10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2010

OR

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

For the transition period from ____________ to _____________

Commission File Number 1-14788

Capital Trust, Inc.

(Exact name of registrant as specified in its charter)

Maryland	94-6181186
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
410 Park Avenue, 14th Floor, New York, NY	10022
(Address of principal executive offices)	(Zip Code)
(212) 655-0220 (Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o [This requirement is currently not applicable to the registrant.]

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer   ý (Do not check if a smaller reporting company)	Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of outstanding shares of the registrant's class A common stock, par value $0.01 per share, as of July 23, 2010 was 21,965,841.

CAPITAL TRUST, INC.

INDEX

Part I.	Financial Information
	Item 1:	Financial Statements	1
		Consolidated Balance Sheets – June 30, 2010 (unaudited) and December 31, 2009	1
		Consolidated Statements of Operations – Three and Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	2
		Consolidated Statements of Changes in Shareholders' Equity (Deficit) – Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	3
		Consolidated Statements of Cash Flows – Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	4
		Notes to Consolidated Financial Statements (unaudited)	5
	Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	42
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk	59
	Item 4:	Controls and Procedures	61
Part II.	Other Information
	Item 1:	Legal Proceedings	62
	Item 1A:	Risk Factors	62
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	62
	Item 3:	Defaults Upon Senior Securities	62
	Item 4:	(Removed and Reserved)	62
	Item 5:	Other Information	62
	Item 6:	Exhibits	63
	Signatures		64

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2010 and December 31, 2009
(in thousands except per share data)
	June 30,			December 31,
Assets	2010			2009
	(unaudited)
Cash and cash equivalents	$	26,495		$	27,954
Securities held-to-maturity		17,695			17,332
Loans receivable, net		717,598			766,745
Loans held-for-sale, net		5,488			—
Equity investments in unconsolidated subsidiaries		5,181			2,351
Accrued interest receivable		2,591			3,274
Deferred income taxes		1,711			2,032
Prepaid expenses and other assets		6,959			8,391
Subtotal		783,718			828,079
Assets of Consolidated Variable Interest Entities ("VIEs")
Securities held-to-maturity		570,722			697,864
Loans receivable, net		3,125,398			391,499
Loans held-for-sale, net		—			17,548
Real estate held-for-sale		12,055			—
Accrued interest receivable and other assets		10,990			1,645
Subtotal		3,719,165			1,108,556
Total assets	$	4,502,883		$	1,936,635
Liabilities & Shareholders' Deficit
Liabilities:
Accounts payable and accrued expenses	$	7,943		$	8,228
Repurchase obligations		428,489			450,137
Senior credit facility		98,665			99,188
Junior subordinated notes		130,112			128,077
Participations sold		288,447			289,144
Interest rate hedge liabilities		4,344			4,184
Subtotal		958,000			978,958
Non-Recourse Liabilities of Consolidated VIEs
Accounts payable and accrued expenses		4,718			1,798
Securitized debt obligations		3,801,225			1,098,280
Interest rate hedge liabilities		32,600			26,766
Subtotal		3,838,543			1,126,844
Total liabilities		4,796,543			2,105,802
Shareholders' deficit:
Class A common stock $0.01 par value 100,000 shares authorized, 21,907 and 21,796 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively ("class A common stock")		219			218
Restricted class A common stock $0.01 par value, 59 and 79 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively ("restricted class A common stock" and together with class A common stock, "common stock")		1			1
Additional paid-in capital		559,267			559,145
Accumulated other comprehensive loss		(57,585	)		(39,135	)
Accumulated deficit		(795,562	)		(689,396	)
Total shareholders' deficit		(293,660	)		(169,167	)
Total liabilities and shareholders' deficit	$	4,502,883		$	1,936,635

See accompanying notes to consolidated financial statements.

- 1 -

Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2010 and 2009
(in thousands, except share and per share data)
(unaudited)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Income from loans and other investments:
Interest and related income	$	39,428		$	30,575		$	79,398		$	63,814
Less: Interest and related expenses		31,653			20,244			62,905			41,512
Income from loans and other investments, net		7,775			10,331			16,493			22,302
Other revenues:
Management fees from affiliates		924			2,929			3,940			5,809
Servicing fees		1,226			155			2,737			1,334
Other interest income		97			8			105			136
Total other revenues		2,247			3,092			6,782			7,279
Other expenses:
General and administrative		4,504			4,503			9,241			12,959
Depreciation and amortization		5			7			10			14
Total other expenses		4,509			4,510			9,251			12,973
Total other-than-temporary impairments of securities		(3,848	)		(4,000	)		(39,835	)		(18,646	)
Portion of other-than-temporary impairments of securities recognized in other comprehensive income		1,852			—			18,015			5,624
Impairment of goodwill		—			(2,235	)		—			(2,235	)
Impairment of real estate held-for-sale		—			(899	)		—			(2,233	)
Net impairments recognized in earnings		(1,996	)		(7,134	)		(21,820	)		(17,490	)
Provision for loan losses		(2,010	)		(7,730	)		(54,227	)		(66,493	)
Valuation allowance on loans held-for-sale		—			—			—			(10,363	)
Gain on extinguishment of debt		463			—			463			—
Income (loss) from equity investments		932			(445	)		1,302			(2,211	)
Income (loss) before income taxes		2,902			(6,396	)		(60,258	)		(79,949	)
Income tax provision (benefit)		—			—			293			(408	)
Net income (loss)	$	2,902		$	(6,396	)	$	(60,551	)	$	(79,541	)
Per share information:
Net income (loss) per share of common stock:
Basic	$	0.13		$	(0.29	)	$	(2.71	)	$	(3.56	)
Diluted	$	0.13		$	(0.29	)	$	(2.71	)	$	(3.56	)
Weighted average shares of common stock outstanding:
Basic		22,344,552			22,368,539			22,340,071			22,327,895
Diluted		22,667,326			22,368,539			22,340,071			22,327,895

See accompanying notes to consolidated financial statements.

- 2 -

Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
For the Six Months Ended June 30, 2010 and 2009
(in thousands)
(unaudited)
	Comprehensive Loss			Class A Common Stock		Restricted Class A Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
Balance at January 1, 2009				$	217	$	3	$	557,435	$	(41,009	)	$	(115,202	)	$	401,444
Net Loss	$	(79,541	)		—		—		—		—			(79,541	)		(79,541	)
Cumulative effect of change in accounting principle		—			—		—		—		(2,243	)		2,243			—
Unrealized gain on derivative financial instruments		14,151			—		—		—		14,151			—			14,151
Amortization of unrealized gains and losses on securities		(537	)		—		—		—		(537	)		—			(537	)
Amortization of deferred gains and losses on settlement of swaps		(47	)		—		—		—		(47	)		—			(47	)
Other-than-temporary impairments of securities related to fair value adjustments in excess of expected credit losses, net of amortization		(5,490	)		—		—		—		(5,490	)		—			(5,490	)
Issuance of warrants in conjunction with debt restructuring		—			—		—		940		—			—			940
Restricted class A common stock earned		—			1		—		774		—			—			775
Deferred directors' compensation		—			—		—		262		—			—			262
Balance at June 30, 2009	$	(71,464	)	$	218	$	3	$	559,411	$	(35,175	)	$	(192,500	)	$	331,957
Balance at January 1, 2010				$	218	$	1	$	559,145	$	(39,135	)	$	(689,396	)	$	(169,167	)
Net loss	$	(60,551	)		—		—		—		—			(60,551	)		(60,551	)
Cumulative effect of change in accounting principle		—			—		—		—		3,800			(45,615	)		(41,815	)
Unrealized loss on derivative financial instruments		(5,994	)		—		—		—		(5,994	)		—			(5,994	)
Amortization of unrealized gains and losses on securities		(406	)		—		—		—		(406	)		—			(406	)
Amortization of deferred gains and losses on settlement of swaps		(50	)		—		—		—		(50	)		—			(50	)
Other-than-temporary impairments of securities related to fair value adjustments in excess of expected credit losses, net of amortization		(15,800	)		—		—		—		(15,800	)		—			(15,800	)
Restricted class A common stock earned		—			1		—		19		—			—			20
Deferred directors' compensation		—			—		—		103		—			—			103
Balance at June 30, 2010	$	(82,801	)	$	219	$	1	$	559,267	$	(57,585	)	$	(795,562	)	$	(293,660	)

See accompanying notes to consolidated financial statements.

- 3 -

Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2010 and 2009
(in thousands)
(unaudited)
	2010			2009
Cash flows from operating activities:
Net loss	$	(60,551	)	$	(79,541	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net impairments recognized in earnings		21,820			17,490
Provision for loan losses		54,227			66,493
Valuation allowance on loans held-for-sale		—			10,363
Gain on extinguishment of debt		(463	)		—
(Income) loss from equity investments		(1,302	)		2,211
Employee stock-based compensation		76			775
Depreciation and amortization		10			14
Amortization of premiums/discounts on loans and securities and deferred interest on loans		(1,347	)		(3,262	)
Amortization of deferred gains and losses on settlement of swaps		(50	)		(47	)
Amortization of deferred financing costs and premiums/discounts on debt obligations		3,711			2,801
Deferred interest on senior credit facility		1,977			948
Deferred directors' compensation		103			262
Changes in assets and liabilities, net:
Accrued interest receivable		312			1,263
Deferred income taxes		321			—
Prepaid expenses and other assets		576			2,081
Accounts payable and accrued expenses		810			(3,692	)
Net cash provided by operating activities		20,230			18,159
Cash flows from investing activities:
Principal collections and proceeds from securities		10,758			7,856
Add-on fundings under existing loan commitments		(886	)		(7,698	)
Principal collections of loans receivable		77,206			45,664
Proceeds from operation/disposition of real estate held-for-sale		—			564
Proceeds from disposition of loans		23,548			—
Contributions to unconsolidated subsidiaries		(1,528	)		(2,315	)
Net cash provided by investing activities		109,098			44,071
Cash flows from financing activities:
Decrease in restricted cash		—			18,666
Repayments under repurchase obligations		(21,883	)		(82,969	)
Repayments under senior credit facility		(2,500	)		(1,250	)
Repayment of securitized debt obligations		(106,404	)		(22,519	)
Payment of deferred financing costs		—			(7	)
Net cash used in financing activities		(130,787	)		(88,079	)
Net decrease in cash and cash equivalents		(1,459	)		(25,849	)
Cash and cash equivalents at beginning of period		27,954			45,382
Cash and cash equivalents at end of period	$	26,495		$	19,533

See accompanying notes to consolidated financial statements.

- 4 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 1. Organization

References herein to “we,” “us” or “our” refer to Capital Trust, Inc., a Maryland corporation, and its subsidiaries unless the context specifically requires otherwise.

We are a fully integrated, self-managed, real estate finance and investment management company that specializes in credit sensitive financial products. To date, our investment programs have focused on loans and securities backed by commercial real estate assets. We invest for our own account directly on our balance sheet and for third parties through a series of investment management vehicles. From the inception of our finance business in 1997 through June 30, 2010, we have completed over $11.2 billion of investments in the commercial real estate debt arena. We conduct our operations as a real estate investment trust, or REIT, for federal income tax purposes and we are headquartered in New York City.

Note 2. Summary of Significant Accounting Policies

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the consolidated financial statements and the related management’s discussion and analysis of financial condition and results of operations filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. In our opinion, all material adjustments (consisting of normal, recurring accruals) considered necessary f or a fair presentation, in accordance with GAAP, have been included. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2010.

Principles of Consolidation

The accompanying financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries, and variable interest entities, or VIEs, in which we are the primary beneficiary, prepared in accordance with GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.

VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary. Our consolidated VIEs generally include two categories of entities: (i) collateralized debt obligations sponsored and issued by us, which we refer to as CT CDOs, and (ii) other consolidated VIEs, which are also securitization vehicles but were not issued or sponsored by us.

As of June 30, 2010, our consolidated balance sheet includes an aggregate $3.7 billion of assets and $3.8 billion of liabilities related to 11 consolidated VIEs. Due to the non-recourse nature of these VIEs, and other factors, our net exposure to loss from investments in these entities is limited to $39.6 million. See Note 11 for additional information on our investments in VIEs.

Balance Sheet Presentation

As a result of the recent accounting pronouncements discussed below, we have adjusted the presentation of our consolidated balance sheet, in accordance with GAAP, to separately categorize (i) our assets and liabilities, and (ii) the assets and liabilities of consolidated VIEs. Assets of consolidated VIEs can generally only be used to satisfy the obligations of those VIEs, and the liabilities of consolidated VIEs are non-recourse to us. We have aggregated all the assets and liabilities of our consolidated VIEs due to our determination that these entities are substantively similar and therefore a further disaggregated presentation would not be more meaningful. Similarly, the notes to our consolidated financial statements separately describe our assets and liabilities and those of our consolidated VIEs.

Equity Investments in Unconsolidated Subsidiaries

Our co-investment interest in the private equity funds we manage, CT Mezzanine Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or CTOPI, and others are accounted for using the equity method. These entities’ assets and liabilities are not consolidated into our financial statements due to our determination that (i) these entities are not VIEs, and (ii) the investors have sufficient rights to preclude consolidation by us. As such, we report our allocable percentage of the earnings or losses of these entities on a single line item in our consolidated statements of operations as income (loss) from equity investments.

CTOPI maintains its financial records at fair value in accordance with GAAP. We have applied such accounting relative to our investment in CTOPI, and include any adjustments to fair value recorded at the fund level in determining the income (loss) we record on our equity investment in CTOPI.

- 5 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Revenue Recognition

Interest income from our loans receivable is recognized over the life of the investment using the effective interest method and is recorded on the accrual basis. Fees, premiums, discounts and direct costs associated with these investments are deferred until the loan is advanced and are then recognized over the term of the loan as an adjustment to yield. For loans where we have unfunded commitments, we amortize these fees and other items on a straight line basis. Fees on commitments that expire unused are recognized at expiration. Income accrual is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, recovery of income and principal becomes doubtful. Income is then recorded on the basis of cash received until accrual is resumed when the loan becomes con tractually current and performance is demonstrated to be resumed.

Interest income from our securities is recognized using a level yield with any purchase premium or discount accreted through income over the life of the security. This yield is calculated using cash flows expected to be collected which are based on a number of assumptions on the underlying loans. Examples include, among other things, the rate and timing of principal payments, including prepayments, repurchases, defaults and liquidations, the pass-through or coupon rate and interest rates. Additional factors that may affect our reported interest income on our securities include interest payment shortfalls due to delinquencies on the underlying mortgage loans and the timing and magnitude of expected credit losses on the mortgage loans underlying the securities that are impacted by, among other things, the general condition of the real es tate market, including competition for tenants and their related credit quality, and changes in market rental rates. These uncertainties and contingencies are difficult to predict and are subject to future events that may alter the assumptions.

Fees from special servicing and asset management services are recorded on an accrual basis as services are rendered under the applicable agreements, and when receipt of fees is reasonably certain. We do not recognize incentive income from our investment management business until contingencies have been eliminated. Accordingly, revenue recognition has been deferred for certain fees received which are subject to potential repayment provisions. Depending on the structure of our investment management vehicles, certain incentive fees may be in the form of carried interest or promote distributions.

Cash and Cash Equivalents

We classify highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents. We place our cash and cash equivalents with high credit quality institutions to minimize credit risk exposure. As of, and for the periods ended, June 30, 2010 and December 31, 2009, we had bank balances in excess of federally insured amounts. We have not experienced any losses on our demand deposits, commercial paper or money market investments.

Securities

We classify our securities as held-to-maturity, available-for-sale, or trading on the date of acquisition of the investment. On August 4, 2005, we decided to change the accounting classification of certain of our securities from available-for-sale to held-to-maturity. Held-to-maturity investments are stated at cost adjusted for the amortization of any premiums or discounts, which are amortized through the consolidated statements of operations using the effective interest method described above. Other than in the instance of an other-than-temporary impairment (as discussed below), these held-to-maturity investments are shown in our consolidated financial statements at their adjusted values pursuant to the methodology described above.

We may also invest in securities which may be classified as available-for-sale. Available-for-sale securities are carried at estimated fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity. Many of these investments are relatively illiquid and management is required to estimate their fair values. In making these estimates, management utilizes market prices provided by dealers who make markets in these securities, but may, under limited circumstances, adjust these valuations based on management’s judgment. Changes in the valuations do not affect our reported income or cash flows, but impact shareholders’ equity and, accordingly, book value per share.

- 6 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Further, as required under GAAP, when, based on current information and events, there has been an adverse change in cash flows expected to be collected from those previously estimated, an other-than-temporary impairment is deemed to have occurred. A change in expected cash flows is considered adverse if the present value of the revised cash flows (taking into consideration both the timing and amount of cash flows expected to be collected) discounted using the security’s current yield is less than the present value of the previously estimated remaining cash flows, adjusted for cash receipts during the intervening period. Should an other-than-temporary impairment be deemed to have occurred, the security is written down to fair value. The total other-than-temporary impairment is bifurcated into (i) the amount related to expected cre dit losses, and (ii) the amount related to fair value adjustments in excess of expected credit losses, or the Valuation Adjustment. The portion of the other-than-temporary impairment related to expected credit losses is calculated by comparing the amortized cost basis of the security to the present value of cash flows expected to be collected, discounted at the security’s current yield, and is recognized through earnings in the consolidated statement of operations. The remaining other-than-temporary impairment related to the Valuation Adjustment is recognized as a component of accumulated other comprehensive income (loss) in shareholders’ equity. A portion of other-than-temporary impairments recognized through earnings is accreted back to the amortized cost basis of the security through interest income, while amounts recognized through other comprehensive income (loss) are amortized over the life of the security with no impact on earnings.

Loans Receivable, Provision for Loan Losses, Loans Held-for-Sale and Related Allowance

We purchase and originate commercial real estate debt and related instruments, or Loans, generally to be held as long-term investments at amortized cost. Management is required to periodically evaluate each of these Loans for possible impairment. Impairment is indicated when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the Loan. If a Loan is determined to be impaired, we write down the Loan through a charge to the provision for loan losses. Impairment on these loans is measured by comparing the estimated fair value of the underlying collateral to the carrying value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditwor thiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management. Actual losses, if any, could ultimately differ from these estimates.

In addition, for certain pools of smaller loans which have similar credit characteristics, primarily loans in our other consolidated VIEs, we have recorded a general provision for loan losses in lieu of the asset-specific provisions we record on all other loans. This general provision is based on macroeconomic data with respect to historic loan losses, vintage, property type, and other factors deemed relevant for such loan pools. These loans do not undergo the same level of asset management as our larger, direct investments.

Loans held-for-sale are carried at the lower of our amortized cost basis and fair value. A reduction in the fair value of loans held-for-sale is recorded as a charge to our consolidated statement of operations as a valuation allowance on loans held-for-sale.

Deferred Financing Costs

The deferred financing costs which are included in prepaid expenses and other assets on our consolidated balance sheets include issuance costs related to our debt obligations and are amortized using the effective interest method, or a method that approximates the effective interest method, over the life of the related obligations.

Repurchase Obligations

In certain circumstances, we have financed the purchase of investments from a counterparty through a repurchase agreement with that same counterparty. We currently record these investments in the same manner as other investments financed with repurchase agreements, with the investment recorded as an asset and the related borrowing under any repurchase agreement recorded as a liability on our consolidated balance sheets. Interest income earned on the investments and interest expense incurred on the repurchase obligations are reported separately on our consolidated statements of operations.

Subsequent to our origination of these investments, revisions to GAAP presume that an initial transfer of a financial asset and a repurchase financing shall be evaluated as a linked transaction and not evaluated separately. If the transaction does not meet the requirements for sale accounting, it shall generally be accounted for as a forward contract, as opposed to the current presentation, where the purchased asset and the repurchase liability are reflected separately on the balance sheet. This revised guidance was effective on a prospective basis, as of January 1, 2009, with earlier application prohibited. Accordingly, new transactions entered into subsequently, which are subject to the revised guidance, may be presented differently on our consolidated financial statements.

Interest Rate Derivative Financial Instruments

In the normal course of business, we use interest rate derivative financial instruments to manage, or hedge, cash flow variability caused by interest rate fluctuations. Specifically, we currently use interest rate swaps to effectively convert floating rate liabilities that are financing fixed rate assets, to fixed rate liabilities. The differential to be paid or received on these agreements is recognized on the accrual basis as an adjustment to the interest expense related to the attendant liability. The interest rate swap agreements are generally accounted for on a held-to-maturity basis, and, in cases where they are terminated early, any gain or loss is generally amortized over the remaining life of the hedged item. These swap agreements must be effective in reducing the variability of cash flows of the hedged items in order to quali fy for the aforementioned hedge accounting treatment. Changes in value of effective cash flow hedges are reflected in our consolidated financial statements through accumulated other comprehensive income (loss) and do not affect our net income. To the extent a derivative does not qualify for hedge accounting, and is deemed a non-hedge derivative, the changes in its value are included in net income.

- 7 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

To determine the fair value of interest rate derivative financial instruments, we use a third-party derivative specialist to assist us in periodically valuing our interests.

Income Taxes

Our financial results generally do not reflect provisions for current or deferred income taxes on our REIT taxable income. Management believes that we operate in a manner that will continue to allow us to be taxed as a REIT and, as a result, we do not expect to pay substantial corporate level taxes (other than taxes payable by our taxable REIT subsidiaries). Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we may be subject to federal, state and local income tax on current and past income, and penalties.

Accounting for Stock-Based Compensation

Compensation expense relating to stock-based compensation is recognized in net income using a fair value measurement method, which we determine with the assistance of a third-party appraisal firm. Compensation expense for the time vesting of stock-based compensation grants is recognized on the accelerated attribution method and compensation expense for performance vesting of stock-based compensation grants is recognized on a straight line basis.

The fair value of the performance vesting restricted common stock is measured on the grant date using a Monte Carlo simulation to estimate the probability of the market vesting conditions being satisfied. The Monte Carlo simulation is run approximately 100,000 times. For each simulation, the payoff is calculated at the settlement date, and is then discounted to the grant date at a risk-free interest rate. The average of the values over all simulations is the expected value of the restricted shares on the grant date. The valuation is performed in a risk-neutral framework, so no assumption is made with respect to an equity risk premium. Significant assumptions used in the valuation include an expected term and stock price volatility, an estimated risk-free interest rate and an estimated dividend growth rate.

Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by us.

Comprehensive Income (Loss)

Total comprehensive loss was ($82.8) million and ($71.5) million, for the six months ended June 30, 2010 and 2009, respectively. The primary components of comprehensive loss other than net income (loss) are the unrealized gains and losses on derivative financial instruments and the component of other-than-temporary impairments of securities related to the Valuation Adjustment.

There was a one-time $3.8 million adjustment to accumulated other comprehensive loss upon our adoption of new accounting guidance effective January 1, 2010. See below in this Note 2 the discussion under “Recent Accounting Pronouncements” for additional information. See also Note 12 for additional discussion of accumulated other comprehensive loss.

Earnings per Share of Common Stock

Basic earnings per share, or EPS, is computed based on the net earnings allocable to common stock and stock units, divided by the weighted average number of shares of common stock and stock units outstanding during the period. Diluted EPS is based on the net earnings allocable to common stock and stock units, divided by the weighted average number of shares of common stock and stock units and potentially dilutive common stock options and warrants. See also Note 12 for additional discussion of earnings per share.

Use of Estimates

The preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates.

Reclassifications

Certain reclassifications have been made in the presentation of the prior period consolidated financial statements to conform to the June 30, 2010 presentation. Primarily, certain assets and liabilities of our consolidated VIEs have been presented separately on our consolidated balance sheet. See above in this Note 2 the discussion under “Balance Sheet Presentation” for additional information.

- 8 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Segment Reporting

We operate in two reportable segments. We have an internal information system that produces performance and asset data for the two segments along service lines.

The Balance Sheet Investment segment includes our portfolio of interest earning assets and the financing thereof.

The Investment Management segment includes the investment management activities of our wholly-owned investment management subsidiary, CT Investment Management Co. LLC, or CTIMCO, and its subsidiaries, as well as our co-investments in investment management vehicles. CTIMCO is a taxable REIT subsidiary and serves as the investment manager of Capital Trust, Inc., all of our investment management vehicles and all of our CT CDOs, and serves as senior servicer and special servicer for certain of our investments and for third parties.

Goodwill

Goodwill represents the excess of acquisition costs over the fair value of the net assets of businesses acquired. Goodwill is reviewed, at least annually, to determine if there is an impairment at a reporting unit level, or more frequently if an indication of impairment exists. During the second quarter of 2009, we completely impaired goodwill, and therefore have not recorded any goodwill as of June 30, 2010.

Fair Value of Financial Instruments

The “Fair Value Measurements and Disclosures” Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or the Codification, defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements under GAAP. Specifically, this guidance defines fair value based on exit price, or the price that would be received upon the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date. Our assets and liabilities which are measured at fair value are discussed in Note 16.

Recent Accounting Pronouncements

New accounting guidance which was effective as of January 1, 2010 changed the criteria for consolidation of VIEs and removed a preexisting consolidation exception for qualified special purpose entities, such as certain securitization vehicles. The amended guidance requires a qualitative, rather than quantitative assessment of when a VIE should be consolidated. Specifically, an entity would generally be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.

As a result of the amended guidance, we have consolidated an additional seven VIEs beginning January 1, 2010, all of which are securitization vehicles not sponsored by us. We have consolidated these entities generally due to our ownership interests in subordinate classes of securities issued by the VIEs, which investments carry certain control provisions. Although our investments are generally passive in nature, by owning more than 50% of the controlling class of each VIE we do control special servicer naming rights, which we believe gives us the power to direct the most significant economic activities of these entities.

Upon consolidation of these seven VIEs, we recorded a one-time adjustment to shareholders’ equity of ($41.8) million on January 1, 2010. This reduction in equity is due to the difference between the net carrying value of our investment in the newly consolidated VIEs and the net assets, or equity, of those VIEs. This difference was primarily caused by asset impairments recorded at the VIEs which are in excess of our investment amount. Due to the fact that the liabilities of these VIEs are entirely non-recourse to us, this excess charge to equity, as well as similar charges on VIEs previously consolidated, will eventually be reversed when our interests in the VIEs are repaid, sold, or the VIEs are otherwise deconsolidated in the future.

