
CHR Lakeland LLC	Delaware
CHR Panama City LLC	Delaware
CHR Pompano Beach Broward LLC	Delaware
CHR Pompano Beach LLC	Delaware
CHR Sanford LLC	Delaware
CHR Sarasota LLC	Delaware
CHR Spring Hill LLC	Delaware
CHR St. Pete Abbey LLC	Delaware
CHR St. Pete Bay LLC	Delaware
CHR St. Pete Egret LLC	Delaware
CHR Tampa Carrollwood LLC	Delaware
CHR Tampa LLC	Delaware
CHR Tarpon Springs LLC	Delaware
CHR Titusville LLC	Delaware
CHR West Palm Beach LLC	Delaware
CIG International, LLC	Delaware
Crown Green Associates LLC	Delaware
CS 1453 North Druid Hills LLC	Delaware
CS 146 Silver Laurel Way LLC	Delaware
CS 1500 Range Way LLC	Delaware
CS 1532 Shady Falls Road LLC	Delaware
CS 2006 Chicago Avenue LLC	Delaware
CS 2994 Santa Monica LLC	Delaware
CS 3 Sylvan Road LLC	Delaware
CS 3381 Elgin Drive LLC	Delaware
CS 3503 Diversified Drive LLC	Delaware
CS 3803 Brookcrest Circle LLC	Delaware
CS 3980 D Jackson Street LLC	Delaware

Name of Subsidiary	State of Incorporation
CS 3980 E Jackson Street LLC	Delaware
CS Bluesky II LLC	Delaware
CS Cantalena LLC	Delaware
CS Capital Advisors LLC	Delaware
CS Central City LLC	Delaware
CS CF Equity 2006-1 LLC	Delaware
CS CF Equity 2006-2 LLC	Delaware
CS CF Equity 2007-1 LLC	Delaware
CS CF Equity 2007-2 LLC	Delaware
CS CF Equity I LLC	Delaware
CS Citrus LLC	Delaware
CS CPR LLC	Delaware
CS Eigelberger LLC	Delaware
CS Equity II LLC	Delaware
CS Equity III LLC	Delaware
CS Equity Investments LLC	Delaware
CS Esplanade LLC	Delaware
CS Europe Finance Limited	England
CS First Indiana LLC	Delaware
CS Florence LLC	Delaware
CS Four Seasons LLC	Delaware
CS Funding IX Depositor LLC	Delaware
CS Funding VII Depositor LLC	Delaware
CS Glen Iris LLC	Delaware
CS Highland Village LLC	Delaware
CS Jackson Trust	DE Common Law
CS JUX Real Estate I Holdings LLC	Delaware
CS JUX Real Estate II Holdings LLC	Delaware
CS JUX Receivables Holdings II LLC	Delaware
CS JUX Receivables Holdings LLC	Delaware
CS Lakeside LLC	Delaware
CS Last Resort Holdings LLC	Delaware
CS Legacy Parc LLC	Delaware
CS MainStreet LLC	Delaware
CS MainStreet Real Estate Holdings LLc	Delaware
CS Mississippi Trust	DE Common Law
CS Note LLC	Delaware
CS NRP Land Holding LLC	Delaware
CS One Carter LLC	Delaware
CS OT I LLC	Delaware
CS Paradiso Holdings LLC	Delaware
CS Rangler Holdings LLC	Delaware
CS SBA Servicing LLC	Delaware
CS Stonehouse LLC	Delaware

Name of Subsidiary	State of Incorporation
CS UK Finance Limited	England
CS Vandelay Real Estate Holdings LLC	Delaware
CS Vandelay Receivables Holdings LLC	Delaware
CS Watermark LLC	Delaware
CSB Modern Luxury DPC Holdings LLC	Delaware
CSB Washington Crossing DPC Holdings LLC	Delaware
CSE Alamo LLC	Delaware
CSE Albany LLC	Delaware
CSE Amarillo LLC	Delaware
CSE Arden L.P.	Delaware
CSE Augusta LLC	Delaware
CSE Bedford LLC	Delaware
CSE Cambridge LLC	Delaware
CSE Cambridge Realty LLC	Delaware
CSE Canton LLC	Delaware
CSE Casablanca Holdings II LLC	Delaware
CSE Casablanca Holdings LLC	Delaware
CSE Cedar Rapids LLC	Delaware
CSE Chelmsford LLC	Delaware
CSE Chesterton LLC	Delaware
CSE CHR Holdco LLC	Delaware
CSE CHR Holdings LLC	Delaware
CSE Claremont LLC	Delaware
CSE CPDH LLC	Delaware
CSE Cromwell (CT) LLC	Delaware
CSE Denver LLC	Delaware
CSE Douglas LLC	Delaware
CSE Dumas LLC	Delaware
CSE East Hartford (CT) LLC	Delaware
CSE Elkton LLC	Delaware
CSE Elkton Realty LLC	Delaware
CSE Equity Holdings LLC	Delaware
CSE Fort Wayne LLC	Delaware
CSE Framingham LLC	Delaware
CSE Frankston LLC	Delaware
CSE Georgetown LLC	Delaware
CSE Green Bay LLC	Delaware
CSE Highland Village I LLC	Delaware
CSE Highland Village II LLC	Delaware
CSE Hilliard LLC	Delaware
CSE Hillsdale LLC	Delaware
CSE Huntsville LLC	Delaware
CSE IC Lender Liquidating Trust LLC	Delaware
CSE Indianapolis – Continental LLC	Delaware