In January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,” or ASU 2010-06. ASU 2010-06 amends existing disclosure guidance related to fair value measurements. Specifically, ASU 2010-06 requires (i) details of significant asset or liability transfers in and out of Level 1 and Level 2 measurements within the fair value hierarchy, and (ii) inclusion of gross purchases, sales, issuances, and settlements within the rollforward of assets and liabilities valued using Level 3 inputs within the fair value hierarchy. In addition, ASU 2010-06 clarifies and increases existing disclosure requirements related to (i) the disaggregation of fair value disclosures, and (ii) the inputs used in arriving at fair values for asse ts and liabilities valued using Level 2 and Level 3 inputs within the fair value hierarchy. ASU 2010-06 is effective for the first interim or annual period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward, which is required for annual reporting periods beginning after December 15, 2010 and for interim periods within those years. The adoption of ASU 2010-06 did not have a material impact on our consolidated financial statements. Additional disclosure, as applicable, is included in Note 16.

- 9 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

In February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement that, for listed companies, financial statements clearly disclose the date through which subsequent events have been evaluated. Subsequent events must still be evaluated through the date of financial statement issuance; however, the disclosure requirement has been removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted in February 2010. The adoption of ASU 2010-09 did not have a material impact on our consolidated financial statements.

Note 3. Securities Held-to-Maturity

As described in Note 2, our consolidated balance sheets separately state our assets and liabilities and certain assets and liabilities of our consolidated VIEs. The following disclosures relate only to our securities portfolio we own directly. See also Note 11 for comparable disclosures regarding our securities which are held in consolidated VIEs, as separately stated on our consolidated balance sheets.

Our securities portfolio consists of commercial mortgage-backed securities, or CMBS, collateralized debt obligations, or CDOs, and other securities. Activity relating to our securities portfolio for the six months ended June 30, 2010 was as follows (in thousands):

	CMBS			CDOs & Other		Total Book Value (1)
December 31, 2009		$2,081			$15,251		$17,332
Principal paydowns		(84	)		—		(84	)
Discount/premium amortization & other (2)		122			325		447
Other-than-temporary impairments:
Recognized in earnings		(227	)		—		(227	)
Recognized in accumulated other comprehensive income		227			—		227
June 30, 2010		$2,119			$15,576		$17,695

(1)	Includes securities with a total face value of $36.1 million and $105.2 million as of June 30, 2010 and December 31, 2009, respectively. Securities with an aggregate face value of $69.0 million, which had a net carrying value of zero as of December 31, 2009, have been eliminated in consolidation beginning January 1, 2010 as discussed in Note 2.
(2)	Includes mark-to-market adjustments on securities previously classified as available-for-sale, amortization of other-than-temporary impairments, and losses, if any.

As detailed in Note 2, on August 4, 2005, we changed the accounting classification of our then portfolio of securities from available-for-sale to held-to-maturity. While we typically account for the securities in our portfolio on a held-to-maturity basis, under certain circumstances we will account for securities on an available-for-sale basis. As of both June 30, 2010 and December 31, 2009, we had no securities classified as available-for-sale. Our securities’ book value of $17.7 million as of June 30, 2010 is comprised of (i) our amortized cost basis, as defined under GAAP, of $24.2 million (of which $5.9 million related to CMBS and $18.3 million related to CDOs and other securities), (ii) amounts related to mark-to-market adjustments on securities previously classified as available-for-sale of ($549,000) and (iii) the portion of other-than-temporary impairments not related to expected credit losses of ($6.0) million.

- 10 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details overall statistics for our securities portfolio as of June 30, 2010 and December 31, 2009:

	June 30, 2010	December 31, 2009
Number of securities	7	9
Number of issues	5	6
Rating (1) (2)	CC	B-
Fixed / Floating (in millions) (3)	$17 / $1	$16 / $1
Coupon (1) (4)	9.60%	9.82%
Yield (1) (4)	7.57%	7.89%
Life (years) (1) (5)	4.3	2.8

(1)	Represents a weighted average as of June 30, 2010 and December 31, 2009, respectively.
(2)	Weighted average ratings are based on the lowest rating published by Fitch Ratings, Standard & Poor’s or Moody’s Investors Service for each security and exclude unrated equity investments in CDOs with a net book value of $1.2 million as of both June 30, 2010 and December 31, 2009.
(3)	Represents the aggregate net book value of our portfolio allocated between fixed rate and floating rate securities.
(4)	Coupon is based on the securities’ contractual interest rates, while yield is based on expected cash flows for each security, and considers discounts/premiums and asset non-performance. Calculations for floating rate securities are based on LIBOR of 0.35% and 0.23% as of June 30, 2010 and December 31, 2009, respectively.
(5)	Weighted average life is based on the timing and amount of future expected principal payments through the expected repayment date of each respective investment.

The table below details the ratings and vintage distribution of our securities as of June 30, 2010 and December 31, 2009 (in thousands):

	Rating as of June 30, 2010			Rating as of December 31, 2009
Vintage	B	CCC and Below	Total	B	CCC and Below	Total
2003	$—	$14,557	$14,557	$13,488	$1,162	$14,650
2002	—	1,019	1,019	—	602	602
2000	—	871	871	—	879	879
1997	233	—	233	246	—	246
1996	—	1,015	1,015	—	955	955
Total	$233	$17,462	$17,695	$13,734	$3,598	$17,332

Other-than-temporary impairments

Quarterly, we reevaluate our securities portfolio to determine if there has been an other-than-temporary impairment based upon expected future cash flows from each securities investment. As a result of this evaluation, under the accounting guidance discussed in Note 2, during the six months ended June 30, 2010, we determined that no additional other-than-temporary impairments were necessary for our securities portfolio. However, we did determine that $227,000 of impairments previously recorded in other comprehensive income should be recognized as credit losses due to a decrease in cash flow expectations for one of our securities with a net book value of $976,000.

To determine the component of the gross other-than-temporary impairment related to expected credit losses, we compare the amortized cost basis of each other-than-temporarily impaired security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. Significant judgment of management is required in this analysis that includes, but is not limited to, (i) assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans, and (ii) current subordination levels at both the individual loans which serve as collateral under our securities and at the securities themselves.

- 11 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table summarizes activity related to the other-than-temporary impairments of our securities during the six months ended June 30, 2010 (in thousands):

	Gross Other-Than-Temporary Impairments			Credit Related Other-Than-Temporary Impairments			Non-Credit Related Other-Than-Temporary Impairments
December 31, 2009		$85,838			$79,210			$6,628
Impact of change in accounting principle (1)		(68,989	)		(68,989	)		—
Additions due to change in expected cash flows		—			227			(227	)
Amortization of other-than-temporary impairments		(549	)		(122	)		(427	)
June 30, 2010		$16,300			$10,326			$5,974

(1) Due to the consolidation of additional VIEs, as discussed in Note 2, other-than-temporary impairments which were previously recorded on our investment in these entities have been eliminated in consolidation beginning January 1, 2010.

Unrealized losses and fair value of securities

Certain of our securities are carried at values in excess of their fair values. This difference can be caused by, among other things, changes in credit spreads and interest rates. The following table shows the gross unrealized losses and fair value of our securities for which the fair value is lower than our book value as of June 30, 2010 and that are not deemed to be other-than-temporarily impaired (in millions):

	Less Than 12 Months				Greater Than 12 Months					Total
	Estimated Fair Value		Gross Unrealized Loss		Estimated Fair Value		Gross Unrealized Loss			Estimated Fair Value		Gross Unrealized Loss			Book Value (1)
Floating Rate		$—		$—		$0.2		($0.9	)		$0.2		($0.9	)		$1.1
Fixed Rate		—		—		2.4		(12.0	)		2.4		(12.0	)		14.4
Total		$—		$—		$2.6		($12.9	)		$2.6		($12.9	)		$15.5

(1) Excludes, as of June 30, 2010, $2.2 million of securities which were carried at or below fair value and securities against which an other-than-temporary impairment equal to the entire book value was recognized in earnings.

As of June 30, 2010, four securities with an aggregate carrying value of $15.5 million were carried at values in excess of their fair values. Fair value for these securities was $2.6 million as of June 30, 2010. In total, as of June 30, 2010, we had seven investments in securities with an aggregate carrying value of $17.7 million that have an estimated fair value of $6.0 million, including three investments in CMBS with an estimated fair value of $3.4 million and four investments in CDOs and other securities with an estimated fair value of $2.6 million. These valuations do not include the value of interest rate swaps entered into in conjunction with the purchase/financing of these investments, if any.

The following table shows the gross unrealized losses and fair value of our securities for which the fair value is lower than our book value as of December 31, 2009 and that are not deemed to be other-than-temporarily impaired (in millions):

	Less Than 12 Months				Greater Than 12 Months					Total
	Estimated Fair Value		Gross Unrealized Loss		Estimated Fair Value		Gross Unrealized Loss			Estimated Fair Value		Gross Unrealized Loss			Book Value (1)
Floating Rate		$—		$—		$0.2		($0.9	)		$0.2		($0.9	)		$1.1
Fixed Rate		—		—		3.8		(9.7	)		3.8		(9.7	)		13.5
Total		$—		$—		$4.0		($10.6	)		$4.0		($10.6	)		$14.6

(1) Excludes, as of December 31, 2009, $2.7 million of securities which were carried at or below fair value and securities against which an other-than-temporary impairment equal to the entire book value was recognized in earnings.

- 12 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

As of December 31, 2009, three securities with an aggregate carrying value of $14.6 million were carried at values in excess of their fair values. Fair value for these securities was $4.0 million as of December 31, 2009. In total, as of December 31, 2009, we had nine investments in securities with an aggregate carrying value of $17.3 million that have an estimated fair value of $8.5 million, including three investments in CMBS with an estimated fair value of $3.9 million and six investments in CDOs and other securities with an estimated fair value of $4.7 million. These valuations do not include the value of interest rate swaps entered into in conjunction with the purchase/financing of these investments, if any.

We determine fair values using third party dealer assessments of value, supplemented in limited cases with our own internal financial model-based estimations of fair value. We regularly examine our securities portfolio and have determined that, despite the differences between carrying value and fair value discussed above, our expectations of future cash flows have only changed adversely for four of our securities, against which we have recognized other-than-temporary-impairments.

Our estimation of cash flows expected to be generated by our securities portfolio is based upon an internal review of the underlying loans securing our investments both on an absolute basis and compared to our initial underwriting for each investment. Our efforts are supplemented by third party research reports, third party market assessments and our dialogue with market participants. As of June 30, 2010, we do not intend to sell our securities, nor do we believe it is more likely than not that we will be required to sell our securities before recovery of their amortized cost bases, which may be at maturity. This, combined with our assessment of cash flows, is the basis for our conclusion that these investments are not impaired, other than as described above, despite the differences between estimated fair value and book value. We attri bute the difference between book value and estimated fair value to the current market dislocation and a general negative bias against structured financial products such as CMBS and CDOs.

Investments in variable interest entities

Our securities portfolio includes investments in both CMBS and CDOs, which securitization structures are generally considered VIEs. We have not consolidated these VIEs due to our determination that, based on the structural provisions of each entity and the nature of our investments, we do not have the power to direct the activities that most significantly impact these entities' economic performance.

These securities were acquired through investment, and do not represent a securitization or other transfer of our assets. We are not named as special servicer on these investments, nor do we have the right to name special servicer.

We are not obligated to provide, nor have we provided, any financial support to these entities. As of June 30, 2010, our maximum exposure to loss as a result of our investment in these entities is $36.1 million, the principal amount of our securities portfolio. We have recorded other-than-temporary impairments of $16.3 million against this portfolio, resulting in a net exposure to loss of $19.8 million as of June 30, 2010.

Note 4. Loans Receivable, net

As described in Note 2, our consolidated balance sheets separately state our assets and liabilities and certain assets and liabilities of our consolidated VIEs. The following disclosures relate only to our loans receivable portfolio we own directly. See also Note 11 for comparable disclosures regarding our loans receivable which are held in consolidated VIEs, as separately stated on our consolidated balance sheets.

- 13 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Activity relating to our loans receivable for the six months ended June 30, 2010 was as follows (in thousands):

	Gross Book Value			Provision for Loan Losses			Net Book Value (1)
December 31, 2009		$1,126,697			($359,952	)		$766,745
Additional fundings (2)		1,071			—			1,071
Satisfactions (3)		(6,000	)		—			(6,000	)
Principal paydowns		(8,109	)		—			(8,109	)
Discount/premium amortization & other		378			—			378
Provision for loan losses (4)		—			(31,000	)		(31,000	)
Realized loan losses		(17,511	)		17,511			—
Reclassification to loans held-for-sale		(16,130	)		10,643			(5,487	)
June 30, 2010		$1,080,396			($362,798	)		$717,598

(1)	Includes loans with a total principal balance of $1.10 billion and $1.13 billion as of June 30, 2010 and December 31, 2009, respectively.
(2)	Additional fundings includes capitalized interest of $185,000.
(3)	Includes final maturities, full repayments, and sales.
(4)	Provision for loan losses is presented net of a $10.0 million recovery of provisions recorded in prior periods.

The following table details overall statistics for our loans receivable portfolio as of June 30, 2010 and December 31, 2009:

	June 30, 2010	December 31, 2009
Number of investments	33	35
Fixed / Floating (in millions) (1)	$53 / $665	$58 / $708
Coupon (2) (3)	3.81%	3.77%
Yield (2) (3)	3.89%	3.59%
Maturity (years) (2) (4)	1.9	2.2

(1)	Represents the aggregate net book value of our portfolio allocated between fixed rate and floating rate loans.
(2)	Represents a weighted average as of June 30, 2010 and December 31, 2009, respectively.
(3)	Calculations for floating rate loans are based on LIBOR of 0.35% and 0.23% as of June 30, 2010 and December 31, 2009, respectively.
(4)	Represents the final maturity of each investment assuming all extension options are executed.

- 14 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The tables below detail the types of loans in our portfolio, as well as the property type and geographic distribution of the properties securing our loans, as of June 30, 2010 and December 31, 2009 (in thousands):

	June 30, 2010					December 31, 2009
Asset Type	Book Value		Percentage			Book Value		Percentage
Senior mortgages		$300,829		42	%		$302,999		40	%
Mezzanine loans		204,173		28			209,980		27
Subordinate interests in mortgages		138,172		19			179,525		23
Other		74,424		11			74,241		10
Total		$717,598		100	%		$766,745		100	%
Property Type	Book Value		Percentage			Book Value		Percentage
Office		$333,050		46	%		$339,142		44	%
Hotel		166,750		23			176,557		23
Healthcare		112,992		16			113,900		15
Multifamily		18,115		3			23,657		3
Retail		14,226		2			14,219		2
Other		72,465		10			99,270		13
Total		$717,598		100	%		$766,745		100	%
Geographic Location	Book Value		Percentage			Book Value		Percentage
Northeast		$221,993		31	%		$222,303		29	%
Southeast		197,396		28			196,640		26
Southwest		96,357		13			97,384		13
West		67,274		9			76,751		10
Northwest		35,788		5			64,260		8
Midwest		18,713		3			18,827		2
International		44,644		6			54,800		7
Diversified		35,433		5			35,780		5
Total		$717,598		100	%		$766,745		100	%

Quarterly, management evaluates our loan portfolio for impairment as described in Note 2. As of June 30, 2010, we identified nine loans with an aggregate gross book value of $460.7 million for impairment, against which we have recorded a $362.8 million provision, and which are carried at an aggregate net book value of $97.9 million. These include five loans with an aggregate gross carrying value of $358.9 million which are current in their interest payments, against which we have recorded a $295.4 million provision, as well as four loans which are delinquent on contractual payments with an aggregate gross carrying value of $101.8 million, against which we have recorded a $67.4 million provision.

Our average balance of impaired loans was $76.2 million during the six months ended June 30, 2010. Subsequent to their impairment, we recorded interest on these loans of $6.0 million during the first six months of 2010. Our average balance of impaired loans was $18.0 million during the six months ended June 30, 2009. Subsequent to their impairment, we recorded interest on these loans of $185,000 during the first six months of 2009.

In some cases our loan originations are not fully funded at closing, creating an obligation for us to make future fundings, which we refer to as Unfunded Loan Commitments. Typically, Unfunded Loan Commitments are part of construction and transitional loans. As of June 30, 2010, our two Unfunded Loan Commitments totaled $1.5 million, which will generally only be funded when and/or if the borrower meets certain performance hurdles with respect to the underlying collateral, or to reimburse costs associated with leasing activity.

Note 5. Loans Held-for-Sale, Net

During the second quarter of 2010, we reclassified a $16.1 million mezzanine loan to loans held-for-sale, against which we have previously recorded a provision for loan losses of $10.6 million. This loan had a net book value of $5.5 million as of June 30, 2010, which amount approximates fair value. The loan has a fixed coupon of 8.55%; however it is in maturity default and is not currently paying interest. See also Note 11 for disclosures regarding loans held-for-sale which are held in consolidated VIEs, as separately stated on our consolidated balance sheets.

- 15 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 6. Real Estate Held-for-Sale

We do not have any real estate held-for-sale as of June 30, 2010. During the six months ended June 30, 2009, we recorded a $2.2 million impairment against an investment which was sold in July 2009. See also Note 11 for disclosures regarding real estate held-for-sale which are held in consolidated VIEs, as separately stated on our consolidated balance sheets.

Note 7. Equity Investments in Unconsolidated Subsidiaries

Our equity investments in unconsolidated subsidiaries consist primarily of our co-investments in investment management vehicles that we sponsor and manage. As of June 30, 2010, we had co-investments in two such vehicles, CT Mezzanine Partners III, Inc., or Fund III, in which we have a 4.7% investment, and CT Opportunity Partners I, LP, or CTOPI, in which we have a 4.6% investment. In addition to our co-investments, we record capitalized costs associated with these vehicles in equity investments in unconsolidated subsidiaries. As of June 30, 2010, $16.3 million of our $25.0 million capital commitment to CTOPI remains unfunded.

Activity relating to our equity investments in unconsolidated subsidiaries for the six months ended June 30, 2010 was as follows (in thousands):

	Fund III			CTOPI		Other			Total
December 31, 2009		$158			$2,175		$18			$2,351
Contributions		—			1,528		—			1,528
(Loss) income from equity investments		(33	)		1,338		(3	)		1,302
June 30, 2010		$125			$5,041		$15			$5,181

In accordance with the respective management agreements with Fund III and CTOPI, CTIMCO may earn incentive compensation when certain returns are achieved for the shareholders/partners of Fund III and CTOPI, which will be accrued if and when earned, and when appropriate contingencies have been eliminated. In the event that additional capital calls are made at Fund III, we may be required to refund some or all of the $5.6 million incentive compensation previously received. As of June 30, 2010, our maximum exposure to loss from Fund III and CTOPI was $6.2 million and $8.7 million, respectively.

Note 8. Debt Obligations

As described in Note 2, our consolidated balance sheets separately state our assets and liabilities and certain assets and liabilities of our consolidated VIEs. The following disclosures relate to the debt obligations of Capital Trust, Inc. and its wholly-owned subsidiaries only. See also Note 11 for comparable disclosures regarding the debt obligations of our consolidated VIEs, which are non-recourse to us, as separately stated on our consolidated balance sheets.

- 16 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

As of June 30, 2010 and December 31, 2009, we had $657.3 million and $677.4 million of total debt obligations outstanding, respectively. The balances of each category of debt, their respective coupons and all-in effective costs, including the amortization of fees and expenses, were as follows (in thousands):

	June 30, 2010		December 31, 2009	June 30, 2010
Recourse Debt Obligations	Principal Balance	Book Balance	Book Balance	Coupon(1)	All-In Cost(1)		Maturity Date(2)
Repurchase obligations
JPMorgan	$247,795	$247,600	$258,203	1.87%	1.92%		March 15, 2011
Morgan Stanley	137,796	137,693	148,170	2.21%	2.21%		March 15, 2011
Citigroup	43,231	43,196	43,764	1.69%	1.69%		March 15, 2011
Total repurchase obligations	428,822	428,489	450,137	1.96%	1.99%		March 15, 2011
Senior credit facility	98,665	98,665	99,188	3.35%	7.20%		March 15, 2011
Junior subordinated notes (3)	143,753	130,112	128,077	1.00%	4.28%		April 30, 2036
Total/Weighted Average	$671,240	$657,266	$677,402	1.96%	3.23%	(4)	March 4, 2016

(1)	Represents a weighted average for each respective facility, assuming LIBOR of 0.35% at June 30, 2010 for floating rate debt obligations.
(2)	Maturity dates for our repurchase obligations with JPMorgan, Morgan Stanley and Citigroup, and our senior credit facility, do not give effect to the potential one year extension, to March 15, 2012, which is at our lenders’ discretion.
(3)	The coupon for junior subordinated notes will remain at 1.00% per annum through April 29, 2012, increase to 7.23% per annum for the period from April 30, 2012 through April 29, 2016 and then convert to a floating interest rate of three-month LIBOR + 2.44% per annum through maturity.
(4)	Including the impact of interest rate hedges with an aggregate notional balance of $64.2 million as of June 30, 2010, the effective all-in cost of our debt obligations would be 3.70% per annum.

Repurchase Obligations

On March 16, 2009, we amended and restructured our repurchase obligations with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global Markets Inc., or collectively Citigroup.

Specifically, on March 16, 2009, we entered into separate amendments to the respective master repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to the terms of each such agreement, we amended the terms of each such facility, without any change to the collateral pool securing the debt owed to each repurchase lender, to provide the following:

· Maturity dates were modified to one year from the March 16, 2009 effective date of each respective agreement, which maturity dates may be extended further for two one-year periods. The first one-year extension option was exercised by us in March 2010, as a result of a successful twenty percent reduction in the amount owed each repurchase lender from the amount outstanding as of the March 16, 2009 amendment. The second one-year extension option is exercisable by each repurchase lender in its sole discretion. Currently, maturity dates for our repurchase agreements have been extended to March 15, 2011.

· We agreed to pay each repurchase lender periodic amortization as follows: (i) mandatory payments, payable monthly in arrears, in an amount equal to sixty-five (65%) of the net interest income generated by each such lender’s collateral pool (this amount did not change during the first one-year extension period), and (ii) one hundred percent (100%) of the principal proceeds received from the repayment of assets in each such lender’s collateral pool. In addition, under the terms of the amendment with Citigroup, we agreed to pay Citigroup an additional quarterly amortization payment generally equal to the product of (i) the total cash paid (including both principal and interest) during the period to our senior credit facility in excess of an amount equivalent to LIBOR plus 1.75% based upon a $100.0 million facility amount, and (ii) a fraction, the numerator of which is Citigroup’s then outstanding repurchase facility balance and the denominator is the total outstanding indebtedness of our repurchase lenders.

· We further agreed to amortize each repurchase lender’s secured debt at the end of each calendar quarter on a pro rata basis until we have repaid our repurchase facilities and thereafter our senior credit facility in an amount equal to any unrestricted cash in excess of the sum of (i) $25.0 million, and (ii) any unfunded loan and co-investment commitments.

- 17 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

· Each repurchase lender was relieved of its obligation to make future advances with respect to unfunded commitments arising under investments in its collateral pool.

· We received the right to sell or refinance collateral assets provided we apply one hundred percent (100%) of the proceeds to pay down the related repurchase facility balance subject to minimum release price mechanics.

· We eliminated the cash margin call provisions and amended the mark-to-market provisions that were in effect under the original terms of the repurchase facilities. Under the revised facilities, going forward, collateral value is expected to be determined by our lenders based upon changes in the performance of the underlying real estate collateral as opposed to changes in market spreads under the original terms. Beginning September 2009, each collateral pool may be valued monthly. If a repurchase lender determines that the ratio of their total outstanding facility balance to total collateral value exceeds 1.15x the ratio calculated as of the effective date of the amended agreements, we may be required to liquidate collateral and reduce the borrowings or post other collateral in an effort to bring the ratio back into compliance with the prescribed ratio, which may or may not be successful.

In each master repurchase agreement amendment and the amendment to our senior credit agreement described in greater detail below, which we collectively refer to as our restructured debt obligations, we also replaced all existing financial covenants with the following uniform covenants which:

· prohibit new balance sheet investments except, subject to certain limitations, co-investments in our investment management vehicles or protective investments to defend existing collateral assets on our balance sheet;

· prohibit the incurrence of any additional indebtedness except in limited circumstances;

· limit the total cash compensation to all employees and, specifically with respect to our chief executive officer and chief financial officer, freeze their base salaries at 2008 levels, and require cash bonuses to any of them to be approved by a committee comprised of one representative designated by the repurchase lenders, the administrative agent under the senior credit facility and a representative of our board of directors;

· prohibit the payment of cash dividends to our common shareholders except to the minimum extent necessary to maintain our REIT status;

· require us to maintain a minimum amount of liquidity, as defined, of $5.0 million;

· trigger an event of default if our current chief executive officer ceases his employment with us during the term of the agreement and we fail to hire a replacement acceptable to the lenders; and

· trigger an event of default, if any event or condition occurs which causes any obligation or liability of more than $1.0 million to become due prior to its scheduled maturity or any monetary default under our restructured debt obligations if the amount of such obligation is at least $1.0 million.

On March 16, 2009, in connection with the restructuring discussed above, we issued to JPMorgan, Morgan Stanley and Citigroup warrants to purchase 3,479,691 shares of our class A common stock at an exercise price of $1.79 per share, which is equal to the closing bid price on the New York Stock Exchange on March 13, 2009. The fair value assigned to these warrants, totaling $940,000, has been recorded as a discount on the related debt obligations with a corresponding increase to additional paid-in capital, and will be accreted as a component of interest expense over the term of each respective facility. The warrants were valued using the Black-Scholes valuation method.

- 18 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details the aggregate outstanding principal balance, carrying value and fair value of our assets, primarily loans receivable, which were pledged as collateral under our repurchase facilities as of June 30, 2010, as well as the amount at risk under each facility (in thousands). The amount at risk is generally equal to the carrying value of our collateral less the outstanding principal balance of the associated repurchase facility.

		Loans and Securities Collateral Balances, as of June 30, 2010
Repurchase Lender	Facility Balance	Principal Balance	Carrying Value	Fair Market Value (1)	Amount at Risk (2)
JPMorgan	$247,795	$493,550	$369,008	$298,478	$127,727
Morgan Stanley (3)	137,796	367,044	243,555	142,885	36,771
Citigroup	43,231	77,648	76,074	55,762	32,842
	$428,822	$938,242	$688,637	$497,125	$197,340

(1)	Fair values represent the amount at which assets could be sold in an orderly transaction between a willing buyer and willing seller. The immediate liquidation value of these assets would likely be substantially lower.
(2)	Amount at risk is calculated on an asset-by-asset basis for each facility and considers the greater of (a) the carrying value of an asset and (b) the fair value of an asset, in determining the total risk.
(3)	Amounts other than principal exclude certain subordinate interests in our CDOs which have been pledged as collateral to Morgan Stanley. These interests have been eliminated in consolidation and therefore have a carrying value of zero on our balance sheet.

Senior Credit Facility

On March 16, 2009, we entered into an amended and restated senior credit agreement governing our term loan from WestLB AG, New York Branch, participant and administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company Americas, which we collectively refer to as the senior lenders. Pursuant to the amended and restated senior credit agreement, we and the senior lenders agreed to:

· extend the maturity date of the senior credit agreement to be co-terminus with the maturity date of our repurchase facilities (as they may be further extended until March 16, 2012, as described above);

· increase the cash interest rate under the senior credit agreement to LIBOR plus 3.00% per annum (from LIBOR plus 1.75%), plus an accrual rate of 7.20% per annum less the cash interest rate;

· initiate quarterly amortization equal to the greater of: (i) $5.0 million per annum, and (ii) 25% of the annual cash flow received from our then unencumbered collateralized debt obligation interests;

· pledge our unencumbered CDO interests and provide a negative pledge with respect to certain other assets; and

· replace all existing financial covenants with substantially similar covenants and default provisions to those described above with respect to our repurchase facilities.

As of June 30, 2010, we had $98.7 million outstanding under our senior credit facility at a cash cost of LIBOR plus 3.00% per annum. Since we amended and restated our senior credit agreement on March 16, 2009, we have made amortization payments of $6.3 million, and $5.0 million of accrued interest was added to the outstanding balance.

Junior Subordinated Notes

The most subordinate component of our debt obligations are our junior subordinated notes. As of June 30, 2010, these notes had a principal balance of $143.8 million ($130.1 million book balance) at a cash cost of 1.00% per annum.

Pursuant to exchange agreements dated March 16, 2009 and May 14, 2009, we issued a $143.8 million aggregate principal amount of junior subordinated notes which mature on April 30, 2036 and are freely redeemable by us at par at any time. The interest rate payable under the subordinated notes is 1% per annum from the date of issuance through and including April 29, 2012, a fixed rate of 7.23% per annum through and including April 29, 2016, and thereafter a floating rate, reset quarterly, equal to three-month LIBOR plus 2.44% until maturity. The junior subordinated notes contain a covenant that through April 30, 2012, subject to certain exceptions, we may not declare or pay dividends or distributions on, or redeem, purchase or acquire any of our equity interests except to the extent necessary to maintain our status as a REIT.

Note 9. Participations Sold

Participations sold represent interests in certain loans that we originated and subsequently sold to one of our investment management vehicles, CT Large Loan 2006, Inc., and third parties. We present these sold interests as both assets and non-recourse liabilities on the basis that these arrangements do not qualify as sales under GAAP. We have no economic exposure to these liabilities in excess of the value of the assets sold. As of June 30, 2010, we had five such participations sold with a total gross carrying value of $288.4 million.

- 19 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The income earned on the loans is recorded as interest income and an identical amount is recorded as interest expense in the consolidated statements of operations. Generally, participations sold are recorded as assets and liabilities in equal amounts on our consolidated balance sheets. During 2009, we recorded $172.5 million of provisions for loan losses against certain of our participations sold assets, resulting in a net book value of $116.0 million as of June 30, 2010. The associated liabilities have not been adjusted as of June 30, 2010, because we are prohibited by GAAP from reducing their carrying value until the loan assets are contractually extinguished.

The following table describes our participations sold assets and liabilities as of June 30, 2010 and December 31, 2009 (in thousands):

	June 30,			December 31,
	2010			2009
Participations sold assets
Gross carrying value		$288,447			$289,144
Less: Provision for loan losses		(172,465	)		(172,465	)
Net book value of assets		$115,982			$116,679
Participations sold liabilities
Net book value of liabilities		$288,447			$289,144
Net impact to shareholders' equity		($172,465	)		($172,465	)

Note 10. Derivative Financial Instruments

To manage interest rate risk, we typically employ interest rate swaps, or other arrangements, to convert a portion of our floating rate debt to fixed rate debt in order to index match our assets and liabilities. The interest rate swaps that we employ are designated as cash flow hedges and are designed to hedge fixed rate assets against floating rate liabilities. Under cash flow hedges, we pay our hedge counterparties a fixed rate amount and our counterparties pay us a floating rate amount, which we settle monthly, and record as a component of interest expense. Our counterparties in these transactions are financial institutions and we are dependent upon the financial health of these counterparties and a functioning interest rate derivative market in order to effectively execute our hedging strategy.

As described in Note 2, our consolidated balance sheets separately state our assets and liabilities and certain assets and liabilities of our consolidated VIEs. The following disclosures relate only to the interest rate hedge liabilities of Capital Trust, Inc. and its wholly-owned subsidiaries. See also Note 11 for comparable disclosures regarding the interest rate hedge liabilities of our consolidated VIEs, which are non-recourse to us, as separately stated on our consolidated balance sheets.

The following table summarizes the notional and fair values of our interest rate swaps as of June 30, 2010 and December 31, 2009. The notional value provides an indication of the extent of our involvement in the instruments at that time, but does not represent exposure to credit or interest rate risk (in thousands):

Type	Counterparty	June 30, 2010 Notional Amount	Interest Rate (1)	Maturity	June 30, 2010 Fair Value	December 31, 2009 Fair Value
Cash Flow Hedge	JPMorgan Chase	$17,846	5.14%	2014	($1,192)	($1,182)
Cash Flow Hedge	JPMorgan Chase	16,894	4.83%	2014	(1,049)	(966)
Cash Flow Hedge	JPMorgan Chase	16,377	5.52%	2018	(1,292)	(1,239)
Cash Flow Hedge	JPMorgan Chase	7,062	5.11%	2016	(490)	(440)
Cash Flow Hedge	JPMorgan Chase	3,231	5.45%	2015	(243)	(237)
Cash Flow Hedge	JPMorgan Chase	2,818	5.08%	2011	(78)	(120)
Total/Weighted Average		$64,228	5.16%	2015	($4,344)	($4,184)

(1) Represents the gross fixed interest rate we pay to our counterparties under these derivative instruments. We receive an amount of interest indexed to one-month LIBOR on all of our interest rate swaps as of June 30, 2010 and December 31, 2009.

As of both June 30, 2010 and December 31, 2009, all of our derivative financial instruments were recorded at fair value as interest rate hedge liabilities on our consolidated balance sheet. During the six months ended June 30, 2010, we did not enter into any new derivative financial instrument contracts.

- 20 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The table below shows amounts recorded to other comprehensive income and amounts recorded to interest expense from other comprehensive income for the six months ended June 30, 2010 and 2009 (in thousands):

	Amount of gain (loss) recognized		Amount of loss reclassified from OCI
	in OCI for the six months ended		to income for the six months ended (1)
Hedge	June 30, 2010	June 30, 2009	June 30, 2010	June 30, 2009
Interest rate swaps	($160)	$4,440	($1,489)	($1,732)

(1) Represents net amounts paid to swap counterparties during the period, which are included in interest expense, offset by an immaterial amount of non-cash swap amortization.

All of our hedges were classified as highly effective for all of the periods presented. Over the next twelve months we expect approximately $2.8 million to be reclassified from other comprehensive income to interest expense, which amount is generally the present value of expected payments under the respective derivative contracts.

Certain of our derivative agreements contain provisions whereby a default on any of our debt obligations could also constitute a default under these derivative obligations. As of June 30, 2010, derivatives related to these agreements were in a net liability position of $9.8 million based on their contractual terms, which amount excludes certain adjustments made in arriving at fair value in accordance with GAAP. If we breach any of these provisions, we could be required to settle our obligations under the agreements at their termination value. As of June 30, 2010, we were not in default under any of our debt obligations and have not posted any assets as collateral under our derivative agreements.

On October 10, 2008, we terminated an interest rate swap with a notional amount of $18.0 million as a result of our counterparty filing for bankruptcy. In the second quarter of 2010, we paid our former counterparty $246,000 to settle a claim concerning the termination of this interest rate swap, which is included as a component of interest expense on our consolidated statement of operations.

Note 11. Consolidated Variable Interest Entities

As of June 30, 2010, our consolidated balance sheet includes an aggregate $3.7 billion of assets and $3.8 billion of liabilities related to 11 consolidated variable interest entities, or VIEs. Due to the non-recourse nature of these VIEs, and other factors discussed below, our net exposure to loss from investments in these entities is limited to $39.6 million.

Our consolidated VIEs generally include two categories of entities: (i) collateralized debt obligations sponsored and issued by us, which we refer to as CT CDOs, and (ii) other consolidated VIEs, which are also securitization vehicles but were not issued or sponsored by us. We have historically consolidated the CT CDOs; however we began consolidating the additional VIEs as of January 1, 2010, as discussed in Note 2.

CT CDOs

We currently consolidate four collateralized debt obligation, or CDO, trusts, which are VIEs that were sponsored by us. These CT CDO trusts invest in commercial real estate debt instruments, some of which we originated/acquired and transferred to the trust entities, and are financed by the debt and equity they issue. We are named as collateral manager of all four CT CDO trusts and are named special servicer on a number of CDO collateral assets. As a result of consolidation, our subordinate debt and equity ownership interests in these CT CDO trusts have been eliminated, and our balance sheet reflects both the assets held and debt issued by these CDO trusts to third parties. Similarly, our operating results and cash flows include the gross amounts related to the assets and liabilities of the CT CDO entities, as opposed to our net economi c interests in these entities. Fees earned by us for the management of these CDO trusts are eliminated in consolidation.

Our interest in the assets held by these CT CDO trusts, which are consolidated on our balance sheet, is restricted by the structural provisions of these entities, and our recovery of these assets will be limited by the CDO trusts’ distribution provisions, which are subject to change due to covenant breaches or asset impairments, as further described below in this Note 11. The liabilities of the CT CDO trusts, which are also consolidated on our balance sheet, are non-recourse to us, and can generally only be satisfied from each CDO trust’s respective asset pool.

We are not obligated to provide, nor have we provided, any financial support to these CT CDO trusts. Accordingly, as of June 30, 2010, our maximum exposure to loss as a result of our investment in these entities is limited to $234.0 million, the notional amount of the subordinate debt and equity interest we retained in these CDO trusts. After giving effect to certain transfers of these interests, provisions for loan losses and other-than-temporary impairments recorded as of June 30, 2010, our remaining net exposure to loss from these entities is $39.6 million.

- 21 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Other Consolidated VIEs

As discussed above, we currently consolidate seven additional VIEs, all of which are securitization vehicles substantially similar to the CT CDOs. These VIEs invest in commercial real estate debt instruments, which investments were not originated or transferred to the VIEs by us. In addition to our investment in the subordinate classes of the securities issued by these VIEs, we are named special servicer on a number of the VIEs’ assets. As a result of consolidation, our ownership interests in these VIEs have been eliminated, and our balance sheet reflects both the assets held and debt issued by these VIEs to third parties. Similarly, our operating results and cash flows include the gross amounts related to the assets and liabilities of the VIEs, as opposed to our net economic interests in these entities. Special servicing fees pa id to us on assets owned by these VIEs are eliminated in consolidation.

Our interest in the assets held by these VIEs, which are consolidated on our balance sheet, is restricted by the structural provisions of these entities, and a recovery of our investment in the VIEs will be limited by each entity’s distribution provisions. The liabilities of the VIEs, which are also consolidated on our balance sheet, are non-recourse to us, and can generally only be satisfied from each VIE’s respective asset pool.

We are not obligated to provide, nor have we provided, any financial support to these VIEs. In addition, five of these seven investments have been made through our CT CDOs, which limits our exposure to loss as discussed above. Accordingly, as of June 30, 2010, our maximum exposure to loss as a result of our investment in these entities is limited to $69.0 million, the notional amount of our investment in the two VIEs not held by our CT CDOs. Prior to consolidation, we have previously impaired 100% of our investment in these entities, resulting in a zero net exposure to loss as of June 30, 2010.

As described in Note 2, our consolidated balance sheets separately state our assets and liabilities and certain assets and liabilities of our consolidated VIEs. The following disclosures relate specifically to the assets and liabilities of these VIEs, as separately stated on our consolidated balance sheets.

A. Securities Held-to-Maturity – Consolidated VIEs

Our consolidated VIEs’ securities portfolio consists of CMBS, CDOs, and other securities. Activity relating to these securities for the six months ended June 30, 2010 was as follows (in thousands):

	CMBS			CDOs & Other			Total Book Value (1)
December 31, 2009		$624,791			$73,073			$697,864
Impact of consolidation due to change in accounting principal		(78,087	)		—			(78,087	)
Principal paydowns		(4,534	)		(6,526	)		(11,060	)
Discount/premium amortization & other (2)		2,278			(438	)		1,840
Other-than-temporary impairments:
Recognized in earnings		(21,593	)		—			(21,593	)
Recognized in accumulated other comprehensive income		(18,242	)		—			(18,242	)
June 30, 2010		$504,613			$66,109			$570,722

(1)	Includes securities with a total face value of $639.1 million and $751.2 million as of June 30, 2010 and December 31, 2009, respectively. Securities with an aggregate face value of $100.2 million, which had a net carrying value of $78.1 million as of December 31, 2009, have been eliminated in consolidation beginning January 1, 2010 as discussed in Note 2.
(2)	Includes mark-to-market adjustments on securities previously classified as available-for-sale, amortization of other-than-temporary impairments, and losses, if any.

As detailed in Note 2, on August 4, 2005, we changed the accounting classification of our then portfolio of securities from available-for-sale to held-to-maturity. While we typically account for the securities in our portfolio on a held-to-maturity basis, under certain circumstances, we will account for securities on an available-for-sale basis. As of both June 30, 2010 and December 31, 2009, our consolidated VIEs had no securities classified as available-for-sale. Our consolidated VIEs’ securities’ book value of $570.7 million as of June 30, 2010 is comprised of (i) their amortized cost basis, as defined under GAAP, of $585.1 million (of which $518.9 million related to CMBS and $66.1 million related to CDOs and other securities), (ii) amounts related to mark-to-market adjustments on securities previously classified as avai lable-for-sale of $5.7 million, and (iii) the portion of other-than-temporary impairments not related to expected credit losses of ($20.0) million.

- 22 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details overall statistics for our consolidated VIEs’ securities portfolio as of June 30, 2010 and December 31, 2009:

	June 30, 2010	December 31, 2009
Number of securities	58	64
Number of issues	42	47
Rating (1) (2) (3)	BB	BB-
Fixed / Floating (in millions) (4)	$560 / $11	$618 / $80
Coupon (1) (5)	6.57%	6.11%
Yield (1) (5)	6.90%	6.58%
Life (years) (1) (6)	3.2	3.6

(1)	Represents a weighted average as of June 30, 2010 and December 31, 2009, respectively.
(2)	Weighted average ratings are based on the lowest rating published by Fitch Ratings, Standard & Poor’s or Moody’s Investors Service for each security.
(3)	Increase in weighted average rating as of June 30, 2010 is primarily due to the consolidation of additional VIEs as described in Note 2.
(4)	Represents the aggregate net book value of our portfolio allocated between fixed rate and floating rate securities.
(5)	Coupon is based on the securities’ contractual interest rates, while yield is based on expected cash flows for each security, and considers discounts/premiums and asset non-performance. Calculations for floating rate securities are based on LIBOR of 0.35% and 0.23% as of June 30, 2010 and December 31, 2009, respectively.
(6)	Weighted average life is based on the timing and amount of future expected principal payments through the expected repayment date of each respective investment.

The table below details the ratings and vintage distribution of our consolidated VIEs’ securities as of June 30, 2010 (in thousands):

	Rating as of June 30, 2010
Vintage	AAA	AA	A	BBB	BB	B	CCC and Below	Total
2007	$—	$—	$—	$—	$—	$—	$—	$—
2006	—	—	—	—	—	2,219	13,838	16,057
2005	—	—	—	—	—	15,876	19,634	35,510
2004	—	24,831	12,700	—	—	9,781	2,292	49,604
2003	9,906	—	—	4,978	—	—	—	14,884
2002	—	—	—	6,639	—	2,625	—	9,264
2001	—	—	—	4,829	4,134	—	7,500	16,463
2000	7,458	—	—	—	4,001	—	22,558	34,017
1999	—	—	11,387	1,428	17,361	—	—	30,176
1998	114,985	—	83,025	43,356	43,159	—	8,806	293,331
1997	—	—	34,929	3,466	8,613	—	—	47,008
1996	24,408	—	—	—	—	—	—	24,408
Total	$156,757	$24,831	$142,041	$64,696	$77,268	$30,501	$74,628	$570,722

- 23 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The table below details the ratings and vintage distribution of our consolidated VIEs’securities as of December 31, 2009 (in thousands):

	Rating as of December 31, 2009
Vintage	AAA	AA	A	BBB	BB	B	CCC and Below	Total
2007	$—	$—	$—	$—	$2,812	$—	$28,921	$31,733
2006	—	—	—	—	—	8,933	28,325	37,258
2005	—	—	—	11,866	1,250	14,630	22,104	49,850
2004	—	24,848	19,225	—	25,540	9,782	—	79,395
2003	9,905	—	—	4,976	—	—	—	14,881
2002	—	—	—	6,616	—	2,599	—	9,215
2001	—	—	—	4,843	14,204	—	—	19,047
2000	7,506	—	—	—	4,982	—	22,069	34,557
1999	—	—	11,436	1,432	17,359	—	—	30,227
1998	117,349	—	82,791	75,314	11,807	—	12,900	300,161
1997	—	—	35,101	4,876	8,580	—	18,778	67,335
1996	24,205	—	—	—	—	—	—	24,205
Total	$158,965	$24,848	$148,553	$109,923	$86,534	$35,944	$133,097	$697,864

Other-than-temporary impairments

Quarterly, we reevaluate our consolidated VIEs’ securities portfolio to determine if there has been an other-than-temporary impairment based upon expected future cash flows from each securities investment. As a result of this evaluation, under the accounting guidance discussed in Note 2, during the six months ended June 30, 2010, we recorded a gross other-than-temporary impairment of $39.8 million. This gross other-than-temporary impairment includes $21.6 million related to expected credit losses which has been recorded through earnings, and $18.2 million of fair value adjustments in excess of expected credit losses, or Valuation Adjustments, which have been recorded as a component of accumulated other comprehensive income (loss) on our consolidated balance sheet with no impact on earnings.

To determine the component of the gross other-than-temporary impairment related to expected credit losses, we compare the amortized cost basis of each other-than-temporarily impaired security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. Significant judgment of management is required in this analysis that includes, but is not limited to, (i) assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans, and (ii) current subordination levels at both the individual loans which serve as collateral under our securities and at the securities themselves.

The following table summarizes activity related to the other-than-temporary impairments of our consolidated VIEs’ securities during the six months ended June 30, 2010 (in thousands):

	Gross Other-Than-Temporary Impairments			Credit Related Other-Than-Temporary Impairments			Non-Credit Related Other-Than-Temporary Impairments
December 31, 2009		$32,508			$25,112			$7,396
Impact of change in accounting principle (1)		(5,376	)		(1,576	)		(3,800	)
Additions due to change in expected cash flows		39,835			21,593			18,242
Amortization of other-than-temporary impairments		(1,569	)		219			(1,788	)
June 30, 2010		$65,398			$45,348			$20,050

(1) Due to the consolidation of additional VIEs, as discussed in Note 2, other-than-temporary impairments which were previously recorded on our investment in these entities have been eliminated in consolidation beginning January 1, 2010.

Unrealized losses and fair value of securities

Certain of our consolidated VIEs’ securities are carried at values in excess of their fair values. This difference can be caused by, among other things, changes in credit spreads and interest rates.

- 24 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table shows the gross unrealized losses and fair value of securities for which the fair value is lower than their book value as of June 30, 2010 and that are not deemed to be other-than-temporarily impaired (in millions):

	Less Than 12 Months		Greater Than 12 Months		Total
	Estimated Fair Value	Gross Unrealized Loss	Estimated Fair Value	Gross Unrealized Loss	Estimated Fair Value	Gross Unrealized Loss	Book Value (1)
Floating Rate	$—	$—	$6.7	($4.4)	$6.7	($4.4)	$11.1
Fixed Rate	—	—	338.5	(73.9)	338.5	(73.9)	412.4
Total	$—	$—	$345.2	($78.3)	$345.2	($78.3)	$423.5

(1) Excludes, as of June 30, 2010, $147.2 million of securities which were carried at or below fair value and securities against which an other-than-temporary impairment equal to the entire book value was recognized in earnings.

As of June 30, 2010, 44 of our consolidated VIEs’ securities with an aggregate carrying value of $423.5 million were carried at values in excess of their fair values. Fair value for these securities was $345.2 million as of June 30, 2010. In total, as of June 30, 2010, we had 58 investments in securities with an aggregate carrying value of $570.7 million that have an estimated fair value of $502.3 million, including 56 investments in CMBS with an estimated fair value of $439.6 million and two investments in CDOs and other securities with an estimated fair value of $62.7 million. These valuations do not include the value of interest rate swaps entered into in conjunction with the purchase/financing of these investments, if any.

The following table shows the gross unrealized losses and fair value of our consolidated VIEs securities for which the fair value is lower than our book value as of December 31, 2009 and that are not deemed to be other-than-temporarily impaired (in millions):

	Less Than 12 Months		Greater Than 12 Months		Total
	Estimated Fair Value	Gross Unrealized Loss	Estimated Fair Value	Gross Unrealized Loss	Estimated Fair Value	Gross Unrealized Loss	Book Value (1)
Floating Rate	$—	$—	$24.5	($55.1)	$24.5	($55.1)	$79.6
Fixed Rate	27.6	(3.9)	333.6	(125.9)	361.2	(129.8)	491.0
Total	$27.6	($3.9)	$358.1	($181.0)	$385.7	($184.9)	$570.6

(1) Excludes, as of December 31, 2009, $127.2 million of securities which were carried at or below fair value and securities against which an other-than-temporary impairment equal to the entire book value was recognized in earnings.

As of December 31, 2009, 54 of our consolidated VIEs securities with an aggregate carrying value of $570.6 million were carried at values in excess of their fair values. Fair value for these securities was $385.7 million as of December 31, 2009. In total, as of December 31, 2009, we had 64 investments in securities with an aggregate carrying value of $697.9 million that have an estimated fair value of $519.1 million, including 62 investments in CMBS with an estimated fair value of $451.5 million and two investments in CDOs and other securities with an estimated fair value of $67.6 million. These valuations do not include the value of interest rate swaps entered into in conjunction with the purchase/financing of these investments, if any.

We determine fair values using third party dealer assessments of value, supplemented in limited cases with our own internal financial model-based estimations of fair value. We regularly examine our securities portfolio and have determined that, despite these differences between carrying value and fair value, our expectations of future cash flows have only changed adversely for eight of our securities, against which we have recognized other-than-temporary-impairments. See Note 3 for additional discussion of fair value estimations.

Investments in variable interest entities

Our consolidated VIEs’ securities portfolio includes investments in both CMBS and CDOs, which securitization structures are generally considered VIEs. We have not consolidated these VIEs due to our determination that, based on the structural provisions of each entity and the nature of our investments, we do not have the power to direct the activities that most significantly impact these entities' economic performance.

- 25 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

These securities were acquired through investment, and do not represent a securitization or other transfer of our assets. We are not named as special servicer on these investments.

We are not obligated to provide, nor have we provided, any financial support to these entities. As these securities are financed by our non-recourse CT CDOs, our exposure to loss is therefore limited to our interests in these consolidated entities described above.

B. Loans Receivable, Net – Consolidated VIEs

Activity relating to our consolidated VIEs’ loans receivable for the six months ended June 30, 2010 was as follows (in thousands):

	Gross Book Value			Provision for Loan Losses			Net Book Value (1)
December 31, 2009		$508,971			($117,472	)		$391,499
Impact of consolidation due to change in accounting principal		2,980,075			(134,834	)		2,845,241
Satisfactions (2)		(20,546	)		—			(20,546	)
Principal paydowns		(49,204	)		—			(49,204	)
Discount/premium amortization & other (3)		(6,310	)		—			(6,310	)
Provision for loan losses		—			(23,227	)		(23,227	)
Realized loan losses		(35,639	)		35,639			—
Reclassification to real estate held-for-sale		(15,069	)		3,014			(12,055	)
June 30, 2010		$3,362,278			($236,880	)		$3,125,398

(1)	Includes loans with a total principal balance of $3.36 billion and $511.4 million as of June 30, 2010 and December 31, 2009, respectively. Loans with an aggregate principal balance of $2.98 billion as of December 31, 2009 have been consolidated onto our balance sheet beginning January 1, 2010, as discussed in Note 2.
(2)	Includes final maturities and full repayments.
(3)	Includes one loan which was restructured in June 2010 and converted to a $6.6 million equity participation in the borrower entity. This equity investment has been reclassified to Accrued Interest Receivable and Other Assets on our consolidated balance sheet as of June 30, 2010.