Name of Subsidiary	State of Incorporation
CSE Indianapolis – Greenbriar LLC	Delaware
CSE International Holdings LLC	Delaware
CSE Issaquah LLC	Delaware
CSE Jeffersonville – Hillcrest Center LLC	Delaware
CSE Jeffersonville – Jennings House LLC	Delaware
CSE King L.P.	Delaware
CSE Kingsport LLC	Delaware
CSE Knightdale L.P.	Delaware
CSE Lake City LLC	Delaware
CSE Lake Worth LLC	Delaware
CSE Lakewood LLC	Delaware
CSE Las Vegas LLC	Delaware
CSE Lawrenceburg LLC	Delaware
CSE Lenoir L.P.	Delaware
CSE Lexington Park LLC	Delaware
CSE Lexington Park Realty LLC	Delaware
CSE Ligonier LLC	Delaware
CSE Liquidating AR Collateral Pool I LLC	Delaware
CSE Live Oak LLC	Delaware
CSE Logansport LLC	Delaware
CSE Lowell LLC	Delaware
CSE MacArthur Holdings LLC	Delaware
CSE Mobile LLC	Delaware
CSE Moore LLC	Delaware
CSE Mortgage LLC	Delaware
CSE NHS Equity LLC	Delaware
CSE New England Holdings LLC	Delaware
CSE North Carolina Holdings I LLC	Delaware
CSE North Carolina Holdings II LLC	Delaware
CSE Omro LLC	Delaware
CSE Orange Park LLC	Delaware
CSE Orlando – Pinar Terrace Manor LLC	Delaware
CSE Orlando – Terra Vista Rehab LLC	Delaware
CSE PHC LLC	Delaware
CSE Piggott LLC	Delaware
CSE Pilot Point LLC	Delaware
CSE Pine View LLC	Delaware
CSE Ponca City LLC	Delaware
CSE Port St. Lucie LLC	Delaware
CSE QRS Funding I LLC	Delaware
CSE Richmond LLC	Delaware
CSE Safford LLC	Delaware
CSE Salina LLC	Delaware
CSE Seminole LLC	Delaware

Name of Subsidiary	State of Incorporation
CSE Shawnee LLC	Delaware
CSE SLB LLC	Delaware
CSE SNF Holding LLC	Delaware
CSE Springfield (MA) LLC	Delaware
CSE State College	Delaware
CSE Stillwater LLC	Delaware
CSE Taylorsville LLC	Delaware
CSE Texas City LLC	Delaware
CSE Upland LLC	Delaware
CSE Vincennes LLC	Delaware
CSE VMA LLC	Delaware
CSE Walnut Cove L.P.	Delaware
CSE Waterbury (CT) LLC	Delaware
CSE Waterford (CT) LLC	Delaware
CSE Winter Haven LLC	Delaware
CSE WKTM Contributor LLC	Delaware
CSE Woodfin L.P.	Delaware
CSE Yorktown LLC	Delaware
Dakota Ridge Holdings LLC	Delaware
Derry (NH) CSE LLC	Delaware
Dixie White House Nursing Home, Inc.	Mississippi
Jackson Broadcasting LLC	Delaware
Mexico Realty Del Sur Funding	Mexico
Ocean Springs Nursing Home, Inc.	Mississippi
Pensacola Real Estate Holdings I, Inc.	Florida
Pensacola Real Estate Holdings II, Inc.	Florida
Pensacola Real Estate Holdings III, Inc.	Florida
Pensacola Real Estate Holdings IV, Inc.	Florida
Pensacola Real Estate Holdings V, Inc.	Florida
PrivateSource Mortgage LLC	Delaware
Skyler Boyington, Inc.	Mississippi
Skyler Florida, Inc.	Mississippi
Skyler Pensacola, Inc.	Florida
Vicksburg Broadcasting LLC	Delaware
VO Receivable Funding, LLC	Delaware

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-107725, 333-117422 and 333-134377) of CapitalSource Inc., of our reports dated March 1, 2010, with respect to the consolidated financial statements of CapitalSource Inc., and the effectiveness of internal control over financial reporting of CapitalSource Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2009.

/s/ Ernst & Young LLP

McLean, Virginia
March 1, 2010

EX-31.1.1

EXHIBIT 31.1.1

CERTIFICATIONS

I, Steven A. Museles, certify that:

     1. I have reviewed this annual report on Form 10-K of CapitalSource Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2010

/s/ STEVEN A. MUSELES

Steven A. Museles

Director and Co-Chief Executive Officer

(Principal Executive Officer)

EX-31.1.2

EXHIBIT 31.1.2

CERTIFICATIONS

I, James J. Pieczynski, certify that:

     1. I have reviewed this annual report on Form 10-K of CapitalSource Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2010

/s/ JAMES J. PIECZYNSKI

James J. Pieczynski

Director and Co-Chief Executive Officer

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Donald F. Cole, certify that:

     1. I have reviewed this annual report on Form 10-K of CapitalSource Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2010

/s/ DONALD F. COLE

Donald F. Cole

Chief Financial Officer

(Principal Financial Officer)

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of CapitalSource Inc. (the “Company”) on Form 10-K for the annual period ending December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Steve A. Museles and James J. Piecznski, as Directors and Co-Chief Executive Officers of the Company, and Donald F. Cole as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: March 1, 2010

/s/ STEVEN A. MUSELES

Steven A. Museles

Director and Co-Chief Executive Officer

(Principal Executive Officer)

Date: March 1, 2010

/s/ JAMES J. PIECZYNSKI

James J. Pieczynski

Director and Co-Chief Executive Officer

(Principal Executive Officer)

Date: March 1, 2010

/s/ DONALD F. COLE

Donald F. Cole

Chief Financial Officer

(Principal Financial Officer)