The following table details overall statistics for our consolidated VIEs’ loans receivable portfolio as of June 30, 2010 and December 31, 2009:

	June 30, 2010	December 31, 2009
Number of investments	100	26
Fixed / Floating (in millions) (1)	$232 / $2,893	$72 / $319
Coupon (2) (3)	2.36%	3.65%
Yield (2) (3)	2.37%	3.58%
Maturity (years) (2) (4)	1.4	3.4

(1)	Represents the aggregate net book value of our portfolio allocated between fixed rate and floating rate loans.
(2)	Represents a weighted average as of June 30, 2010 and December 31, 2009, respectively.
(3)	Calculations for floating rate loans are based on LIBOR of 0.35% and 0.23% as of June 30, 2010 and December 31, 2009, respectively.
(4)	For loans in CT CDOs, assumes all extension options are executed. For loans in other consolidated VIEs, maturity is based on information provided by the trustees of each respective VIE.

- 26 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The tables below detail the types of loans in our consolidated VIEs’ portfolio, as well as the property type and geographic distribution of the properties securing these loans, as of June 30, 2010 and December 31, 2009 (in thousands):

	June 30, 2010					December 31, 2009
Asset Type	Book Value		Percentage			Book Value		Percentage
Senior mortgages		$2,364,771		76	%		$35,829		9	%
Mezzanine loans		384,928		12			103,726		26
Subordinate interests in mortgages		352,631		10			228,662		59
Other		23,068		2			23,282		6
Total		$3,125,398		100	%		$391,499		100	%
Property Type	Book Value		Percentage			Book Value		Percentage
Healthcare		$1,168,036		37	%		$27,976		7	%
Office		839,571		27			174,695		45
Hotel		685,499		22			128,150		33
Retail		265,613		9			8,660		2
Other		166,679		5			52,018		13
Total		$3,125,398		100	%		$391,499		100	%
Geographic Location	Book Value		Percentage			Book Value		Percentage
Northeast		$493,584		16	%		$225,117		57	%
Southeast		422,680		13			72,976		19
Southwest		181,736		6			29,550		8
West		172,811		6			36,041		9
Midwest		24,733		1			8,884		2
Diversified		1,829,854		58			18,931		5
Total		$3,125,398		100	%		$391,499		100	%

Quarterly, management evaluates our consolidated VIEs’ loan portfolio for impairment as described in Note 2. As of June 30, 2010, we identified 13 loans with an aggregate gross book value of $387.8 million for impairment, against which we have recorded a $231.3 million provision, and which are carried at an aggregate net book value of $156.5 million. These include six loans with an aggregate gross carrying value of $242.0 million which are current in their interest payments, against which we have recorded a $133.1 million provision, as well as seven loans which are delinquent on contractual payments with an aggregate gross carrying value of $145.8 million, against which we have recorded a $98.2 million provision. In addition, as described in Note 2, we have recorded a $5.6 million general provision for loan losses against 41 loan s in our consolidated VIEs with an aggregate principal balance of $128.6 million.

The average balance of impaired loans held by consolidated VIEs was $128.0 million during the six months ended June 30, 2010. Subsequent to their impairment, we recorded interest on these loans of $2.3 million during the first six months of 2010. The average balance of impaired loans held by consolidated VIEs was $27.1 million during the six months ended June 30, 2009. Subsequent to their impairment, we recorded interest on these loans of $258,000 during the first six months of 2009.

C. Loans Held-for-Sale, Net – Consolidated VIEs

As of December 31, 2009, we were in the process of finalizing a sale of one of our consolidated VIEs’ non-performing loans with a gross carrying value of $18.3 million to a third party. We had previously recorded a provision for loan losses of $9.2 million against this loan, and in the fourth quarter of 2009 recaptured $8.4 million of the provision to reflect the expected sales proceeds. In January 2010, we completed the sale of this loan for $17.5 million, which approximates its net book value at December 31, 2009. Accordingly, our consolidated VIEs do not have any loans classified as held-for-sale as of June 30, 2010.

D. Real Estate Held-for-Sale – Consolidated VIEs

In April 2010 we completed foreclosure on the land which served as collateral for a $15.1 million loan held by one of our consolidated VIEs. This loan had a net book value of $12.1 million at the time of foreclosure, which amount was transferred to real estate held-for-sale to reflect this investment at its approximate fair value.

- 27 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

E. Debt Obligations – Consolidated VIEs

As of June 30, 2010 and December 31, 2009, our consolidated VIEs had $3.8 billion and $1.1 billion of total non-recourse securitized debt obligations outstanding, respectively. The balances of each entity’s outstanding securitized debt obligations, their respective coupons and all-in effective costs, including the amortization of fees and expenses, were as follows (in thousands):

	June 30, 2010		December 31, 2009	June 30, 2010
Non-Recourse Securitized Debt Obligations	Principal Balance	Book Balance	Book Balance	Coupon(1)	All-In Cost(1)		Maturity Date(2)
CT collateralized debt obligations (CDOs)
CT CDO I	$202,443	$202,443	$233,168	1.04%	1.04%		July 2039
CT CDO II	273,686	273,686	283,671	0.87%	1.13%		March 2050
CT CDO III	250,110	251,089	254,156	5.23%	5.15%		June 2035
CT CDO IV (3)	317,110	317,110	327,285	0.98%	1.09%		October 2043
Total CT CDOs	1,043,349	1,044,328	1,098,280	1.98%	2.07%		August 2042
Other consolidated VIEs
GMACC 1997-C1	105,799	105,799	N/A	7.11%	7.11%		July 2029
GSMS 2006-FL8A	140,278	140,278	N/A	0.80%	0.80%		June 2020
JPMCC 2004-FL1A	60,892	60,892	N/A	1.39%	1.39%		April 2019
JPMCC 2005-FL1A	99,131	99,131	N/A	0.83%	0.83%		February 2019
MSC 2007-XLFA	757,563	757,563	N/A	0.51%	0.51%		October 2020
MSC 2007-XLCA	537,203	537,203	N/A	1.51%	1.51%		July 2017
CSFB 2006-HC1	1,056,031	1,056,031	N/A	0.79%	0.79%		May 2023
Total other consolidated VIEs	2,756,897	2,756,897	N/A	1.11%	1.11%		April 2021
Total/Weighted Average	$3,800,246	$3,801,225	$1,098,280	1.35%	1.37%	(4)	March 2027

(1)	Represents a weighted average for each respective facility, assuming LIBOR of 0.35% at June 30, 2010 for floating rate debt obligations.
(2)	Maturity dates represent the contractual maturity of each securitization trust. Repayment of securitized debt is a function of collateral cash flows which are disbursed in accordance with the contractual provisions of each trust, and is therefore expected to occur prior to contractual maturity.
(3)	Comprised, at June 30, 2010 of $304.1 million of floating rate notes sold and $13.0 million of fixed rate notes sold.
(4)	Including the impact of interest rate hedges with an aggregate notional balance of $349.7 million as of June 30, 2010, the effective all-in cost of our consolidated VIEs’ debt obligations would be 1.80% per annum.

As discussed above, our consolidated VIEs generally include two categories of entities: (i) collateralized debt obligations sponsored and issued by us, which we refer to as CT CDOs, and (ii) other consolidated VIEs, which are also securitization vehicles but were not issued or sponsored by us. We have historically consolidated the CT CDOs; however we began consolidating the additional VIEs as of January 1, 2010.

CT CDOs

As of June 30, 2010, we had CT CDOs outstanding from four separate issuances with a total face value of $1.0 billion. Our CT CDOs are financing vehicles for our assets and, as such, are consolidated on our balance sheet at the amortized sales price of the securities we sold to third parties. On a combined basis, our CDOs provide us with $1.0 billion of non-recourse, non-mark-to-market, index-matched financing at a weighted average cash cost of 0.55% over the applicable indices (1.98% at June 30, 2010) and a weighted average all-in cost of 0.64% over the applicable indices (2.07% at June 30, 2010). As of June 30, 2010, $350.3 million of loans receivable and $570.7 million of securities were financed by our CT CDOs. As of December 31, 2009, $409.0 million of loans receivable and $697.9 million of securities were financed by our CT CDOs.< /font>

CT CDO I and CT CDO II each have interest coverage and overcollateralization tests, which, when breached, provide for hyper-amortization of the senior notes sold by a redirection of cash flow that would otherwise have been paid to the subordinate classes, some of which are owned by us. When such tests are in breach for six consecutive months, the reinvesting feature of the CDO is suspended. The hyper-amortization is ceased once the test is back in compliance. The overcollateralization tests are a function of impairments to the CDO collateral. During the first quarter of 2009, we were informed by our CDO trustee of impairments due to rating agency downgrades of certain of the securities which serve as collateral in all of our CT CDOs. The impairments resulted in a breach of a CT CDO II overcollateralization test. During the second and t hird quarters of 2009, additional ratings downgrades on securities combined with the non-performance of loan collateral resulted in breaches of the CT CDO I overcollateralization tests and an additional CDO II overcollateralization test failure as well as a breach of a CT CDO II interest coverage test. These breaches have caused the redirection of CT CDO I and CT CDO II cash flow that would otherwise have been paid to the subordinate classes of the CDOs, some of which we own.

- 28 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Furthermore, all four of our CT CDOs provide for the re-classification of interest proceeds from impaired collateral as principal proceeds. During the first quarter of 2009, we were informed by our CDO trustee of impairments due to rating agency downgrades of certain of the securities which serve as collateral in all of our CT CDOs resulting in the reclassification of interest proceeds from those securities as principal proceeds. During the second and third quarters of 2009, additional downgrades of securities in CT CDO IV resulted in additional impairments and therefore a redirection of cash flow from us to senior note holders. Other than collateral management fees, we currently receive cash payments from only one of our four CT CDOs, CT CDO III.

Other Consolidated VIEs

In addition to the CT CDOs sponsored by us, which are discussed above, we also have consolidated certain other VIEs beginning on January 1, 2010, as discussed in Note 2. The debt obligations of these entities are separately presented on our consolidated balance sheet along with the CT CDOs issued by us, as they represent similar non-recourse obligations. These obligations will generally be satisfied with the repayment of assets in each such entity’s collateral pool, or will be discharged when losses are realized. As of June 30, 2010, $2.8 billion of loans receivable were financed by the securities issued by these other consolidated VIEs.

F. Derivative Financial Instruments – Consolidated VIEs

The following table summarizes the notional and fair values of our consolidated VIEs’ interest rate swaps as of June 30, 2010 and December 31, 2009. The notional value provides an indication of the extent of our involvement in the instruments at that time, but does not represent exposure to credit or interest rate risk (in thousands):

Type	Counterparty	June 30, 2010 Notional Amount	Interest Rate (1)	Maturity	June 30, 2010 Fair Value	December 31, 2009 Fair Value
Cash Flow Hedge	Swiss RE Financial	$269,853	5.10%	2015	($26,443)	($21,785)
Cash Flow Hedge	Bank of America	44,950	4.58%	2014	(3,681)	(3,005)
Cash Flow Hedge	Morgan Stanley	17,960	3.95%	2011	(647)	(794)
Cash Flow Hedge	Bank of America	11,035	5.05%	2016	(1,354)	(930)
Cash Flow Hedge	Bank of America	5,104	4.12%	2016	(451)	(212)
Cash Flow Hedge	Morgan Stanley	780	5.31%	2011	(24)	(40)
Total/Weighted Average		$349,682	4.96%	2015	($32,600)	($26,766)

(1) Represents the gross fixed interest rate we pay to our counterparties under these derivative instruments. We receive an amount of interest indexed to one-month LIBOR on all of our interest rate swaps as of June 30, 2010 and December 31, 2009.

As of both June 30, 2010 and December 31, 2009, all of our consolidated VIEs’ derivative financial instruments were recorded at fair value as interest rate hedge liabilities on our consolidated balance sheet.

The table below shows amounts recorded to other comprehensive income and amounts recorded to interest expense from other comprehensive income for the six months ended June 30, 2010 and 2009 (in thousands):

	Amount of (loss) gain recognized		Amount of loss reclassified from OCI
	in OCI for the six months ended		to income for the six months ended (1)
Hedge	June 30, 2010	June 30, 2009	June 30, 2010	June 30, 2009
Interest rate swaps	($5,835)	$9,711	($8,248)	($8,595)

(1) Represents net amounts paid to swap counterparties during the period, which are included in interest expense, offset by an immaterial amount of non-cash swap amortization.

All of our consolidated VIEs’ hedges were classified as highly effective for all of the periods presented. Over the next twelve months, we expect approximately $14.7 million to be reclassified from other comprehensive income to interest expense, which amount is generally the present value of expected payments under the respective derivative contracts.

As of June 30, 2010, our consolidated VIEs have not posted any assets as collateral under derivative agreements.

Note 12. Shareholders’ Equity

Authorized Capital

We have the authority to issue up to 200,000,000 shares of stock, consisting of (i) 100,000,000 shares of class A common stock, and (ii) 100,000,000 shares of preferred stock. Subject to applicable New York Stock Exchange listing requirements, our board of directors is authorized to issue additional shares of authorized stock without shareholder approval. In addition, to the extent not issued, currently authorized stock may be reclassified between class A common stock and preferred stock.

- 29 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Common Stock

Shares of class A common stock are entitled to vote on all matters presented to a vote of shareholders, except as provided by law or subject to the voting rights of any outstanding preferred stock. Holders of record of shares of class A common stock on the record date fixed by our board of directors are entitled to receive such dividends as may be declared by the board of directors subject to the rights of the holders of any outstanding preferred stock. A total of 22,391,725 shares of common stock and stock units were issued and outstanding as of June 30, 2010.

We did not repurchase any of our common stock during the six months ended June 30, 2010, other than the 5,443 shares we acquired pursuant to elections by incentive plan participants to satisfy tax withholding obligations through the surrender of shares equal in value to the amount of the withholding obligation incurred upon the vesting of restricted stock.

Preferred Stock

We have not issued any shares of preferred stock since we repurchased all of the previously issued and outstanding preferred stock in 2001.

Warrants

As discussed in Note 8, in conjunction with our debt restructuring, we issued to our repurchase lenders warrants to purchase an aggregate 3,479,691 shares of our class A common stock at an exercise price of $1.79 per share. The warrants will become exercisable on March 16, 2012 and expire on March 16, 2019, and may be exercised through a cashless exercise at the option of the warrant holders. The fair value assigned to these warrants, totaling $940,000, has been recorded as an increase to additional paid-in capital, and will be amortized over the term of the related debt obligations. The warrants were valued using the Black-Scholes valuation method.

Dividends

We generally intend to distribute each year substantially all of our taxable income (which does not necessarily equal net income as calculated in accordance with GAAP) to our shareholders to comply with the REIT provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. If necessary for REIT qualification purposes, we may need to distribute any taxable income remaining after giving effect to the distribution of the final regular quarterly dividend each year, together with the first regular quarterly dividend payment of the following taxable year or, at our discretion, in a separate dividend distributed prior thereto. We refer to these dividends as special dividends. As required by covenants in our restructured debt obligations, our cash dividend distributions are restricted to the minimum amount necessar y to maintain our status as a REIT. Moreover, such covenants require us to make any distribution in stock to the extent permitted, taking into consideration the recent Internal Revenue Service rulings which allow REITs to distribute up to 90% of their dividends in the form of stock for tax years ending on or before December 31, 2011.

In additionto the foregoing restrictions, ourdividend policy remains subject to revision at the discretion of our board of directors. All distributions will be made at the discretion of our board of directors and will depend upon our taxable income, our financial condition, our maintenance of REIT status and other factors as our board of directors deems relevant. No dividends were declared during the six months ended June 30, 2010 or 2009.

Accumulated Other Comprehensive Income (Loss)

The following table details the primary components of accumulated other comprehensive income (loss) as of June 30, 2010 and significant activity for the six months ended June 30, 2010 (in thousands):

	Mark-to-Market on Interest Rate Hedges			Deferred Gains on Settled Hedges			Other-than-Temporary Impairments			Unrealized Gains on Securities			Total
December 31, 2009		($30,950	)		$263			($14,024	)		$5,576			($39,135	)
Cumulative effect of change in accounting principle		—			—			3,800			—			3,800
Unrealized loss on derivative financial instruments		(5,994	)		—			—			—			(5,994	)
Amortization of net unrealized gains on securities		—			—			—			(406	)		(406	)
Amortization of net deferred gains on settlement of swaps		—			(50	)		—			—			(50	)
Other-than-temporary impairments of securities (1)		—			—			(15,800	)		—			(15,800	)
June 30, 2010		($36,944	)		$213			($26,024	)		$5,170			($57,585	)

(1) Represents other-than-temporary impairments of securities related to fair value adjustments in excess of expected credit losses, net of amortization of $2.2 million.

- 30 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Earnings Per Share

The following table sets forth the calculation of Basic and Diluted earnings per share, or EPS, based on the weighted average of both restricted and unrestricted class A common stock outstanding, for the six months ended June 30, 2010 and 2009 (in thousands, except share and per share amounts):

	Six Months Ended June 30, 2010								Six Months Ended June 30, 2009
	Net			Wtd. Avg.		Per Share			Net			Wtd. Avg.		Per Share
	Loss			Shares		Amount			Loss			Shares		Amount
Basic EPS:
Net loss allocable to common stock	$	(60,551	)		22,340,071	$	(2.71	)	$	(79,541	)		22,327,895	$	(3.56	)
Effect of Dilutive Securities:
Warrants & Options outstanding for the purchase of common stock		—			—					—			—
Diluted EPS:
Net loss per share of common stock and assumed conversions	$	(60,551	)		22,340,071	$	(2.71	)	$	(79,541	)		22,327,895	$	(3.56	)

The following table sets forth the calculation of Basic and Diluted earnings per share, or EPS, based on the weighted average of both restricted and unrestricted class A common stock outstanding, for the three months ended June 30, 2010 and 2009 (in thousands, except share and per share amounts):

	Three Months Ended June 30, 2010						Three Months Ended June 30, 2009
	Net		Wtd. Avg.		Per Share		Net			Wtd. Avg.		Per Share
	Income		Shares		Amount		Loss			Shares		Amount
Basic EPS:
Net income (loss) allocable to common stock	$	2,902		22,344,552	$	0.13	$	(6,396	)		22,368,539	$	(0.29	)
Effect of Dilutive Securities:
Warrants & Options outstanding for the purchase of common stock		—		322,774				—			—
Diluted EPS:
Net income (loss) per share of common stock and assumed conversions	$	2,902		22,667,326	$	0.13	$	(6,396	)		22,368,539	$	(0.29	)

As of June 30, 2010, Diluted EPS excludes 129,000 options, which were antidilutive for the period. These instruments could potentially impact Diluted EPS in future periods depending on changes in our stock price. As of June 30, 2009, Diluted EPS excludes 163,000 options and 3.5 million warrants, which were similarly antidilutive.

- 31 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 13. General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2010 and 2009 consisted of the following (in thousands):

	Six Months Ended June 30,
	2010		2009
Personnel costs	$	4,732	$	5,395
Employee stock-based compensation		76		781
Professional services		2,029		2,300
Restructuring costs		249		3,139
Operating and other costs		1,180		1,344
Subtotal	$	8,266	$	12,959
Expenses from other consolidated VIEs		975		—
Total	$	9,241	$	12,959

Note 14. Income Taxes

We made an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code, commencing with the tax year ending December 31, 2003. As a REIT, we generally are not subject to federal, state, and local income taxes except for the operations of our taxable REIT subsidiary, CTIMCO. To maintain qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain other requirements. If we fail to qualify as a REIT, we may be subject to material penalties as well as federal, state and local income tax on our taxable income at regular corporate rates. As of June 30, 2010 and December 31, 2009, we were in compliance with all REIT requirements.

In addition, we are subject to taxation on the income generated by investments in our CT CDOs. Due to the redirection provisions of our CT CDOs, which reallocate principal proceeds and interest otherwise distributable to us to repay senior note holders, assets financed through our CT CDOs may generate current taxable income without a corresponding cash distribution to us.

During the six months ended June 30, 2010, CTIMCO paid small amounts of federal, state and local taxes. During the six months ended June 30, 2009, CTIMCO paid no federal taxes but paid small amounts of state and local taxes. As of June 30, 2010, we have net operating losses and net capital losses available to be carried forward and utilized in current or future periods.

Deferred income taxes recorded on our consolidated balance sheets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for tax reporting purposes.

Note 15. Employee Benefit and Incentive Plans

We had four benefit plans in effect as of June 30, 2010: (1) the Second Amended and Restated 1997 Long-Term Incentive Stock Plan, or 1997 Employee Plan, (2) the Amended and Restated 1997 Non-Employee Director Stock Plan, or 1997 Director Plan, (3) the Amended and Restated 2004 Long-Term Incentive Plan, or 2004 Plan, and (4) the 2007 Long-Term Incentive Plan, or 2007 Plan. The 1997 Employee Plan and 1997 Director Plan expired in 2007 and no new awards may be issued under them, and no further grants will be made under the 2004 Plan. Under the 2007 Plan, a maximum of 700,000 shares of class A common stock may be issued. Shares canceled under the 2004 Plan are available to be reissued under the 2007 Plan. As of June 30, 2010, there were 416,033 shares available under the 2007 Plan.

Under these plans, our employees are issued shares of our restricted common stock which is expensed by us over their vesting period. A portion of these shares vest pro rata over a three-year service period, with the remainder contingently vesting after a four-year period based on the returns we have achieved.

As of June 30, 2010, unvested share-based compensation consisted of 58,512 shares of restricted common stock with an unamortized value of $167,000. Subject to vesting conditions and the continued employment of certain employees, these costs will be recognized as compensation expense over the next three and a half years.

- 32 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Activity under these four plans for the six months ended June 30, 2010 is summarized in the table below in share and share equivalents:

Benefit Type	1997 Employee Plan			1997 Director Plan			2004  Plan			2007 Plan			Total
Options(1)
Beginning balance		170,477			—			—			—			170,477
Expired		(41,585	)		—			—			—			(41,585	)
Ending balance		128,892			—			—			—			128,892
Restricted Common Stock(2)
Beginning balance		—			—			3,480			75,543			79,023
Granted		—			—			—			16,875			16,875
Vested		—			—			(3,480	)		(33,906	)		(37,386	)
Forfeited		—			—			—			—			—
Ending balance		—			—			—			58,512			58,512
Stock Units(3)
Beginning balance		—			80,017			—			384,029			464,046
Granted, deferred and (vested), net		—			(11,473	)		—			(26,689	)		(38,162	)
Ending balance		—			68,544			—			357,340			425,884
Total outstanding		128,892			68,544			—			415,852			613,288

(1)	All options are fully vested as of June 30, 2010.
(2)	Comprised of both performance based awards that vest upon the attainment of certain common equity return thresholds and time based awards that vest based upon an employee’s continued employment on vesting dates.
(3)	Stock units are granted to certain members of our board of directors in lieu of cash compensation for services and in lieu of dividends earned on previously granted stock units.

The following table summarizes the outstanding options as of June 30, 2010:

				Weighted Average		Weighted Average
Exercise Price per Share		Options Outstanding		Exercise Price per Share		Remaining Life (in Years)
	$10.00 - $15.00		35,557		$13.50		0.43
	$15.00 - $20.00		93,335		15.80		0.47
Total/Weighted Average			128,892		$15.17		0.46

In addition to the equity interests detailed above, we may grant percentage interests in the incentive compensation received by us from certain of our investment management vehicles. As of June 30, 2010, we had so granted a portion of the Fund III incentive compensation received by us.

A summary of the unvested restricted common stock as of and for the six months ended June 30, 2010 was as follows:

	Restricted Common Stock
	Shares			Grant Date Fair Value
Unvested at January 1, 2010		79,023			$7.99
Granted		16,875			1.27
Vested		(37,386	)		8.08
Unvested at June 30, 2010		58,512			$6.45

- 33 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

A summary of the unvested restricted common stock as of and for the six months ended June 30, 2009 was as follows:

	Restricted Common Stock
	Shares			Grant Date Fair Value
Unvested at January 1, 2009		331,197			$30.61
Granted		216,269			3.32
Vested		(46,697	)		28.28
Forfeited		(201,696	)		28.99
Unvested at June 30, 2009		299,073			$12.43

The total grant date fair value of restricted shares which vested during the six months ended June 30, 2010 and 2009 was $127,000 and $603,000, respectively.

Note 16. Fair Values

Assets and Liabilities Recorded at Fair Value

Certain of our assets and liabilities are measured at fair value either (i) on a recurring basis, as of each quarter-end, or (ii) on a nonrecurring basis, as a result of impairment or other events. Generally, loans held-for-sale, real estate held-for-sale, and interest rate swaps are measured at fair value on a recurring basis, while impaired loans and securities are measured at fair value on a nonrecurring basis. These fair values are determined using a variety of inputs and methodologies, which are detailed below. As discussed in Note 2, the “Fair Value Measurement and Disclosures” Topic of the Codification establishes a fair value hierarchy that prioritizes the inputs used in determining fair value under GAAP, which includes the following classifications, in order of priority:

· Level 1 generally includes only unadjusted quoted prices in active markets for identical assets or liabilities as of the reporting date.

· Level 2 inputs are those which, other than Level 1 inputs, are observable for identical or similar assets or liabilities.

· Level 3 inputs generally include anything which does not meet the criteria of Levels 1 and 2, particularly any unobservable inputs.

The following table summarizes our assets and liabilities, including those of our consolidated VIEs, which are recorded at fair value as of June 30, 2010 (in thousands):

				Fair Value Measurements at Reporting Date Using
	Total			Quoted Prices in		Significant Other			Significant
	Fair Value at			Active Markets		Observable Inputs			Unobservable Inputs
	June 30, 2010			(Level 1)		(Level 2)			(Level 3)
Measured on a recurring basis:
Non-VIE loans held-for-sale		$5,488			$—		$—			$5,488
VIE real estate held-for-sale		$12,055			$—		$—			$12,055
Non-VIE interest rate hedge liabilities		($4,344	)		$—		($4,344	)		$—
VIE interest rate hedge liabilities		($32,600	)		$—		($32,600	)		$—
Measured on a nonrecurring basis:
Non-VIE impaired loans (1)
Senior mortgage		$36,400			$—		$—			$36,400
Subordinate interests in mortgages		61,535			—		—			61,535
Mezzanine loans		—			—		—			—
		$97,935			$—		$—			$97,935
VIE impaired loans (1)
Senior mortgage		$86,286			$—		$—			$86,286
Subordinate interests in mortgages		29,100			—		—			29,100
Mezzanine loans		41,078			—		—			41,078
		$156,464			$—		$—			$156,464
Non-VIE impaired securities (2)		$—			$—		$—			$—
VIE impaired securities (2)
Commercial mortgage-backed securities		$7,500			$—		$7,500			$—

(1)	Loans receivable against which we have recorded a provision for loan losses as of June 30, 2010.
(2)	Securities which were other-than-temporarily impaired during the three months ended June 30, 2010.

- 34 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following methods and assumptions were used to estimate the fair value of each type of asset and liability which was recorded at fair value as of June 30, 2010:

Loans held-for-sale: Our only loan held-for-sale is carried at fair value, which was determined by taking into consideration the value of the underlying collateral, creditworthiness of the borrower, and expected proceeds from the sale of the loan.

Real estate held-for-sale: Real estate held-for-sale was valued based on expected proceeds from a sale of the asset.

Interest rate hedge liabilities: Interest rate hedges were valued using advice from a third party derivative specialist, based on a combination of observable market-based inputs, such as interest rate curves, and unobservable inputs such as credit valuation adjustments due to the risk of non-performance by both us and our counterparties. See Notes 10 and 11 for additional details on our interest rate hedges.

Impaired loans: The loans identified for impairment are collateral dependant loans. Impairment on these loans is measured by comparing management’s estimation of fair value of the underlying collateral to the carrying value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management. The table above includes all impaired loans, regardless of the period in which impairment was recognized.

Additional details of our loans which were recorded at fair value as of June 30, 2010 are described below:

Senior mortgage loans: Two of our senior mortgage loans with an aggregate principal balance of $51.5 million are reported at fair value as of June 30, 2010, including one hotel loan ($25.1 million) and one office loan ($26.4 million). These loans have a weighted average maturity of October 2011 and a weighted average coupon of 2.0% as of June 30, 2010.

Subordinate interests in mortgages: Four of our subordinate interests in mortgage loans with an aggregate principal balance of $115.0 million are reported at fair value as of June 30, 2010, including two hotel loans ($43.5 million), one office loan ($30.1 million), and one condominium loan ($41.4 million). These loans have a weighted average maturity of March 2011 and a weighted average coupon of 3.5% as of June 30, 2010.

Mezzanine loans: Three of our mezzanine loans with an aggregate principal balance of $294.3 million are reported at fair value as of June 30, 2010, all of which are collateralized by hotel assets. These loans have a weighted average maturity of March 2012 and a weighted average coupon of 3.3% as of June 30, 2010.

Additional details of our consolidated VIEs loans which were recorded at fair value as of June 30, 2010 are described below:

Senior mortgage loans: Two of our consolidated VIEs’ senior mortgage loans with an aggregate principal balance of $142.6 million are reported at fair value as of June 30, 2010, including one office loan ($75.0 million) and one mixed-use/other loan ($67.6 million). These loans have a weighted average maturity of May 2011 and a weighted average coupon of 1.5% as of June 30, 2010.

Subordinate interests in mortgages: Eight of our consolidated VIEs’ subordinate interests in mortgage loans with an aggregate principal balance of $137.8 million are reported at fair value as of June 30, 2010, including three hotel loans ($61.5 million), three office loans ($60.7 million), one multifamily loan ($5.4 million), and one mixed-use/other loan ($10.2 million). These loans have a weighted average maturity of August 2011 and a weighted average coupon of 2.7% as of June 30, 2010.

Mezzanine loans: Three of our consolidated VIEs’ mezzanine loans with an aggregate principal balance of $107.7 million are reported at fair value as of June 30, 2010, including one hotel loan ($75.6 million), one multifamily loan ($11.1 million), and one retail loan ($21.0 million). These loans have a weighted average maturity of April 2011 and a weighted average coupon of 2.6% as of June 30, 2010.

Impaired securities: Securities which are other-than-temporarily impaired are generally valued by a combination of (i) obtaining assessments from third-party dealers and, (ii) in limited cases where such assessments are unavailable or, in the opinion of management, deemed not to be indicative of fair value, discounting expected cash flows using internal cash flow models and estimated market discount rates. In the case of internal models, expected cash flows of each security are based on management’s assumptions regarding the collection of principal and interest on the underlying loans and securities. The table above includes only securities which were impaired during the three months ended June 30, 2010. Previously impaired securities have been subsequently adjusted for amo rtization, and are therefore no longer reported at fair value as of June 30, 2010. As of June 30, 2010, two of our consolidated VIEs commercial mortgage-backed securities were other-than-temporarily impaired and therefore reported at fair value. These securities were both valued using assessments from third-party dealers.

- 35 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table reconciles the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs (in thousands):

	Loans	Real Estate
	Held-for-Sale	Held-for-Sale
December 31, 2009	$—	$—
Transfer from loans recivable (non-VIEs)	5,488	—
Transfer from loans recivable (VIEs)	—	12,055
June 30, 2010	$5,488	$12,055

Fair Value of Financial Instruments

In addition to the above disclosures for assets and liabilities which are recorded at fair value, GAAP also requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the estimated market discount rate and the estimated future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate settlement of the instrument. Rather, these fair values reflect the amounts that management bel ieves are realizable in an orderly transaction among willing parties. These disclosure requirements exclude certain financial instruments and all non-financial instruments.

The following table details the carrying amount, face amount, and approximate fair value of the financial instruments described above (in thousands):

Fair Value of Financial Instruments
(in thousands)	June 30, 2010			December 31, 2009
	Carrying Amount	Face Amount	Fair Value	Carrying Amount	Face Amount	Fair Value
Financial assets:
Cash and cash equivalents	$26,495	$26,495	$26,495	$27,954	$27,954	$27,954
Securities held-to-maturity	17,695	36,102	6,033	17,332	105,174	8,544
Loans receivable, net	717,598	1,082,070	594,051	766,745	1,128,738	588,466
Consolidated VIE assets
Securities held-to-maturity	570,722	639,068	502,344	697,864	751,214	519,118
Loans receivable, net	3,125,398	3,364,284	2,586,301	391,499	511,412	316,230
Financial liabilities:
Repurchase obligations	428,489	428,822	428,822	450,137	450,704	450,704
Senior credit facility	98,665	98,665	14,800	99,188	99,188	24,797
Junior subordinated notes	130,112	143,753	2,875	128,077	143,753	14,375
Participations sold	288,447	288,555	105,095	289,144	289,209	102,220
Consolidated VIE liabilities
Securitized debt obligations	3,801,225	3,800,246	2,396,700	1,098,280	1,097,106	494,704

The following methods and assumptions were used to estimate the fair value of each class of financial instruments, excluding those described above that are carried at fair value, for which it is practicable to estimate that value:

Cash and cash equivalents: The carrying amount of cash on deposit and in money market funds is considered to be a reasonable estimate of fair value.

Securities held-to-maturity: These investments, other than securities that have been other-than-temporarily impaired, are recorded on a held-to-maturity basis and not at fair value. The fair values presented above have been estimated by a combination of (i) obtaining assessments from third party dealers and, (ii) in limited cases where such assessments are unavailable or, in the opinion of management, deemed not to be indicative of fair value, discounting expected cash flows using internal cash flow models and estimated market discount rates. The expected cash flows of each security are based on management’s assumptions regarding the collection of principal and interest on the underlying loans and securities.

- 36 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Loans receivable, net: Other than impaired loans, these assets are recorded at their amortized cost and not at fair value. The fair values presented above were estimated by management taking into consideration factors including capitalization rates, leasing, occupancy rates, availability and cost of financing, exit plan, sponsorship, actions of other lenders and indications of market value from other market participants.

Repurchase obligations: These instruments are recorded on the basis of their total face balance, less unamortized discount. As a result of our debt restructuring on March 16, 2009, our repurchase obligations no longer have terms which are comparable to other facilities in the market. Given the unique nature of our restructured obligations, it is not practicable to estimate their fair value. Accordingly, they are presented above at their current face value. See Note 8 for a detailed description of our repurchase obligations.

Senior credit facility: This instrument is recorded on the basis of total cash proceeds borrowed, and not at fair value. The fair value presented above was estimated by management based on the amount at which similar placed financial instruments would be valued today.

Junior subordinated notes: These instruments are recorded on the basis of their total face balance, less unamortized discount. The fair value presented above was estimated by management based on the amount at which similar placed financial instruments would be valued today.

Securitized debt obligations: These obligations are recorded on the basis of proceeds received at issuance and not at fair value.The fair values presented above have been estimated by obtaining assessments from third party dealers.

Note 17. Supplemental Disclosures for Consolidated Statements of Cash Flows

As a result of the amended accounting guidance described in Note 2, we have consolidated an additional seven VIEs beginning January 1, 2010, all of which are securitization vehicles not sponsored by us. The consolidation of these entities has materially impacted our statement of cash flows, primarily the amounts reported as principal collections of loans and repayments of securitized debt obligations. Notwithstanding the gross presentation on our consolidated statement of cash flows, the consolidation of these entities has a net cash-neutral impact on our consolidated financial statements.

Interest paid on our outstanding debt obligations during the six months ended June 30, 2010 and 2009 was $52.5 million and $35.3 million, respectively. This includes $23.2 million of interest paid on our outstanding debt obligations for the six months ended June 30, 2010 from newly consolidated VIEs. Taxes recovered by us during the six months ended June 30, 2010 and 2009 were $132,000 and $408,000, respectively.

Note 18. Transactions with Related Parties

We earn base management and incentive fees in our capacity as investment manager for multiple vehicles which we have sponsored. Due to the nature of our relationship with these vehicles, all management fees are considered revenue from related parties under GAAP.

On November 9, 2006, we commenced our CT High Grade MezzanineSM investment management initiative and entered into three separate account agreements with affiliates of W. R. Berkley Corporation, or WRBC, for an aggregate of $250 million. On July 25, 2007, we amended the agreements to increase the aggregate commitment of the WRBC affiliates to $350 million. Pursuant to these agreements, we invest, on a discretionary basis, capital on behalf of WRBC in commercial real estate mortgages, mezzanine loans and participations therein. The separate accounts are entirely funded with committed capital from WRBC and are managed by a subsidiary of CTIMCO. CTIMCO earns a management fee equal to 0.25% per annum on invested assets.

WRBC beneficially owned approximately 17.1% of our outstanding common stock and stock units as of July 23, 2010, and a member of our board of directors is an employee of WRBC.

In July 2008, CTOPI, a private equity fund that we manage, held its final closing completing its capital raise with $540 million total equity commitments. EGI-Private Equity II, L.L.C., an affiliate under common control of the chairman of our board of directors, owns a 3.7% limited partner interest in CTOPI. During the six months ended June 30, 2010, we recorded $2.1 million in fees from CTOPI, $86,000 of which were attributable to EGI Private Equity II, L.L.C. Affiliates of the chairman of our board of directors also own interests in Fund III, an investment management vehicle that we manage and in which we also have an ownership interest.

- 37 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Effective December 1, 2009, John R. Klopp retired as our chief executive officer. In conjunction with his departure, Mr. Klopp was retained as a consultant to the company through November 2010, for which he will be paid $83,333 per month over the twelve-month term. We recognized 100% of this consulting fee in 2009 as a component of general and administrative expense.

Note 19. Segment Reporting

We operate in two reportable segments. We have an internal information system that produces performance and asset data for our two segments along service lines.

The Balance Sheet Investment segment includes all of our portfolio of interest earning assets and the financing thereof.

The Investment Management segment includes the investment management activities of our wholly-owned investment management subsidiary, CT Investment Management Co. LLC, or CTIMCO, and its subsidiaries, as well as our co-investments in investment management vehicles. CTIMCO is a taxable REIT subsidiary and serves as the investment manager of Capital Trust, Inc., all of our investment management vehicles and all of our CT CDOs, and serves as senior servicer and special servicer for certain of our investments and for third parties.

The following table details each segment's contribution to our operating results and the identified assets attributable to each such segment for the six months ended, and as of, June 30, 2010 (in thousands):

	Balance Sheet			Investment		Inter-Segment
	Investment			Management		Activities			Total
Income from loans and other investments:
Interest and related income		$79,398			$—		$—			$79,398
Less: Interest and related expenses		62,905			—		—			62,905
Income from loans and other investments, net		16,493			—		—			16,493
Other revenues:
Management fees from affiliates		—			4,385		(445	)		3,940
Servicing fees		—			3,285		(548	)		2,737
Other interest income		104			1		—			105
Total other revenues		104			7,671		(993	)		6,782
Other expenses
General and administrative		3,365			6,321		(445	)		9,241
Servicing fee expense		548			—		(548	)		—
Depreciation and amortization		—			10		—			10
Total other expenses		3,913			6,331		(993	)		9,251
Total other-than-temporary impairments of securities		(39,835	)		—		—			(39,835	)
Portion of other-than-temporary impairments of securities recognized in other comprehensive income		18,015			—		—			18,015
Net impairments recognized in earnings		(21,820	)		—		—			(21,820	)
Provision for loan losses		(54,227	)		—		—			(54,227	)
Gain on extinguishment of debt		463			—		—			463
Income from equity investments		—			1,302		—			1,302
(Loss) income before income taxes		(62,900	)		2,642		—			(60,258	)
Income tax provision		14			279		—			293
Net (loss) income		($62,914	)		$2,363		$—			($60,551	)
Total assets		$4,491,259			$13,830		($2,206	)		$4,502,883

All revenues were generated from external sources within the United States. The Investment Management segment earned fees of $445,000 for management of the Balance Sheet Investment segment and $548,000 for serving as collateral manager of the four CT CDOs consolidated under our Balance Sheet Investment segment as well as special servicing activity for certain CT CDO assets for the six months ended June 30, 2010.

- 38 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details each segment's contribution to our operating results and the identified assets attributable to each such segment for the six months ended, and as of, June 30, 2009 (in thousands):

	Balance Sheet			Investment			Inter-Segment
	Investment			Management			Activities			Total
Income from loans and other investments:
Interest and related income		$63,814			$—			$—			$63,814
Less: Interest and related expenses		41,512			—			—			41,512
Income from loans and other investments, net		22,302			—			—			22,302
Other revenues:
Management fees from affiliates		—			8,287			(2,478	)		5,809
Servicing fees		—			1,589			(255	)		1,334
Other interest income		134			15			(13	)		136
Total other revenues		134			9,891			(2,746	)		7,279
Other expenses
General and administrative		7,467			7,970			(2,478	)		12,959
Servicing fee expense		255			—			(255	)		—
Other interest expense		—			13			(13	)		—
Depreciation and amortization		—			14			—			14
Total other expenses		7,722			7,997			(2,746	)		12,973
Total other-than-temporary impairments of securities		(18,646	)		—			—			(18,646	)
Portion of other-than-temporary impairments of securities recognized in other comprehensive income		5,624			—			—			5,624
Impairment of goodwill		—			(2,235	)		—			(2,235	)
Impairment of real estate held-for-sale		(2,233	)		—			—			(2,233	)
Net impairments recognized in earnings		(15,255	)		(2,235	)		—			(17,490	)
Provision for loan losses		(66,493	)		—			—			(66,493	)
Valuation allowance on loans held-for-sale		(10,363	)		—			—			(10,363	)
Loss from equity investments		—			(2,211	)		—			(2,211	)
Loss before income taxes		(77,397	)		(2,552	)		—			(79,949	)
Income tax benefit		(408	)		—			—			(408	)
Net loss		($76,989	)		($2,552	)		$—			($79,541	)
Total assets		$2,520,140			$11,543			($3,587	)		$2,528,096

All revenues were generated from external sources within the United States. The Investment Management segment earned fees of $2.5 million for management of the Balance Sheet Investment segment and $255,000 for servicing as collateral manager on the four CT CDOs consolidated under our Balance Sheet Investment segment, and was charged $13,000 for inter-segment interest for the six months ended June 30, 2009.

- 39 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details each segment's contribution to our operating results and the identified assets attributable to each such segment for the three months ended, and as of, June 30, 2010 (in thousands):

	Balance Sheet			Investment		Inter-Segment
	Investment			Management		Activities			Total
Income from loans and other investments:
Interest and related income		$39,428			$—		$—			$39,428
Less: Interest and related expenses		31,653			—		—			31,653
Income from loans and other investments, net		7,775			—		—			7,775
Other revenues:
Management fees from affiliates		—			885		39			924
Servicing fees		—			1,529		(303	)		1,226
Other interest income		96			1		—			97
Total other revenues		96			2,415		(264	)		2,247
Other expenses
General and administrative		1,508			2,957		39			4,504
Servicing fee expense		303			—		(303	)		—
Depreciation and amortization		—			5		—			5
Total other expenses		1,811			2,962		(264	)		4,509
Total other-than-temporary impairments of securities		(3,848	)		—		—			(3,848	)
Portion of other-than-temporary impairments of securities recognized in other comprehensive income		1,852			—		—			1,852
Net impairments recognized in earnings		(1,996	)		—		—			(1,996	)
Provision for loan losses		(2,010	)		—		—			(2,010	)
Gain on extinguishment of debt		463			—		—			463
Income from equity investments		—			932		—			932
Income before income taxes		2,517			385		—			2,902
Income tax provision		—			—		—			—
Net income		$2,517			$385		$—			$2,902
Total assets		$4,491,259			$13,830		($2,206	)		$4,502,883

All revenues were generated from external sources within the United States. The Investment Management segment refunded fees of $39,000 related to its management of the Balance Sheet Investment segment and earned $303,000 for serving as collateral manager of the four CT CDOs consolidated under our Balance Sheet Investment segment as well as special servicing activity for certain CT CDO assets for the three months ended June 30, 2010.

- 40 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details each segment's contribution to our operating results and the identified assets attributable to each such segment for the three months ended, and as of, June 30, 2009 (in thousands):

	Balance Sheet			Investment			Inter-Segment
	Investment			Management			Activities			Total
Income from loans and other investments:
Interest and related income		$30,575			$—			$—			$30,575
Less: Interest and related expenses		20,244			—			—			20,244
Income from loans and other investments, net		10,331			—			—			10,331
Other revenues:
Management fees from affiliates		—			3,902			(973	)		2,929
Servicing fees		—			410			(255	)		155
Other interest income		7			1			—			8
Total other revenues		7			4,313			(1,228	)		3,092
Other expenses
General and administrative		1,662			3,814			(973	)		4,503
Servicing fee expense		255			—			(255	)		—
Depreciation and amortization		—			7			—			7
Total other expenses		1,917			3,821			(1,228	)		4,510
Total other-than-temporary impairments of securities		(4,000	)		—			—			(4,000	)
Impairment of goodwill		—			(2,235	)		—			(2,235	)
Impairment of real estate held-for-sale		(899	)		—			—			(899	)
Net impairments recognized in earnings		(4,899	)		(2,235	)		—			(7,134	)
Provision for loan losses		(7,730	)		—			—			(7,730	)
Loss from equity investments		—			(445	)		—			(445	)
Loss before income taxes		(4,208	)		(2,188	)		—			(6,396	)
Income tax provision		—			—			—			—
Net loss		($4,208	)		($2,188	)		$—			($6,396	)
Total assets		$2,520,140			$11,543			($3,587	)		$2,528,096

All revenues were generated from external sources within the United States. The Investment Management segment earned fees of $973,000 for management of the Balance Sheet Investment segment and $255,000 for serving as collateral manager of the four CT CDOs consolidated under our Balance Sheet Investment segment for the three months ended June 30, 2009.

- 41 -

ITEM 2.                   Management's Discussion and Analysis of Financial Condition and Results of Operations

References herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Historical results set forth are not necessarily indicative of our future financial position and results of operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires our management to make estimates and assumptions with regard to the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Other than the adoption of the new accounting guidance discussed below under “Principles of Consolidation,” there have been no material changes to our Critical Accounting Policies described in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2010.

Principles of Consolidation

The accompanying financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries, and variable interest entities, or VIEs, in which we are the primary beneficiary, prepared in accordance with GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.

VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary.

As of June 30, 2010, our consolidated balance sheet includes an aggregate $3.7 billion of assets and $3.8 billion of liabilities related to 11 consolidated VIEs. Due to the non-recourse nature of these VIEs, and other factors, our net exposure to loss from investments in these entities is limited to $39.6 million. See Note 11 to our consolidated financial statements for addition information on our investments in VIEs.

Balance Sheet Presentation

We have adjusted the presentation of our consolidated balance sheet, in accordance with GAAP, to separately categorize (i) our assets and liabilities, and (ii) the assets and liabilities of consolidated VIEs. Assets of consolidated VIEs can generally only be used to satisfy the obligations of those VIEs, and the liabilities of consolidated VIEs are non-recourse to us. Similarly, the following discussion of our financial condition and results of operations separately describes our assets and liabilities from those of our consolidated VIEs.

We believe that the accounting for loan participations sold as well as consolidation of VIEs, in particular the VIEs newly consolidated effective January 1, 2010, while in accordance with GAAP, has resulted in a presentation of gross assets and liabilities and provisions/impairments being recorded in excess of our economic exposure in such entities.

Introduction

Our business model is designed to produce a mix of net interest margin from our balance sheet investments and fee income plus co-investment income from our investment management operations. In managing our operations, we focus on originating investments, managing our portfolios and capitalizing our businesses.

Originations

We have historically allocated investment opportunities between our balance sheet and investment management vehicles based upon our assessment of risk and return profiles, the availability and cost of capital, and applicable regulatory restrictions associated with each opportunity. The restructuring of our recourse secured and unsecured debt obligations, as discussed in Note 8 to our consolidated financial statements, includes covenants that require us to effectively cease our balance sheet investment activities. Going forward, until these covenants are eliminated, we will not make new balance sheet investments, but will continue to carry out investment activities for our investment management vehicles, consistent with our previous strategies and investment mandates for each respective vehicle.

Notwithstanding the current capabilities of our investment management platform, we have maintained a defensive posture with respect to investment originations in light of the continued market volatility.

- 42 -

The table below summarizes our total originations and the allocation of opportunities between our balance sheet and investment management business for the six months ended June 30, 2010 and for the year ended December 31, 2009.

Originations(1)
(in millions)	Six months ended June 30, 2010	Year ended December 31, 2009
Balance sheet	$―	$―
Investment management	54	138
Total originations	$54	$138

(1) Includes total commitments, both funded and unfunded, net of any related purchase discounts.

Our balance sheet investments include various types of commercial mortgage backed securities and collateralized debt obligations, or Securities, and commercial real estate loans and related instruments, or Loans, certain of which are assets of consolidated VIEs. We collectively refer to these as Interest Earning Assets. The table below shows our Interest Earning Assets as of June 30, 2010 and December 31, 2009.

Interest Earning Assets
(in millions)	June 30, 2010					December 31, 2009
	Book Value		Yield(1)			Book Value		Yield(1)
Securities held-to-maturity	$18			7.57	%	$17			7.89	%
Loans receivable, net (2)		602		4.08			650		3.73
Loans held-for-sale, net		5		—			—		—
Subtotal / Weighted Average	$625			4.15	%	$667			3.84	%
Consolidated VIE Assets
Securities held-to-maturity	$571			6.90	%	$698			6.58	%
Loans receivable, net		3,125		2.37			391		3.58
Loans held-for-sale, net		—		—			18		—
Subtotal / Weighted Average	$3,696			3.07	%	$1,107			5.41	%
Total / Weighted Average	$4,321			3.23	%	$1,774			4.82	%

(1)	Yield on floating rate assets assumes LIBOR of 0.35% and 0.23% at June 30, 2010 and December 31, 2009, respectively.
(2)	Excludes loan participations sold with a net book value of $116.0 million and $116.7 million as of June 30, 2010 and December 31, 2009, respectively. These participations are net of $172.5 million of provisions for loan losses as of both June 30, 2010 and December 31, 2009.

In some cases our Loan originations are not fully funded at closing, creating an obligation for us to make future fundings, which we refer to as Unfunded Loan Commitments. Typically, Unfunded Loan Commitments are part of construction and transitional Loans. As of June 30, 2010, our two Unfunded Loan Commitments totaled $1.5 million, which will generally only be funded when and/or if the borrower meets certain performance hurdles with respect to the underlying collateral, or to reimburse costs associated with leasing activity.

In addition to our investments in Interest Earning Assets, we have two equity investments in unconsolidated subsidiaries as of June 30, 2010. These represent our equity co-investments in private equity funds that we manage, CT Mezzanine Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or CTOPI.

The table below details the carrying value of those investments, as of June 30, 2010 and December 31, 2009.

Equity Investments
(in thousands)	June 30, 2010	December 31, 2009
Fund III	$125	$158
CTOPI	5,041	2,175
Capitalized costs/other	15	18
Total	$5,181	$2,351

Asset Management

We actively manage our balance sheet portfolio and the assets held by our investment management vehicles with our in-house team of asset managers. While our investments are primarily in the form of debt, we are aggressive in exercising the rights afforded to us as a lender. These rights may include collateral level budget approvals, lease approvals, loan covenant enforcement, escrow/reserve management/collection, collateral release approvals and other rights that we may negotiate. In light of the recent deterioration in property level performance, property valuation, and the real estate capital markets, an increasing number of our loans are either non-performing and/or on our watch list. This requires intensive efforts on the part of our asset management team to maximize our recovery on those investments.

- 43 -

We actively manage our Securities portfolio using a combination of quantitative tools and loan/property level analysis to monitor the performance of the Securities and their collateral against our original expectations. Securities are analyzed to monitor underlying loan delinquencies, transfers to special servicing, and changes to the servicer’s watch list population. Realized losses on underlying loans are tracked and compared to our original loss expectations. On a periodic basis, individual loans of concern are also re-underwritten.

At June 30, 2010, there were significant differences between the estimated fair value and the book value of some of the Securities in our portfolio. We believe these differences to be related to the current market dislocation and a general negative bias against structured financial products and not reflective of a change in cash flow expectations from these securities. Accordingly, we have not recorded any additional other-than-temporary impairments against such Securities.

The table below details the overall credit profile of our Interest Earning Assets, excluding those held by consolidated VIEs, which includes: (i) Loans against which we have recorded a provision for loan losses, or reserves, (ii) Securities against which we have recorded an other-than-temporary impairment, and (iii) Loans and Securities that are categorized as Watch List, which are currently performing but pose a higher risk of non-performance and/or loss, that we actively monitor and manage to mitigate these risks.

Portfolio Performance - Non-VIE Assets(1)
(in millions, except for number of investments)		June 30, 2010		December 31, 2009
Interest earning assets, excluding VIEs ($ / #)		$625	/ 41	$667	/ 44
Impaired Loans (2)
	Performing loans ($ / #)	$64	/ 5	$53	/ 6
	Non-performing loans ($ / #)	$40	/ 5	$5	/ 3
	Total ($ / #)	$104	/ 10	$58	/ 9
	Percentage of interest earning assets	16.6%		8.7%
Impaired Securities (2) ($ / #)		$3	/ 4	$3	/ 6
	Percentage of interest earning assets	0.5%		0.4%
Watch List Assets (3)
	Watch list loans ($ / #)	$233	/ 10	$259	/ 8
	Watch list securities ($ / #)	$15	/ 3	$15	/ 3
	Total ($ / #)	$248	/ 13	$274	/ 11
	Percentage of interest earning assets	39.7%		41.1%

(1)	Portfolio statistics include Loans classified as held-for-sale, but exclude loan participations sold.
(2)	Amounts represent net book value after provisions for loan losses and other-than-temporary impairments of securities.
(3)	Watch List Assets exclude Loans against which we have recorded a provision for loan losses, and Securities which have been other-than-temporarily impaired.

Excluding Loans in our consolidated VIEs, three Loans with an outstanding balance of $81.3 million as of June 30, 2010, which did not qualify for extension pursuant to the corresponding loan agreements, were extended during the six months ended June 30, 2010.

- 44 -

The table below details the overall credit profile of Interest Earning Assets held in consolidated VIEs, which includes: (i) Loans where we have foreclosed upon the underlying collateral and own an equity interest in real estate, (ii) Loans against which we have recorded a provision for loan losses, or reserves, (iii) Securities against which we have recorded an other-than-temporary impairment, and (iv) Loans and Securities that are categorized as Watch List, which are currently performing but pose a higher risk of non-performance and/or loss, that we actively monitor and manage to mitigate these risks.

Portfolio Performance - Consolidated VIE Assets(1)
(in millions, except for number of investments)		June 30, 2010		December 31, 2009
Interest earning assets of consolidated VIEs ($ / #)		$3,696	/ 158	$1,107	/ 91
Real estate owned ($ / #)		$12	/ 1	$―	/ ―
	Percentage of interest earning assets	0.3%		―%
Impaired Loans (2)
	Performing loans ($ / #)	$109	/ 6	$43	/ 6
	Non-performing loans ($ / #)	$48	/ 7	$30	/ 5
	Total ($ / #)	$157	/ 13	$73	/ 11
	Percentage of interest earning assets	4.2%		6.6%
Impaired Securities (2) ($ / #)		$17	/ 9	$25	/ 5
	Percentage of interest earning assets	0.5%		2.3%
Watch List Assets (3)
	Watch list loans ($ / #)	$786	/ 19	$53	/ 2
	Watch list securities ($ / #)	$85	/ 11	$150	/ 16
	Total ($ / #)	$871	/ 30	$203	/ 18
	Percentage of interest earning assets	23.6%		18.3%

(1)	Portfolio statistics include Loans classified as held-for-sale.
(2)	Amounts represent net book value after provisions for loan losses and other-than-temporary impairments of securities.
(3)	Watch List Assets exclude Loans against which we have recorded a provision for loan losses, and Securities which have been other-than-temporarily impaired.

The ratings performance of our Securities portfolio, including securities held by consolidated VIEs, over the six months ended June 30, 2010 and the year ended December 31, 2009 is detailed below:

Rating Activity(1)
	Six months ended June 30, 2010	Year ended December 31, 2009
Securities Upgraded	─	1
Securities Downgraded	15	21

(1) Represents activity from any of Fitch Ratings, Standard & Poor’s and/or Moody’s Investors Service.

We continue to foresee trends in asset performance in 2010 that are likely to lead to further defaults and downgrades: borrowers faced with maturities continue to have a difficult time refinancing their properties in light of the volatility and lack of liquidity in the financial markets, and the continued weakness of real estate fundamentals as the impacts of a weak U.S. economy continue to filter into the commercial real estate sector, impacting cash flows. These trends may result in negotiated extensions or modifications of the terms of our investments or the exercise of foreclosure and other remedies; in any event, it is likely that we will continue to experience difficulty with respect to our investments and will likely incur material losses in our portfolio.

Capitalization

We capitalize our business with a combination of debt and equity. Our debt sources, which we collectively refer to as Interest Bearing Liabilities, currently include repurchase agreements, a senior credit facility and junior subordinated notes. Our balance sheet also includes the non-recourse securitized debt obligations of consolidated VIEs. Our equity capital is currently comprised entirely of common stock.

- 45 -

During 2009, our recourse Interest Bearing Liabilities, including repurchase agreements, our senior credit facility and junior subordinated notes, were restructured, exchanged, terminated, or otherwise satisfied. We believe that the March 2009 restructuring improved the stability of our capital structure, however, there can be no assurance that a further restructuring will not be required or that any such further restructuring will be successful.

Critical features of our restructured debt obligations are described below; see also Note 8 to our consolidated financial statements for additional information.

· Maturity dates of our repurchase agreements and senior credit facility have been extended to March 16, 2011 with an additional one-year extension option, exercisable by each lender in its sole discretion.

· We agreed to pay each of our repurchase lenders periodic amortization as follows: (i) sixty-five (65%) of the net interest income generated by each lender’s collateral pool, and (ii) one hundred percent (100%) of the principal proceeds received from the repayment of assets in each lender’s collateral pool.

· We agreed to initiate quarterly amortization of our senior credit facility, an amount generally equal to $5.0 million per annum.

· We eliminated the cash margin call provisions and amended the mark-to-market provisions that were in effect under the original terms of the repurchase facilities. Generally, if a repurchase lender determines that the ratio of their total outstanding facility balance to total collateral value exceeds 1.15x the ratio calculated as of the effective date of the amended agreements, we may be required to liquidate collateral and reduce the borrowings or post other collateral in an effort to bring the ratio back into compliance with the prescribed ratio.

· We are prohibited from making new balance sheet investments except, subject to certain limitations, co-investments in our investment management vehicles or protective investments to defend existing collateral assets on our balance sheet.

· We are prohibited from incurring any additional indebtedness except in limited circumstances.

· We are prohibited from paying cash dividends to our common shareholders except to the minimum extent necessary to maintain our REIT status.

- 46 -

The table below describes our Interest Bearing Liabilities as of June 30, 2010 and December 31, 2009:

Interest Bearing Liabilities(1) (2)
(in millions)	June 30, 2010		December 31, 2009
Recourse debt obligations
Secured credit facilities
Repurchase obligations	$429		$451
Senior credit facility	99		99
Subtotal	528		550
Unsecured credit facilities
Junior subordinated notes	144		144
Total recourse debt obligations	$672		$694
% Subject to valuation tests	63.8	%	65.0	%
Weighted average effective cost of recourse debt (3)	3.23	%	3.11	%
Non-recourse securitized debt obligations
CT Collateralized debt obligations	$1,043		$1,097
Other consolidated VIE's
GMACC 1997-C1	106		—
GSMS 2006-FL8A	140		—
JPMCC 2004-FL1A	61		—
JPMCC 2005-FL1A	99		—
MSC 2007-XLFA	758		—
MSC 2007-XLCA	537		—
CSFB 2006-HC1	1,056		—
Subtotal	2,757		N/A
Total non-recourse securitized debt obligations	$3,800		$1,097
Weighted average effective cost of non-recourse debt (4)	1.37	%	1.93	%
Total interest bearing liabilities	$4,472		$1,791
Shareholders' deficit	($294	)	($169	)
Ratio of interest bearing liabilities to shareholders' deficit	N/A		N/A

(1)	Excludes participations sold.
(2)	Amounts represent principal balances as of June 30, 2010 and December 31, 2009.
(3)	Floating rate debt obligations assume LIBOR of 0.35% and 0.23% at June 30, 2010 and December 31, 2009, respectively. Including the impact of interest rate hedges with an aggregate notional balance of $64.2 million as of June 30, 2010 and $64.4 million as of December 31, 2009, the effective all-in cost of our recourse debt obligations would be 3.70% and 3.58% per annum, respectively.
(4)	Floating rate debt obligations assume LIBOR of 0.35% and 0.23% at June 30, 2010 and December 31, 2009, respectively. Including the impact of interest rate hedges with an aggregate notional balance of $349.7 million as of June 30, 2010 and $352.8 million as of December 31, 2009, the effective all-in cost of our non-recourse debt obligations would be 1.80% and 3.44% per annum, respectively.

The table below summarizes our repurchase obligations as of June 30, 2010 and December 31, 2009, the terms of which are generally discussed above:

Repurchase Obligations
($ in millions)	June 30, 2010	December 31, 2009
Counterparties	3	3
Outstanding repurchase obligations	$429	$451
All-in cost	L + 1.64%	L + 1.66%

Our senior credit facility currently has a cash interest rate of LIBOR plus 3.00% per annum, and accrues additional interest equal to 7.20% per annum less the cash interest rate. Additional accrued interest is added to the outstanding facility balance on a quarterly basis.

The most subordinated component of our recourse debt obligations are our junior subordinated notes. These securities represent long-term, subordinated, unsecured financing and generally carry limited covenants. As of June 30, 2010, we had $143.8 million of junior subordinated notes outstanding with a book value of $130.1 million and a current coupon of 1.00% per annum. The interest rate on these notes will increase to 7.23% per annum for the period from April 30, 2012 through April 29, 2016 and then convert to a floating interest rate of three-month LIBOR plus 2.44% per annum through maturity on April 30, 2036.

- 47 -

Non-recourse securitized debt obligations of our consolidated VIEs include our four CT CDOs as well as securities issued by other consolidated VIEs, which are not entities sponsored by us. These consolidated non-recourse securitized debt obligations are described below:

Non-Recourse Securitized Debt Obligations
(in millions)	June 30, 2010					December 31, 2009
	Book Value		All-in Cost(1)			Book Value		All-in Cost(1)
CT collateralized debt obligations
CT CDO I		$202		1.04	%		$233		0.88	%
CT CDO II		274		1.13			284		0.99
CT CDO III		251		5.15			254		5.15
CT CDO IV		317		1.09			327		0.97
Total CT CDOs		$1,044		2.07	%		$1,098		1.92	%
Other consolidated VIEs
GMACC 1997-C1		$106		7.11	%		$—		N/A
GSMS 2006-FL8A		140		0.80			—		N/A
JPMCC 2004-FL1A		61		1.39			—		N/A
JPMCC 2005-FL1A		99		0.83			—		N/A
MSC 2007-XLFA		758		0.51			—		N/A
MSC 2007-XLCA		537		1.51			—		N/A
CSFB 2006-HC1		1,056		0.79			—		N/A
Total other consolidated VIE's		$2,757		1.11	%		$—		N/A
Total non-recourse debt obligations		$3,801		1.37	%		$1,098		1.92	%

(1) Includes amortization of premiums and issuance costs of CT CDOs. Floating rate debt obligations assume LIBOR of 0.35% and 0.23% at June 30, 2010 and December 31, 2009, respectively.

We did not issue any new shares of class A common stock during the year. Changes in the number of outstanding shares during the six months ended June 30, 2010 resulted from restricted stock grants, forfeitures and vesting, as well as stock unit grants.

The following table calculates our book value per share as of June 30, 2010 and December 31, 2009:

Shareholders' Equity
	June 30, 2010			December 31, 2009
Book value (in millions)		($294	)		($169	)
Shares:
Class A common stock		21,907,329			21,796,259
Restricted stock		58,512			79,023
Stock units		425,884			464,046
Warrants & Options(1)		—			—
Total		22,391,725			22,339,328
Book value per share		($13.11	)		($7.57	)

(1) Dilutive shares issuable upon the exercise of outstanding warrants and options assuming a June 30, 2010 and December 31, 2009 stock price, respectively, and the treasury stock method.

As of June 30, 2010, there were 21,965,841 shares of our class A common stock and restricted common stock outstanding.

Other Balance Sheet Items

Participations sold represent interests in certain loans that we originated and subsequently sold to one of our investment management vehicles, CT Large Loan 2006, Inc., and third parties. We present these sold interests as both assets and liabilities on the basis that these arrangements do not qualify as sales under GAAP. As of June 30, 2010, we had five such participations sold with a total gross carrying value of $288.4 million. The income earned on the loans is recorded as interest income and an identical amount is recorded as interest expense on the consolidated statements of operations. Generally, participations sold are recorded as assets and liabilities in equal amounts on our consolidated balance sheet. During 2009, we recorded $172.5 million of provisions for loan losses against certain of our participations sold assets, resu lting in a net book value of $116.0 million as of June 30, 2010. The associated liabilities have not been adjusted as of June 30, 2010, and will not be eliminated until the loans are contractually extinguished, at which time we will record a gain of $172.5 million.

- 48 -

Interest Rate Exposure

We endeavor to manage a book of assets and liabilities that are generally matched with respect to interest rates, typically financing floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liabilities. In some cases, we finance fixed rate assets with floating rate liabilities and, in those cases, we may use interest rate derivatives, such as swaps, to effectively convert the floating rate debt to fixed rate debt. In such instances, the equity we have invested in fixed rate assets is not typically swapped, leaving a portion of our equity capital exposed to changes in value of the fixed rate assets due to interest rate fluctuations. The balance of our assets earn interest at floating rates and are financed with floating rate liabilities, leaving a portion of our equity capital exposed to cash flow varia bility from fluctuations in rates. Generally, these assets and liabilities earn interest at rates indexed to one-month LIBOR.

Our counterparties in these transactions are large financial institutions and we are dependent upon the financial health of these counterparties and a functioning interest rate derivative market in order to effectively execute our hedging strategy.

The table below details our interest rate exposure as of June 30, 2010 and December 31, 2009:

Interest Rate Exposure
(in millions)	June 30, 2010			December 31, 2009
Value exposure to interest rates(1)
Fixed rate assets		$944			$833
Fixed rate debt		(513	)		(410	)
Interest rate swaps		(414	)		(417	)
Net fixed rate exposure		$17			$6
Weighted average coupon (fixed rate assets)		7.18	%		6.91	%
Cash flow exposure to interest rates(1)
Floating rate assets		$3,905			$1,678
Floating rate debt less cash		(3,932	)		(1,642	)
Interest rate swaps		414			417
Net floating rate exposure		$387			$453
Weighted average coupon (floating rate assets) (2)		2.26	%		3.29	%
Net income impact from 100 bps change in LIBOR		$3.9			$4.5

(1)	All values are in terms of face or notional amounts, and include loans classified as held-for-sale.
(2)	Weighted average coupon assumes LIBOR of 0.35% and 0.23% at June 30, 2010 and December 31, 2009, respectively.

- 49 -

Investment Management Overview

In addition to our balance sheet investment activities, we act as an investment manager for third parties and as special servicer for certain of our loan investments, as well as for third parties. The table below details investment management and special servicing fee revenue generated by our wholly-owned, taxable, investment management subsidiary, CT Investment Management Co., LLC, or CTIMCO, for the six months ended June 30, 2010 and 2009:

Investment Management Revenues
(in thousands)	June 30, 2010			June 30, 2009
Fees generated as:
Public company manager		$445			$2,478
Private equity manager		3,940			5,809
CDO collateral manager		485			255
Special servicer		2,800			1,334
Total fees		$7,670			$9,876
Eliminations (1)		(993	)		(2,733	)
Total fees, net		$6,677			$7,143

(1) Fees received by CTIMCO from Capital Trust, Inc., or other consolidated subsidiaries, have been eliminated in consolidation.

We have developed our investment management business to leverage our platform, generate fee revenue from investing third party capital and, in certain instances, earn co-investment income. Our active investment management mandates are described below:

· CT Opportunity Partners I, LP, or CTOPI, is currently investing capital. The fund held its final closing in July 2008 with $540 million in total equity commitments. Currently, $352 million of committed equity remains undrawn. We have a $25 million commitment to invest in the fund ($9 million currently funded, $16 million unfunded) and entities controlled by the chairman of our board have committed to invest $20 million. In May 2010 the fund’s investment period was extended to December 13, 2011. The fund targets opportunistic investments in commercial real estate, specifically high yield debt, equity and hybrid instruments, as well as non-performing and sub-performing loans and securities. Currently, we earn base management fees of 0.6% per annum of unfunded equity commitments and 1.3% per annum of invested capital through December 13, 2010. Subsequent to December 13, 2010, we will earn base management fees of 1.3% per annum of invested capital. In addition, we earn net incentive management fees of 17.7% of profits after a 9% preferred return and a 100% return of capital.

· CT High Grade Partners II, LLC, or CT High Grade II, is currently investing capital. The fund closed in June 2008 with $667 million of commitments from two institutional investors. Currently, $343 million of committed equity remains undrawn. In May 2010, the fund’s investment period was extended to May 30, 2011. The fund targets senior debt opportunities in the commercial real estate sector and does not employ leverage. We earn a base management fee of 0.40% per annum on invested capital.

· CT High Grade MezzanineSM, or CT High Grade, is no longer investing capital (its investment period expired in July 2008). The fund closed in November 2006, with a single, related party investor committing $250 million, which was subsequently increased to $350 million in July 2007. This separate account targeted lower LTV subordinate debt investments without leverage. We earn management fees of 0.25% per annum on invested assets.

· CT Large Loan 2006, Inc., or CT Large Loan, is no longer investing capital (its investment period expired in May 2008). The fund closed in May 2006 with total equity commitments of $325 million from eight third-party investors. We earn management fees of 0.75% per annum of invested assets (capped at 1.5% on invested equity).

· CTX Fund I, L.P., or CTX Fund, is no longer investing capital. CTX is a single investor fund designed to invest in CDOs sponsored, but not issued, by us. We do not earn fees on the CTX Fund; however, we earn CDO management fees from the CDOs in which the CTX Fund invests.

· CT Mezzanine Partners III, Inc., or Fund III, is no longer investing capital. The fund is a vehicle we co-sponsored with a joint venture partner, and is currently liquidating in the ordinary course. We earn 100% of base management fees of 1.42% of invested capital, and we split incentive management fees with our partner, which receives 37.5% of the fund’s incentive management fees.

- 50 -

The table below provides additional information regarding the five private equity funds and one separate account we managed as of June 30, 2010.

Investment Management Mandates, as of June 30, 2010
(in millions)							Incentive Management Fee
		Total	Total Capital	Co-		Base	Company	Employee
	Type	Investments(1)	Commitments	Investment %		Management Fee	%	%
Investing:
CT High Grade II	Fund	$324	$667	—		0.40% (Assets)	N/A	N/A
CTOPI	Fund	255	540	4.63%	(2)	(Assets/Equity)(3)	100%(4)	—%(5)
Liquidating:
CT High Grade	Sep. Acc.	344	350	—		0.25% (Assets)	N/A	N/A
CT Large Loan	Fund	201	325	—	(6)	0.75% (Assets)(7)	N/A	N/A
CTX Fund	Fund	8	10	—		(Assets)(8)	N/A	N/A
Fund III	Fund	36	425	4.71%		1.42% (Equity)	57%(9)	43%(5)

(1)	Represents total investments, on a cash basis, as of period-end.
(2)	We have committed to invest $25.0 million in CTOPI.
(3)	CTIMCO earns base management fees of 0.6% per annum of unfunded equity commitments and 1.3% per annum of invested capital through December 13, 2010. Subsequent to December 13, 2010 CTIMCO will earn base management fees of 1.3% per annum of invested capital.
(4)	CTIMCO earns net incentive management fees of 17.7% of profits after a 9% preferred return on capital and a 100% return of capital, subject to a catch-up.
(5)	Portions of the Fund III incentive management fees received by us have been allocated to our employees as long-term performance awards. We have not allocated any of the CTOPI incentive management fee to employees as of June 30, 2010.
(6)	We have co-invested on a pari passu, asset by asset basis with CT Large Loan.
(7)	Capped at 1.5% of equity.
(8)	CTIMCO serves as collateral manager of the CDOs in which the CTX Fund invests, and earns base management fees as CDO collateral manager. As of June 30, 2010, we managed one such $500 million CDO and earn base management fees of 0.10% based on the notional amount of assets in the CDO.
(9)	CTIMCO (62.5%) and our co-sponsor (37.5%) earn net incentive management fees of 18.9% of profits after a 10% preferred return on capital and a 100% return of capital, subject to a catch-up.

- 51 -

Results of Operations

Comparison of Results of Operations: Three Months Ended June 30, 2010 vs. June 30, 2009
(in thousands, except per share data)
	2010			2009			$ / % Change			% Change
Income from loans and other investments:
Interest and related income		$39,428			$30,575			$8,853			29.0	%
Less: Interest and related expenses		31,653			20,244			11,409			56.4	%
Income from loans and other investments, net		7,775			10,331			(2,556	)		(24.7	%)
Other revenues:
Management fees from affiliates		924			2,929			(2,005	)		(68.5	%)
Servicing fees		1,226			155			1,071			691.0	%
Other interest income		97			8			89			—	%
Total other revenues		2,247			3,092			(845	)		(27.3	%)
Other expenses:
General and administrative		4,504			4,503			1			—	%
Depreciation and amortization		5			7			(2	)		(28.6	%)
Total other expenses		4,509			4,510			(1	)		—	%
Total other-than-temporary impairments of securities		(3,848	)		(4,000	)		152			(3.8	%)
Portion of other-than-temporary impairments of securities recognized in other comprehensive income		1,852			—			1,852			N/A
Impairment of goodwill		—			(2,235	)		2,235			(100.0	%)
Impairment of real estate held-for-sale		—			(899	)		899			(100.0	%)
Net impairments recognized in earnings		(1,996	)		(7,134	)		5,138			(72.0	%)
Provision for loan losses		(2,010	)		(7,730	)		5,720			(74.0	%)
Gain on extinguishment of debt		463			—			463			100.0	%
Income (loss) from equity investments		932			(445	)		1,377			N/A
Income (loss) before income taxes		2,902			(6,396	)		9,298			N/A
Income tax provision		—			—			—			N/A
Net income (loss)		$2,902			($6,396	)		$9,298			N/A
Net income (loss) per share - diluted		$0.13			($0.29	)		$0.42			N/A
Dividend per share		$0.00			$0.00			$0.00			N/A
Average LIBOR		0.32	%		0.37	%		(0.05	%)		(14.7	%)

Income from loans and other investments, net

As discussed in Note 2 to our consolidated financial statements, recent accounting guidance has required us to consolidate additional entities beginning January 1, 2010. As a result, an increase in interest earning assets of $2.0 billion from June 30, 2009 to June 30, 2010 resulted in a material increase in interest income for the second quarter of 2010 compared to the second quarter of 2009. Similarly, an increase in interest bearing liabilities of $2.6 billion resulted in a material increase in interest expense for the second quarter of 2010 compared to the second quarter of 2009. In addition, an increase in non-performing loans and a decrease in average LIBOR contributed to a decrease in net interest income during the second quarter of 2010 compared to the second quarter of 2009.

Management fees from affiliates

Base management fees from our investment management business decreased $2.0 million, or 69%, during the second quarter of 2010 compared to the second quarter of 2009. The decrease was attributed primarily to a decrease of $2.1 million in fees from CTOPI due to an amendment to the management agreement with the fund, offset by increased fees at CT High Grade II due to additional investment activity.

Servicing fees

Servicing fees increased $1.1 million during the second quarter of 2010 compared to the second quarter of 2009. The increase in fees was primarily due to fees for modifications to loans for which we are named special servicer.

General and administrative expenses

General and administrative expenses include personnel costs, operating expenses, professional fees and, for the second quarter of 2010, $510,000 of expenses associated with newly consolidated VIEs, as described in Note 2 to our consolidated financial statements. Excluding expenses from newly consolidated VIEs, general and administrative expenses decreased 11% between the second quarter of 2010 and the second quarter of 2009 due to lower personnel costs (including stock-based compensation), and lower professional fees and other operating costs.

- 52 -

Net impairments recognized in earnings

During the second quarter of 2010, we recorded a gross other-than-temporary impairment of $3.8 million on four of our Securities that had an adverse change in cash flow expectations. Of this amount, $1.9 million (the amount considered fair value adjustments in excess of credit impairment) was included in other comprehensive income, resulting in a net $2.0 million impairment (the amount considered credit impairment) included in earnings.

During the second quarter of 2009, we similarly recorded a gross other-than-temporary impairment of $4.0 million on one of our Securities, of which all $4.0 million was included in earnings. During the second quarter of 2009 we also recorded an other-than-temporary impairment of $899,000 on our Real Estate Held-for-Sale to reflect the property at fair value and a $2.2 million impairment of goodwill related to our June 2007 acquisition of a healthcare loan origination platform.

Provision for loan losses

During the second quarter of 2010 we recorded an aggregate $2.0 million provision for loan losses. This net provision included $19.0 million of provisions against four loans, offset by $17.0 million of recoveries of four loans that had previously been impaired. These recoveries include $7.0 million on two loans held by consolidated VIEs. During the second quarter of 2009, we recorded an aggregate $7.7 million provision for loan losses against four loans.

Gain on extinguishment of debt

During the second quarter of 2010, we recorded a $463,000 gain on the extinguishment of debt due to realized losses from collateral assets held by consolidated securitization trusts. We recorded no such gains in 2009.

Income (loss) from equity investments

The income from equity investments during the second quarter of 2010 resulted primarily from our $1.0 million share of income from CTOPI, primarily due to fair value adjustments on the underlying investments in the fund. The loss from equity investments during the second quarter of 2009 resulted primarily from our share of losses from CTOPI, also primarily due to fair value adjustments on the underlying investments.

Income tax provision

We did not record an income tax provision in the second quarter of 2010 or 2009.

Dividends

We did not pay any dividends in the second quarter of 2010 or 2009.

- 53 -

Comparison of Results of Operations: Six Months Ended June 30, 2010 vs. June 30, 2009
(in thousands, except per share data)
	2010			2009			$ / % Change			% Change
Income from loans and other investments:
Interest and related income		$79,398			$63,814			$15,584			24.4	%
Less: Interest and related expenses		62,905			41,512			21,393			51.5	%
Income from loans and other investments, net		16,493			22,302			(5,809	)		(26.0	%)
Other revenues:
Management fees from affiliates		3,940			5,809			(1,869	)		(32.2	%)
Servicing fees		2,737			1,334			1,403			105.2	%
Other interest income		105			136			(31	)		(22.8	%)
Total other revenues		6,782			7,279			(497	)		(6.8	%)
Other expenses:
General and administrative		9,241			12,959			(3,718	)		(28.7	%)
Depreciation and amortization		10			14			(4	)		(28.6	%)
Total other expenses		9,251			12,973			(3,722	)		(28.7	%)
Total other-than-temporary impairments of securities		(39,835	)		(18,646	)		(21,189	)		113.6	%
Portion of other-than-temporary impairments of securities recognized in other comprehensive income		18,015			5,624			12,391			220.3	%
Impairment of goodwill		—			(2,235	)		2,235			(100.0	%)
Impairment of real estate held-for-sale		—			(2,233	)		2,233			(100.0	%)
Net impairments recognized in earnings		(21,820	)		(17,490	)		(4,330	)		24.8	%
Provision for loan losses		(54,227	)		(66,493	)		12,266			(18.4	%)
Valuation allowance on loans held-for-sale		—			(10,363	)		10,363			(100.0	%)
Gain on extinguishment of debt		463			—			463			100.0	%
Income (loss) from equity investments		1,302			(2,211	)		3,513			N/A
Loss before income taxes		(60,258	)		(79,949	)		19,691			(24.6	%)
Income tax provision (benefit)		293			(408	)		701			N/A
Net loss		($60,551	)		($79,541	)		$18,990			(23.9	%)
Net loss per share - diluted		($2.71	)		($3.56	)		$0.85			(23.9	%)
Dividend per share		$0.00			$0.00			$0.00			N/A
Average LIBOR		0.27	%		0.42	%		(0.15	%)		(34.9	%)

Income from loans and other investments, net

As discussed in Note 2 to our consolidated financial statements, recent accounting guidance has required us to consolidate additional entities beginning January 1, 2010. As a result, an increase in interest earning assets of $2.0 billion from June 30, 2009 to June 30, 2010 resulted in a material increase in interest income for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Similarly, an increase in interest bearing liabilities of $2.6 billion resulted in a material increase in interest expense for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. In addition, an increase in non-performing loans and a decrease in average LIBOR contributed to a decrease in net interest income during the six months ended June 30, 2010 compared to the six months ended June 30, 2009.

Management fees from affiliates

Base management fees from our investment management business decreased $1.9 million, or 32%, during the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was attributed primarily to a decrease of $2.2 million in fees from CTOPI due to an amendment to the management agreement with the fund, offset by increased fees at CT High Grade II due to additional investment activity.

Servicing fees

Servicing fees increased $1.4 million during the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Servicing fees in 2010 and 2009 were primarily fees for modifications to loans for which we are named special servicer.

- 54 -

General and administrative expenses

General and administrative expenses include personnel costs, operating expenses and professional fees and, for the six months ended June 30, 2010, $975,000 of expenses associated with newly consolidated VIEs, as described in Note 2 to our consolidated financial statements. Excluding expenses from newly consolidated VIEs, general and administrative expenses decreased $4.7 million, or 36%, between the six months ended June 30, 2010 and the six months ended June 30, 2009. Personnel costs, including stock-based compensation, decreased $1.4 million relative to the six months ended June 30, 2009 and $3.0 million of costs associated with our March 2009 debt restructuring were included in general and administrative expenses for the six months ended June 30, 2009.

Net impairments recognized in earnings

During the six months ended June 30, 2010, we recorded a gross other-than-temporary impairment of $39.8 million on eight of our Securities that had an adverse change in cash flow expectations. Of this amount, $18.0 million (the amount considered fair value adjustments in excess of credit impairment) was included in other comprehensive income, resulting in a net $21.8 million impairment (the amount considered credit impairment) included in earnings.

During the six months ended June 30, 2009, we similarly recorded a gross other-than-temporary impairment of $18.6 million on seven of our Securities, of which $5.6 million was included in other comprehensive income, and $13.0 million was included in earnings. During the six months ended June 30, 2009, we also recorded an other-than-temporary impairment of $2.2 million on our Real Estate Held-for-Sale to reflect the property at fair value and a $2.2 million impairment of goodwill related to our June 2007 acquisition of a healthcare loan origination platform.

Provision for loan losses

During the six months ended June 30, 2010, we recorded $54.2 million of provisions for loan losses against 13 loans. During the six months ended June 30, 2009, we recorded an aggregate $66.5 million provision for loan losses against eleven loans.

Valuation allowance on loans held-for-sale

During the six months ended June 30, 2009,we recorded a $10.4 million valuation allowance against two loans that we classified as held-for-sale to reflect these assets at fair value. No such allowances were recorded during the six months ended June 30, 2010.

Gain on extinguishment of debt

During the second quarter of 2010, we recorded a $463,000 gain on the extinguishment of debt due to realized losses from collateral assets held by consolidated securitization trusts. We recorded no such gains in 2009.

Income (loss) from equity investments

The income from equity investments during the six months ended June 30, 2010 resulted primarily from our $1.3 million share of income from CTOPI, primarily due to fair value adjustments on the underlying investments in the fund. The loss from equity investments during the six months ended June 30, 2009 resulted primarily from our share of losses at both CTOPI and Fund III. The $2.0 million loss recorded in 2009 with respect to CTOPI was also primarily due to fair value adjustments on the underlying investments.

Income tax provision (benefit)

During the six months ended June 30, 2010, we recorded an income tax provision of $293,000 which was primarily due to GAAP-to-tax differences for stock-based compensation to our employees. During the six months ended June 30, 2009, we received $408,000 in tax refunds that we recorded as an offset to income tax expense.

Dividends

We did not pay any dividends in the six months ended June 30, 2010 or 2009.

Liquidity and Capital Resources

Our primary source of liquidity is our portfolio of interest earning assets, a significant portion of which serves as collateral for our secured debt obligations (primarily our repurchase facilities and CT CDOs). Correspondingly, our primary use of liquidity is the payment of interest and principal to our lenders.

Our liquidity and capital resources outlook was significantly impacted by the restructuring of our debt obligations during the first quarter of 2009. We agreed to pay each of our repurchase lenders additional principal amortization equal to 65% of the net interest margin and 100% of the principal proceeds from assets in their collateral pool, which amounts would otherwise have been free cash flow available to us. In addition, as described in Note 11 to our consolidated financial statements, covenant breaches in our CT CDOs have resulted in a redirection of cash flow to amortize senior note holders, which amounts would similarly have been available to us. In both cases, the additional principal amortization to our repurchase lenders and senior CT CDO notes are a function of cash received under each respective collateral pool, and are on ly required to the extent there is cash flow in excess of the interest expense otherwise due under each respective facility. Accordingly, these amortization and redirection provisions cannot result in a cash outflow to our repurchase lenders and CT CDOs, only a diminution of liquidity available to us.

- 55 -

In addition to the required repayments to our repurchase lenders, we agreed to increase the cash coupon by 1.25% per annum and to make a minimum quarterly amortization payment of $1.3 million under our senior credit facility. See Note 8 to our consolidated financial statements for additional information on our restructured debt obligations.

Sources of liquidity as of June 30, 2010 include cash on deposit, the net cash flow generated by our interest earning assets described above, interest on unencumbered assets, and investment management fees from private equity funds, CDOs, and special servicing. Uses of liquidity other than those described above related to our secured debt obligations include interest on our senior credit facility and junior subordinated notes, operating expenses, Unfunded Loan Commitments, various commitments to our managed funds, and any dividends necessary to maintain our REIT status. We believe our current sources of capital, coupled with our expectations regarding potential asset dispositions and other transactions, will be adequate to meet our near term cash requirements.

Cash Flows

Our consolidated statement of cash flows for the six months ended June 30, 2010 includes the cash inflows and outflows of the newly consolidated VIEs described in Note 2 to our consolidated financial statements. While this does not impact our net cash flow, it does increase certain gross cash flow disclosures.

We experienced a net decrease in cash of $1.5 million for the six months ended June 30, 2010, compared to a net decrease of $25.8 million for the six months ended June 30, 2009.

Cash provided by operating activities during the six months ended June 30, 2010 was $20.2 million, compared to cash provided by operating activities of $18.2 million during the same period of 2009. The increase was primarily due to non-recurring restructuring costs of $3.0 million incurred in the first two quarters of 2009 offset by a decrease in our net interest margin.

During the six months ended June 30, 2010, cash provided by investing activities was $109.1 million, compared to $44.1 million provided by investing activities during the same period in 2009. The significant change was primarily due to (i) $17.5 million of proceeds collected from the disposition of our loans held-for-sale in the first six months of 2010, and (ii) an additional $40.4 million of asset principal repayments in the first six months of 2010 resulting from newly consolidated VIEs, as discussed above. Also contributing to the increase in cash provided by investing activities during the first six months of 2010 was a decrease of $6.8 million in add-on loan fundings.

During the six months ended June 30, 2010, cash used in financing activities was $130.8 million, compared to $88.1 million during the same period in 2009. During the six months ended June 30, 2010, the cash used in financing activities was primarily comprised of repayments of $106.4 million on our securitized debt obligations, $21.9 million on our repurchase obligations and $2.5 million on our senior credit facility. Of the $106.4 million in repayments on our securitized debt obligations, $51.8 million was on newly consolidated VIEs, and $54.6 million was on CT CDOs. During the six months ended June 30, 2009, cash used in financing activities was comprised of repayments under repurchase obligations of $83.0 million and repayment on our securitized debt obligations of $22.5 million offset by a decrease in restricted cash of $18.7 millio n.

Capitalization

Our authorized capital stock consists of 100,000,000 shares of $0.01 par value class A common stock, of which 21,965,841 shares were issued and outstanding as of June 30, 2010, and 100,000,000 shares of preferred stock, none of which were outstanding as of June 30, 2010.

Pursuant to the terms of our debt restructuring on March 16, 2009, we issued to JPMorgan, Morgan Stanley and Citigroup warrants to purchase 3,479,691 shares of our class A common stock at an exercise price of $1.79 per share, the closing bid price on the New York Stock Exchange on March 13, 2009. The warrants will become exercisable on March 16, 2012 and expire on March 16, 2019, and may be exercised through a cashless exercise.

Repurchase Obligations

As of June 30, 2010, we were party to three master repurchase agreements with three counterparties, with aggregate total outstanding borrowings of $428.8 million. The terms of these agreements are described in Note 8 to our consolidated financial statements.

Senior Credit Facility

As of June 30, 2010, we had $98.7 million outstanding under our senior credit facility at a cash cost of LIBOR plus 3.00% and an all-in cost of 7.20%. The terms of this agreement are described in Note 8 to our consolidated financial statements.

- 56 -

Junior Subordinated Notes

As of June 30, 2010 we had $143.8 million of junior subordinated notes outstanding with a book value of $130.1 million and a current coupon of 1.00% per annum. The terms of these notes are described in Note 8 to our consolidated financial statements.

Non-Recourse Securitized Debt Obligations

As of June 30, 2010, we had non-recourse securitized debt obligations from consolidated VIEs with a total face value of $3.8 billion. The terms of these obligations are described in Note 11 to our consolidated financial statements.

The information concerning the terms of our repurchase agreements, our senior credit facility, our junior subordinated notes, and the non-recourse securitized debt obligations of consolidated VIEs, presented in Notes 8 and 11 to our consolidated financial statements, is incorporated herein by reference.

Contractual Obligations

The following table sets forth information about certain of our contractual obligations as of June 30, 2010:

Contractual Obligations(1)
(in millions)
	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than  5 years
Parent company obligations
Recourse debt obligations
Repurchase obligations		$429		$429		$—		$—		$—
Senior credit facility		99		99		—		—		—
Junior subordinated notes		144		—		—		—		144
Total recourse debt obligations		672		528		—		—		144
Unfunded commitments
Loans		1		—		1		—		—
Equity investments(2)		16		—		16		—		—
Total unfunded commitments		17		—		17		—		—
Operating lease obligations		9		1		2		2		4
Total parent company obligations		698		529		19		2		148
Consolidated VIE obligations
Non-recourse securitized debt obligations
CT collateralized debt obligations		1,043		—		—		—		1,043
Other consolidated VIEs		2,757		—		—		—		2,757
Total non-recourse debt obligations		3,800		—		—		—		3,800
Total consolidated VIE obligations		3,800		—		—		—		3,800
Total contractual obligations		$4,498		$529		$19		$2		$3,948

(1)	We are also subject to interest rate swaps for which we cannot estimate future payments due.
(2)	CTOPI’s investment period expires in December 2011, at which point our obligation to fund capital calls will be limited. It is possible that our unfunded capital commitment will not be entirely called, and the timing and amount of such required contributions is not estimable. Our entire unfunded commitment is assumed to be funded by December 2011 for purposes of the above table.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

- 57 -

Note on Forward-Looking Statements

Except for historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Section 21E of the Securities and Exchange Act of 1934, as amended, which involve certain risks and uncertainties. Forward-looking statements are included with respect to, among other things, our current business plan, business and investment strategy and portfolio management. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes" and "scheduled" and similar expressions. Our actual results or outcomes may differ m aterially from those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Important factors that we believe might cause actual results to differ from any results expressed or implied by these forward-looking statements are discussed in the risk factors contained in Exhibit 99.1 to this Form 10-Q, which are incorporated herein by reference. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q.

- 58 -

ITEM 3.                      Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The principal objective of our asset and liability management activities is to maximize net interest income while minimizing levels of interest rate risk. Interest income and interest expense are subject to the risk of interest rate fluctuations. In certain instances, to mitigate the impact of fluctuations in interest rates, we use interest rate swaps to effectively convert floating rate liabilities to fixed rate liabilities for proper matching with fixed rate assets. Each derivative used as a hedge is matched with a liability with which it is expected to have a high correlation. The swap agreements are generally held-to-maturity and we do not use interest rate derivative financial instruments for trading purposes. The differential to be paid or received on these agreements is recognized as an adjustment to interest expense and is reco gnized on the accrual basis.

As of June 30, 2010, a 100 basis point change in LIBOR would impact our net income by approximately $3.9 million.

Credit Risk

Our loans and investments, including our fund investments, are also subject to credit risk. The ultimate performance and value of our loans and investments depends upon the owner’s ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our asset management team continuously reviews our investment portfolio and in certain instances is in constant contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

- 59 -

The following table provides information about our financial instruments that are sensitive to changes in interest rates as of June 30, 2010. For financial assets and debt obligations, the table presents face balance and weighted average interest rates. For interest rate swaps, the table presents notional amounts and weighted average fixed pay and floating receive interest rates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract.

Financial Assets and Liabilities Sensitive to Changes in Interest Rates as of June 30, 2010
(in thousands)
Non-VIE Assets:
	Securities	Loans Receivable	Loans Held-for-Sale	Total
Fixed rate assets	$34,518	$52,240	$16,130	$102,888
Interest rate(1)	8.24%	8.23%	8.55%	8.28%
Floating rate assets	$1,584	$1,029,830	$—	$1,031,414
Interest rate(1)	0.47%	3.54%	—	3.53%
Non-VIE Debt Obligations:
	Repurchase	Senior	Jr. Subordinated	Participations
	Obligations	Credit Facility	Notes	Sold	Total
Fixed rate debt	$—	$—	$143,753	$—	$143,753
Interest rate(1) (2)	—	—	1.00%	—	1.00%
Floating rate debt	$428,822	$98,665	$—	$288,555	$816,042
Interest rate(1) (2)	1.96%	3.35%	—	3.30%	2.60%
Non-VIE Derivative Financial Instruments:
Notional amounts	$64,228
Fixed pay rate(1)	5.16%
Floating receive rate(1)	0.35%
Assets of Consolidated VIEs:
	Securities	Loans Receivable	Total
Fixed rate assets	$603,535	$237,882	$841,417
Interest rate(1)	6.59%	8.22%	7.05%
Floating rate assets	$35,533	$3,126,402	$3,161,935
Interest rate(1)	2.02%	1.94%	1.94%
Securitized Non-Recourse Debt Obligations of Consolidated VIEs:
		Other
	CT CDOs	Consolidated VIEs	Total
Fixed rate debt	$263,119	$105,799	$368,918
Interest rate(1)	5.31%	7.11%	5.82%
Floating rate debt	$780,230	$2,651,098	$3,431,328
Interest rate(1)	0.86%	0.87%	0.87%
Derivative Financial Instruments of Consolidated VIEs:
Notional amounts	$349,682
Fixed pay rate(1)	4.96%
Floating receive rate(1)	0.35%

(1)	Represents weighted average rates where applicable. Floating rates are based on LIBOR of 0.35%, which is the rate as of June 30, 2010.
(2)	The coupon on our junior subordinated notes will remain at 1.00% per annum through April 29, 2012, increase to 7.23% per annum for the period from April 30, 2012 through April 29, 2016 and then convert to a floating interest rate of three-month LIBOR + 2.44% per annum through maturity in 2036.

- 60 -

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this quarterly report was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commission rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no significant changes in our "internal control over financial reporting" (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

- 61 -

PART II. OTHER INFORMATION

ITEM 1: Legal Proceedings

None.

ITEM 1A: Risk Factors

In addition to the other information discussed in this quarterly report on Form 10-Q, please consider the risk factors provided in our updated risk factors attached as Exhibit 99.1, which could materially affect our business, financial condition or future results.

To reflect risks related to the listing of our class A common stock on the New York Stock Exchange ("NYSE"), we added the risk factor entitled:

"Our shares of class A common stock may be delisted from the NYSE if the price per share trades below $1.00 for an extended period of time, which could negatively affect our business, our financial condition, our results of operations and our ability to service our debt obligations."

Other than with respect to the risk related to the listing of our class A common stock on the NYSE, we do not believe the updates to the risk factors have materially changed the type or magnitude of the risks we face in comparison to the disclosure provided in our most recent Annual Report on Form 10-K.

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3: Defaults Upon Senior Securities

None.

ITEM 4: (Removed and Reserved)

None.

ITEM 5: Other Information

None.

- 62 -

ITEM 6: Exhibits

	3.1a	Charter of the Capital Trust, Inc. (filed as Exhibit 3.1.a to Capital Trust, Inc.’s Current Report on Form 8-K (File No. 1-14788) filed on April 2, 2003 and incorporated herein by reference).
	3.1b	Certificate of Notice (filed as Exhibit 3.1 to Capital Trust, Inc.’s Current Report on Form 8-K (File No. 1-14788) filed on February 27, 2007 and incorporated herein by reference).
	3.2	Second Amended and Restated By-Laws of Capital Trust, Inc. (filed as Exhibit 3.2 to Capital Trust, Inc.’s Current Report on Form 8-K (File No. 1-4788) filed on February 27, 2007 and incorporated herein by reference).
·	31.1	Certification of Stephen D. Plavin, Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
·	31.2	Certification of Geoffrey G. Jervis, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
·	32.1	Certification of Stephen D. Plavin, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
·	32.2	Certification of Geoffrey G. Jervis, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
·	99.1	Updated Risk Factors from our Annual Report on Form 10-K for the year ended December 31, 2009, filed on March 2, 2010 with the Securities and Exchange Commission.

_______________________

· Filed herewith

- 63 -

SIGNATURES

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

	CAPITAL TRUST, INC.
July 27, 2010	By:	/s/ Stephen D. Plavin
Date		Stephen D. Plavin
		Chief Executive Officer (Principal executive officer)
July 27, 2010		/s/ Geoffrey G. Jervis
Date		Geoffrey G. Jervis
		Chief Financial Officer (Principal financial officer and Principal accounting officer)

- 64 -

EX-31.1

Exhibit 31.1

CERTIFICATION

PURSUANT TO 17 CFR 240.13a-14

PROMULGATED UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen D. Plavin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Capital Trust, 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 officer 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 officer 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: July 27, 2010

/s/ Stephen D. Plavin

Stephen D. Plavin

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

PURSUANT TO 17 CFR 240.13a-14

PROMULGATED UNDER

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Geoffrey G. Jervis, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Capital Trust, 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 officer 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 officer 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: July 27, 2010

/s/ Geoffrey G. Jervis

Geoffrey G. Jervis

Chief Financial Officer

EX-32.1

Exhibit 32.1

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 Quarterly Report of Capital Trust, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen D. Plavin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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 results of operations of the Company.

/s/ Stephen D. Plavin

Stephen D. Plavin

Chief Executive Officer

July 27, 2010

This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided by the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

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 Quarterly Report of Capital Trust, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey G. Jervis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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 results of operations of the Company.

/s/ Geoffrey G. Jervis

Geoffrey G. Jervis

Chief Financial Officer

July 27, 2010

This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided by the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

Exhibit 99.1

RISK FACTORS

Risks Related to Our Investment Activities

We have recently experienced significant loses and given the condition of our balance sheet portfolio we may experience future losses.

We experienced net losses of $60.6 million and $576.4 million in the six months ended June 30, 2010 and year ended December 31, 2009, respectively, and currently have negative shareholders equity of $293.7 million. Our losses have resulted principally from reserves and impairments recorded on our investments and there can be no assurance that our investments will not further deteriorate and lead us to record further reserves and impairments, which may be significant and lead to future material net losses.

Our current business is subject to a high degree of risk. Our assets and liabilities are subject to increasing risk due to the impact of market turmoil in commercial real estate. Our efforts to stabilize our business with the restructuring of our debt obligations may not be successful as our balance sheet portfolio is subject to the risk of further deterioration and ongoing turmoil in the financial markets.

Our portfolio is comprised of debt and related interests, directly or indirectly secured by commercial real estate. A significant portion of these investments are in subordinate positions, increasing the risk profile of our investments as underlying property performance deteriorates. Furthermore, we have leveraged our portfolio at the corporate level, effectively further increasing our exposure to loss on our investments. The recent financial market turmoil and economic recession has resulted in a material deterioration in the value of commercial real estate and dramatically reduced the amount of capital to finance the commercial real estate industry (both at the property and corporate level). Given the composition of our portfolio, the leverage in our capital structure and the continuing negative impact of the commercial real estate m arket turmoil, the risks associated with our business have dramatically increased. Even with the March 2009 restructuring of our debt obligations, we may not be able to satisfy our obligations to our lenders. There can be no assurance that further restructuring will not be required and that any such restructuring will be successful. The impact of the economic recession on the commercial real estate sector in general, and our portfolio in particular, cannot be predicted and we expect to experience significant defaults by borrowers and other impairments to our investments. These events may trigger defaults under our restructured debt obligations that may result in the exercise of remedies that cause severe (and potentially complete) losses in the book value of our investments. Therefore, an investment in our class A common stock is subject to a high degree of risk.

Given current conditions, our restructured debt obligations are an unstable source of financing and expose us to further erosions of shareholders equity.

Our secured obligations mature in March 2011. There can be no assurance that we will be able to further extend our liabilities, in which case we may lose substantially all of our assets. Furthermore, any extension of these liabilities would likely require further repayment and changes in economic terms that may have a material adverse impact on us.

Our restructured debt obligations with our lenders prohibit new balance sheet investment activities, which prevents us from growing our balance sheet portfolio.

Under the terms of the restructured debt obligations, we are prohibited from acquiring or originating new investments. This restriction precludes us from growing our balance sheet portfolio at a time when investment opportunities that provide attractive risk-adjusted returns may otherwise be available to us. Our interest earning investments will continue to be reduced which will negatively impact our net investment income. There can be no assurance that we will be able to retire completely or refinance our restructured debt obligations so that we can resume our balance sheet investment activities.

1

Our liquidity will be impacted by our restructured debt obligations and any plans to further restructure our debt obligations or recapitalize our business to improve liquidity may involve a high cost of capital and significant dilution to our shareholders.

Our restructured debt obligations further reduce our current liquidity as a result of ongoing principal payment sweeps and additional interest payments. The reduction in liquidity may impair our ability to meet our obligations and, given the covenants contained in our restructured debt obligations, our ability to improve our liquidity position is constrained. In addition, we must maintain a minimum of $5.0 million in liquidity during the remaining term of our restructuring, a requirement that may limit our ability to make commitments to investment management vehicles and, ultimately, that we may not be able to maintain.

To improve our liquidity, we will need to further restructure our debt obligations and/or recapitalize our business, for which we can provide no assurances. We would expect any such restructuring and/or recapitalization to require us to raise additional capital at a significantly high cost of capital and/or with significant dilution to our shareholders. Our shareholders are subordinate to the claims of our creditors and therefore we can provide no assurance that any transaction to restructure or recapitalize will provide any recovery to our shareholders.

Our restructured debt obligations are subject to debt to collateral value ratio maintenance covenants for which we can provide no assurance as to our future compliance.

Under the terms of our debt restructuring, we eliminated the cash margin call provisions and amended the mark-to-market provisions that were in effect under the original terms of the secured credit facilities. The revised secured credit facilities allow our secured lenders to determine collateral value based upon changes in the performance of the underlying real estate collateral as opposed to changes in market spreads under the original terms. Beginning September 2009, each collateral pool may be valued monthly. If the ratio of a secured lender’s total outstanding secured credit facility balance to total collateral value exceeds 1.15x the ratio calculated as of the effective date of the amended agreements, we may be required to liquidate collateral and reduce the borrowings& #160;or post other collateral to bring the ratio back into compliance with the prescribed ratio. There can be no assurances that we will pass these tests and, as the commercial real estate markets continue to deteriorate, we expect that passing these tests will become more difficult. If we fail these tests, sales of assets to return to compliance will be extremely difficult in light of the lack of liquidity for the types of assets that serve as collateral and, even if we locate buyers for the collateral, the sales prices may be insufficient to reduce the ratio of outstanding secured credit facility balance to total collateral value. Failure to remedy these tests is an event of default under our secured credit facilities and would trigger a cross default under other of our financial instruments. Any such action would have a material adverse impact on our business and financial condition and would negativel y impact our share price.

The U.S. and other financial markets have been in turmoil and the U.S. and other economies in which we operate are in the midst of an economic recession which can be expected to negatively impact our operations.

The U.S. and other financial markets have been experiencing extreme dislocations and a severe contraction in available liquidity globally as important segments of the credit markets are frozen as lenders are unwilling or unable to originate new credit. Global financial markets have been disrupted by, among other things, volatility in security prices, credit rating downgrades, the failure and near failure of a number of large financial institutions and declining valuations, and this disruption has been acute in real estate related markets. This disruption has lead to a decline in business and consumer confidence and increased unemployment and has precipitated an economic recession around the globe. As a consequence, owners and operators of commercial real estate that secure or back our investments have experienced distress and commercia l real estate values have declined substantially. We are unable to predict the likely duration or severity of the current disruption in financial markets and adverse economic conditions which could materially and adversely affect our business, financial condition and results of operations, including leading to significant impairment to our assets and our ability to generate income.

2

Our existing loans and investments expose us to a high degree of risk associated with investing in real estate assets.

Real estate historically has experienced significant fluctuations and cycles in performance that may result in reductions in the value of our real estate related investments. The performance and value of our loans and investments once originated or acquired by us depends upon many factors beyond our control. The ultimate performance and value of our investments is subject to the varying degrees of risk generally incident to the ownership and operation of the properties which collateralize or support our investments. The ultimate performance and value of our loans and investments depends upon, in large part, the commercial property owner’s ability to operate the property so that it produces sufficient cash flows necessary either to pay the interest and principal due to us on our loans and investments or pay us as an equity advisor . Revenues and cash flows may be adversely affected by:

· changes in national economic conditions;

· changes in local real estate market conditions due to changes in national or local economic conditions or changes in local property market characteristics;

· the extent of the impact of the current turmoil in the financial markets, including the lack of available debt financing for commercial real estate;

· tenant bankruptcies;

· competition from other properties offering the same or similar services;

· changes in interest rates and in the state of the debt and equity capital markets;

· the ongoing need for capital improvements, particularly in older building structures;

· changes in real estate tax rates and other operating expenses;

· adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes, hurricanes and other natural disasters, and acts of war or terrorism, which may decrease the availability of or increase the cost of insurance or result in uninsured losses;

· adverse changes in zoning laws;

· the impact of present or future environmental legislation and compliance with environmental laws;

· the impact of lawsuits which could cause us to incur significant legal expenses and divert management’s time and attention from our day-to-day operations; and

· other factors that are beyond our control and the control of the commercial property owners.

In the event that any of the properties underlying or collateralizing our loans or investments experiences any of the foregoing events or occurrences, the value of, and return on, such investments, our profitability and the market price of our class A common stock would be negatively impacted. In addition, our restructured debt obligations contain covenants which limit the amount of protective investments we may make to preserve value in collateral securing our investments.

3

A prolonged economic slowdown, a lengthy or severe recession, a credit crisis, or declining real estate values could harm our operations or may adversely affect our liquidity.

We believe the risks associated with our business are more severe during periods of economic slowdown or recession like those we are currently experiencing, particularly if these periods are accompanied by declining real estate values.The recent dislocation of the global credit markets and anticipated collateral consequences to commercial activity of businesses unable to finance their operations as required has lead to a weakening of general economic conditions and precipitated declines in real estate values and otherwise exacerbate troubled borrowers’ ability to repay loans in our portfolio or backing our CMBS. We have made loans to hotels, an industry whose performance has been severely impacted by the current recession. Declining real estate values would likely redu ce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of or investment in additional properties, which in turn could lead to fewer opportunities for our investment. Borrowers may also be less able to pay principal and interest on our loans as the real estate economy continues to weaken. Continued weakened economic conditions could negatively affect occupancy levels and rental rates in the markets in which the collateral supporting our investments are located, which, in turn, may have a material adverse impact on our cash flows and operating results of our borrowers. Further, declining real estate values like those occurring in the commercial real estate sector significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our basis in the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to operate our investment management business, which would significantly harm our revenues, results of operations, financial condition, liquidity, business prospects and our share price.

We are exposed to the risks involved with making subordinated investments.

Our subordinated investments involve the risks attendant to investments consisting of subordinated loans and similar positions. Subordinate positions incur losses before the senior positions in a capital structure and, as a result, foreclosures on the underlying collateral can reduce or eliminate the proceeds available to satisfy our investment. Also, in certain cases where we experience appraisal reductions, we may lose our controlling class status, or special servicer designator rights. In many cases, management of our investments and our remedies with respect thereto, including the ability to foreclose on or direct decisions with respect to the collateral securing such investments, is subject to the rights of senior lenders and the rights set forth in inter-creditor or servicing agreements. Our interests and those of the senior lend ers and other interested parties may not be aligned.

We are obligated to fund unfunded commitments under our loan agreements.

We are required to fund unfunded obligations to our borrowers. Historically, prior to our restructuring, we relied upon our lenders to fund a portion of these commitments. Going forward, we can rely only on our immediately available liquidity to meet these commitments. If we do not have the liquidity in excess of the minimum amounts required under our restructured debt obligations, and the lenders do not consent to our obtaining additional financing, if available, we would default on these commitments and potentially lose value in these investments and expose ourselves to litigation.

We are subject to counterparty risk associated with our debt obligations and interest rate swaps.

Our counterparties for these critical financial relationships include both domestic and international financial institutions. Many of them have been severely impacted by the credit market turmoil and have been experiencing financial pressures. In some cases, our counterparties have filed bankruptcy.

We are subject to the general risk of a leveraged investment strategy and the specific risks of our restructured indebtedness.

Our restructured secured debt obligations are secured by our investments, which are subject to being revalued by our credit providers. If the value of the underlying property collateralizing our investments declines, we may be required to liquidate our investments, the impact of which could be magnified if such a liquidation is at a commercially inopportune time, such as the market environment we are currently experiencing. In addition, the occurrence of any event or condition which causes any obligation or liability of more than $1.0 million to become due prior to its scheduled maturity or any monetary default under our restructured debt obligations if the amount of such obligation is at least $1.0 million could constitute a cross-default under our restructured debt obligations. If a cross-default occurs, the maturity of almost all of our indebtedness could be accelerated and become immediately due and payable.

4

We guarantee many of our debt and contingent obligations.

We guarantee the performance of many of our obligations, including, but not limited to, our repurchase agreements, derivative agreements, obligations to co-invest in our investment management vehicles and unsecured indebtedness. The non-performance of such obligations may cause losses to us in excess of the capital we initially may have invested or committed under such obligations and there is no assurance that we will have sufficient capital to cover any such losses.

Our secured and unsecured credit agreements may impose restrictions on our operation of the business.

Under our secured and unsecured indebtedness, such as our credit and derivative agreements, we make certain representations, warranties and affirmative and negative covenants that restrict our ability to operate while still utilizing those sources of credit. Currently, our restructured debt obligations prohibit us from acquiring or originating new balance sheet investments except, subject to certain limitations, co-investments in our investment management vehicles or protective investments to defend existing collateral assets on our balance sheet, and from incurring additional indebtedness unless used to pay down suchobligations. In addition, such representations, warranties and covenants include, but are not limited to covenants which:

· limit the total cash compensation to all employees and, specifically with respect to our chief executive officer and chief financial officer, freeze their base salaries at 2008 levels, and require cash bonuses to any of them to be approved by a committee comprised of one representative designated by the secured lenders, the administrative agent under the senior unsecured credit facility and a representative of our board of directors;

· prohibit the payment of cash dividends to our common shareholders except to the minimum extent necessary to maintain our REIT status;

· require us to maintain a minimum amount of liquidity, as defined, of $5.0 million;

· trigger an event of default if our current chief executive officer ceases his current employment with us during the term of the agreement and we fail to hire a replacement acceptable to the lenders; and

· trigger an event of default, if any event or condition occurs which causes any obligation or liability of more than $1.0 million to become due prior to its scheduled maturity or any monetary default under our restructured debt obligations if the amount of such obligation is at least $1.0 million.

Our success depends on the availability of attractive investments and our ability to identify, structure, consummate, leverage, manage and realize returns on attractive investments.

Our operating results are dependent upon the availability of, as well as our ability to identify, structure, consummate, leverage, manage and realize returns on, credit sensitive investment opportunities for our managed vehicles and our balance sheet assuming we are able to resume balance sheet investment activity. In general, the availability of desirable investment opportunities and, consequently, our balance sheet returns and our investment management vehicles’ returns, will be affected by the level and volatility of interest rates, conditions in the financial markets, general economic conditions, the demand for credit sensitive investment opportunities and the supply of capital for such investment opportunities. We cannot make any assurances that we will be successful in identifying and consummating investments which satisfy our rate of return objectives or that such investments, once consummated, will perform as anticipated. In addition, if we are not successful in investing for our investment management vehicles, the potential revenues we earn from management fees and co-investment returns will be reduced. We may expend significant time and resources in identifying and pursuing targeted investments, some of which may not be consummated.

5

The real estate investment business is highly competitive. Our success depends on our ability to compete with other providers of capital for real estate investments.

Our business is highly competitive. Competition may cause us to accept economic or structural features in our investments that we would not have otherwise accepted and it may cause us to search for investments in markets outside of our traditional product expertise. We compete for attractive investments with traditional lending sources, such as insurance companies and banks, as well as other REITs, specialty finance companies and private equity vehicles with similar investment objectives, which may make it more difficult for us to consummate our target investments. Many of our competitors have greater financial resources and lower costs of capital than we do, which provides them with greater operating flexibility and a competitive advantage relative to us.

Our loans and investments may be subject to fluctuations in interest rates which may not be adequately protected, or protected at all, by our hedging strategies.

Our current balance sheet investments include loans with both floating interest rates and fixed interest rates. Floating rate investments earn interest at rates that adjust from time to time (typically monthly) based upon an index (typically one month LIBOR). These floating rate loans are insulated from changes in value specifically due to changes in interest rates, however, the coupons they earn fluctuate based upon interest rates (again, typically one month LIBOR) and, in a declining and/or low interest rate environment, these loans will earn lower rates of interest and this will impact our operating performance. Fixed interest rate investments, however, do not have adjusting interest rates and, as prevailing interest rates change, the relative value of the fixed cash flows from these investments will cause potentially significant ch anges in value. We may employ various hedging strategies to limit the effects of changes in interest rates (and in some cases credit spreads), including engaging in interest rate swaps, caps, floors and other interest rate derivative products. We believe that no strategy can completely insulate us or our investment management vehicles from the risks associated with interest rate changes and there is a risk that they may provide no protection at all and potentially compound the impact of changes in interest rates. Hedging transactions involve certain additional risks such as counterparty risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense. We cannot make assurances that we will be able to enter into hedging transactions or that such hedging transactions will adequately protect us or our investment mana gement vehicles against the foregoing risks.

Accounting for derivatives under GAAP is extremely complicated. Any failure by us to account for our derivatives properly in accordance with GAAP in our consolidated financial statements could adversely affect our earnings. In particular, cash flow hedges which are not perfectly correlated (and appropriately designated and/or documented as such) with a variable rate financing will impact our reported income as gains, and losses on the ineffective portion of such hedges.

Our use of leverage may create a mismatch with the duration and index of the investments that we are financing.

We attempt to structure our leverage to minimize the difference between the term of our investments and the leverage we use to finance such an investment. In light of the financial market turmoil, we can no longer rely on a functioning market to be available to us in order to refinance our existing debt. In March 2009, in the face of the financial market dislocation, we restructured our recourse debt obligations; however, there can be no assurances that our restructuring will enable the successful collection of our balance sheet assets or that our liquidity and financial condition will not require us to pursue a further restructuring of our debt and/or recapitalization of our business. The risks of a duration mismatch are further magnified by the trends we are experiencing in our portfolio which results from extending loans made to our borrowers in order to maximize the likelihood and magnitude of our recovery on our assets. This trend effectively extends the duration of our assets, while the ultimate duration of our liabilities is uncertain.

6

Our loans and investments are illiquid, which will constrain our ability to vary our portfolio of investments.

Our real estate investments and structured financial product investments are relatively illiquid and some are highly illiquid. Such illiquidity may limit our ability to vary our portfolio or our investment management vehicles’ portfolios of investments in response to changes in economic and other conditions. Illiquidity may result from the absence of an established market for investments as well as the legal or contractual restrictions on their resale. In addition, illiquidity may result from the decline in value of a property securing these investments. We cannot make assurances that the fair market value of any of the real property serving as security will not decrease in the future, leaving our or our investment management vehicles’ investments under-collateralized or not collateralized at all, which could impair the liq uidity and value, as well as our return on such investments.

We may not have control over certain of our loans and investments.

Our ability to manage our portfolio of loans and investments may be limited by the form in which they are made. In certain situations, we or our investment management vehicles may:

· acquire investments subject to rights of senior classes and servicers under inter-creditor or servicing agreements;

· acquire only a minority and/or a non-controlling participation in an underlying investment;

· co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests; or

· rely on independent third party management or strategic partners with respect to the management of an asset.

Therefore, we may not be able to exercise control over the loan or investment. Such financial assets may involve risks not present in investments where senior creditors, servicers or third party controlling investors are not involved. Our rights to control the process following a borrower default may be subject to the rights of senior creditors or servicers whose interests may not be aligned with ours. A third party partner or co-venturer may have financial difficulties resulting in a negative impact on such asset, may have economic or business interests or goals which are inconsistent with ours and those of our investment management vehicles, or may be in a position to take action contrary to our or our investment management vehicles’ investment objectives. In addition, we and our investment management vehicles may, in certain c ircumstances, be liable for the actions of our third party partners or co-venturers.

The use of our CDO financings may have a negative impact on our cash flow.

The terms of CDOs generally provide that the principal amount of investments must exceed the principal balance of the related bonds by a certain amount and that interest income exceeds interest expense by a certain ratio. Certain of our CDOs provide that, if defaults, losses, or rating agency downgrades cause a decline in collateral value or cash flow levels, the cash flow otherwise payable to our retained subordinated classes may be redirected to repay classes of CDOs senior to ours until the tests are brought in compliance. In certain instances, we have breached these tests and cash flow has been redirected and there can be no assurances that this will not occur on all of our CDOs. Once breached there is no certainty about when or if the cash flow redirection will remedy the tests’ failure or that cash flow will be restored to our subordinated classes. Other than collateral management fees, we currently receive cash payments from only one of our four CDOs, CDO III, which has caused a material deterioration in our cash flow available for operations, debt service, debt repayments and unfunded loan and fund management commitments.

7

We may be required to repurchase loans that we have sold or to indemnify holders of our CDOs.

If any of the loans we originate or acquire and sell or securitize through CDOs do not comply with representations and warranties that we make about certain characteristics of the loans, the borrowers and the underlying properties, we may be required to repurchase those loans or replace them with substitute loans. In addition, in the case of loans that we have sold instead of retained, we may be required to indemnify persons for losses or expenses incurred as a result of a breach of a representation or warranty. Repurchased loans typically require a significant allocation of working capital to carry on our books, and our ability to borrow against such assets is limited. Any significant repurchases or indemnification payments could adversely affect our financial condition and operating results.

The commercial mortgage and mezzanine loans we originate or acquire and the commercial mortgage loans underlying the commercial mortgage backed securities in which we invest are subject to delinquency, foreclosure and loss, which could result in losses to us.

Our commercial mortgage and mezzanine loans are secured by commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things, tenant mix, success of tenant businesses, property management decisions, property location and condition, competition fro m comparable types of properties, changes in laws that increase operating expenses or limit rents that may be charged, any need to address environmental contamination at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, and changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.

Our investments in subordinated commercial mortgage backed securities and similar investments are subject to losses.

In general, losses on an asset securing a mortgage loan included in a securitization will be borne first by the equity holder of the property and then by the most junior security holder, referred to as the “first loss” position. In the event of default and the exhaustion of any equity support and any classes of securities junior to those in which we invest (and in some cases we may be invested in the junior most classes of securitizations), we may not be able to recover all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related mortgage backed securities, the securities in which we invest may incur significant losses. Subordinate interests generally are not actively traded and are relatively illiquid investments and recent volatility in CMBS trading markets has caused the value of these investments to decline.

The prices of lower credit quality CMBS are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns and underlying borrower developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality CMBS because the ability of borrowers to make principal and interest payments on the mortgages underlying the mortgage backed securities may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect us against the loss of our principal on these securities.

We may have difficulty or be unable to sell some of our loans and commercial mortgage backed securities.

A prolonged period of frozen capital markets, decline in commercial real estate values and an out of favor real estate sector may prevent us from selling our loans and CMBS. Given the terms of our March 2009 restructuring, we may be forced to sell assets in order to meet required debt reduction levels. If the market for real estate loans and CMBS is disrupted or dislocated, this may be difficult or impossible, causing further losses or events of default.

8

The impact of the events of September 11, 2001 and the effect thereon on terrorism insurance expose us to certain risks.

The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets, including the real estate capital markets, and negatively impacted the U.S. economy in general. Any future terrorist attacks, the anticipation of any such attacks, and the consequences of any military or other response by the U.S. and its allies may have a further adverse impact on the U.S. financial markets and the economy generally. We cannot predict the severity of the effect that such future events would have on the U.S. financial markets, the economy or our business.

In addition, the events of September 11, 2001 created significant uncertainty regarding the ability of real estate owners of high profile assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. The Terrorism Risk Insurance Act of 2002, or TRIA, was extended in December 2007. Coverage under the new law, the Terrorism Risk Insurance Program Reauthorization Act, or TRIPRA, now expires in 2014. There is no assurance that TRIPRA will be extended beyond 2014. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties that we inves t in are unable to obtain affordable insurance coverage, the value of those investments could decline and in the event of an uninsured loss, we could lose all or a portion of our investment.

The economic impact of any future terrorist attacks could also adversely affect the credit quality of some of our loans and investments. Some of our loans and investments will be more susceptible to such adverse effects than others. We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our results of operations.

There are increased risks involved with construction lending activities.

We originate loans for the construction of commercial and residential use properties. Construction lending generally is considered to involve a higher degree of risk than other types of lending due to a variety of factors, including generally larger loan balances, the dependency on successful completion of a project, the dependency upon the successful operation of the project (such as achieving satisfactory occupancy and rental rates) for repayment, the difficulties in estimating construction costs and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at stated maturity.

Some of our investments and investment opportunities may be in synthetic form.

Synthetic investments are contracts between parties whereby payments are exchanged based upon the performance of an underlying obligation. In addition to the risks associated with the performance of the obligation, these synthetic interests carry the risk of the counterparty not performing its contractual obligations. Market standards, GAAP accounting methodology, tax and other regulations related to these investments are evolving, and we cannot be certain that their evolution will not adversely impact the value or sustainability of these investments. Furthermore, our ability to invest in synthetic investments, other than through taxable REIT subsidiaries, may be severely limited by the REIT qualification requirements because synthetic investment contracts generally are not qualifying assets and do not produce qualifying income for pur poses of the REIT asset and income tests.

Risks Related to Our Investment Management Business and Management of CDOs

Our investment management agreements contain “clawback” provisions which may require repayment of incentive management fees previously received by us.

As part of our investment management business we earn incentive fees based on the performance of certain of our investment management vehicles. The investment management agreements which govern our relationship with these vehicles contain “clawback” provisions which may require the repayment of incentive fees previously received by us. If certain predetermined performance thresholds are not met upon the ultimate dissolution of such entities, we could be required to refund up to $5.6 million of incentive fees previously received.

9

Our March 2009 balance sheet restructuring and financial condition may adversely impact our investment management business.

In large part, our ability to raise capital and garner other investment management and advisory business is dependent upon our reputation as a balance sheet manager and credit underwriter, as well as the ability to demonstrate that we have the resources to manage and co-invest in our internal funds. Our recent losses and March 2009 restructuring limit our abilities in this regard. In addition, further credit deterioration in our balance sheet portfolio and our overall financial condition could jeopardize our status as an approved special servicer from the three major rating agencies, which would impair our ability to generate future servicing revenues.

We are subject to risks and uncertainties associated with operating our investment management business, and we may not achieve the investment returns that we expect.

We will encounter risks and difficulties as we operate our investment management business. In order to achieve our goals as an investment manager, we must:

· manage our investment management vehicles successfully by investing their capital in suitable investments that meet their respective investment criteria;

· actively manage the assets in our portfolios in order to realize targeted performance;

· create incentives for our management and professional staff to develop and operate the investment management business; and

· structure, sponsor and capitalize future investment management vehicles that provide investors with attractive investment opportunities.

If we do not successfully operate our investment management business to achieve the investment returns that we or the market anticipates, our results of operations may be adversely impacted.

We may expand our investment management business to involve other investment classes where we do not have prior investment experience. We may find it difficult to attract third party investors without a performance track record involving such investments. Even if we attract third party capital, there can be no assurance that we will be successful in deploying the capital to achieve targeted returns on the investments.

We face substantial competition from established participants in the private equity market as we offer investment management vehicles to third party investors.

We face significant competition from large financial and other institutions that have proven track records in marketing and managing vehicles and otherwise have a competitive advantage over us because they have access to pre-existing third party investor networks into which they can channel competing investment opportunities. If our competitors offer investment products that are competitive with products offered by us, we will find it more difficult to attract investors and to capitalize our investment management vehicles.

Our investment management vehicles are subject to the risk of defaults by third party investors on their capital commitments.

The capital commitments made by third party investors to our investment management vehicles represent unsecured promises by those investors to contribute cash to the investment management vehicles from time to time as investments are made by the investment management vehicles. Accordingly, we are subject to general credit risks that the investors may default on their capital commitments. If defaults occur, we may not be able to close loans and investments we have identified and negotiated which could materially and adversely affect the investment management vehicles’ investment program or make us liable for breach of contract, in either case to the detriment of our franchise in the private equity market.

10

CTIMCO’s role as collateral manager for our CDOs and investment manager for our funds may expose us to liabilities to investors.

We are subject to potential liabilities to investors as a result of CTIMCO’s role as collateral manager for our CDOs and our investment management business generally. In serving in such roles, we could be subject to claims by CDO investors and investors in our funds that we did not act in accordance with our duties under our CDO and investment fund documentation or that we were negligent in taking or refraining from taking actions with respect to the underlying collateral in our CDOs or in making investments. In particular, the discretion that we exercise in managing the collateral for our CDOs and the investments in our investment management business could result in liability due to the current negative conditions in the commercial real estate market and the inherent uncertainties surrounding the course of action that will resul t in the best long term results with respect to such collateral and investments. This risk could be increased due to the affiliated nature of our roles. If we were found liable for our actions as collateral manager or investment manager and we were required to pay significant damages to our CDO and investment advisory investors, our financial condition could be materially adversely effected.

Risks Related to Our Company

We are dependent upon our senior management team to develop and operate our business.

Our ability to develop and operate our business depends to a substantial extent upon the experience, relationships and expertise of our senior management and key employees. We cannot assure you that these individuals will remain in our employ. Our chief executive officer, Stephen D. Plavin, and our chief credit officer, Thomas C. Ruffing, are currently not employed pursuant to employment agreements and the employment agreement with our chief financial officer, Geoffrey G. Jervis, expires on December 31, 2010. There can be no assurance that Messrs. Plavin and Ruffing, and upon expiration of his agreement, Mr. Jervis, will enter into new employment agreements pursuant to which they agree to long-term employment with us. In addition, the departure of Mr. Plavin from his employment with us constitutes an event of default under our restruct ured debt obligations unless a suitable replacement acceptable to the lenders is hired by us.

Our ability to compensate our employees is limited by our restructured debt obligations.

Our restructured debt obligations limit the aggregate cash compensation we are able to pay our employees (excluding our chief executive officer and chief financial officer) to 2008 aggregate compensation levels. In the case of our chief executive officer and chief financial officer, cash compensation must be approved by our lenders. This may impact our ability to retain our employees or attract new employees.

There may be conflicts between the interests of our investment management vehicles and us.

We are subject to a number of potential conflicts between our interests and the interests of our investment management vehicles. We are subject to potential conflicts of interest in the allocation of investment opportunities between our balance sheet once our balance sheet investment activity resumes and our investment management vehicles. In addition, we may make investments that are senior or junior to, participations in, or have rights and interests different from or adverse to, the investments made by our investment management vehicles. Our interests in such investments may conflict with the interests of our investment management vehicles in related investments at the time of origination or in the event of a default or restructuring of the investment. Finally, our officers and employees may have conflicts in allocating their time a nd services among us and our investment management vehicles.

11

We must manage our portfolio in a manner that allows us to rely on an exclusion from registration under the Investment Company Act of 1940 in order to avoid the consequences of regulation under that Act.

We rely on an exclusion from registration as an investment company afforded by Section 3(c)(5)(C) of the Investment Company Act of 1940. Under this exclusion, we are required to maintain, on the basis of positions taken by the SEC staff in interpretive and no-action letters, a minimum of 55% of the value of the total assets of our portfolio in “mortgages and other liens on and interests in real estate,” which we refer to as “Qualifying Interests,” and a minimum of 80% in Qualifying Interests and real estate related assets. Because registration as an investment company would significantly affect our ability to engage in certain transactions or to organize ourselves in the manner we are currently organized, we intend to maintain our qualification for this exclusion from registration. In the past, based on SEC staf f positions, when required due to the mix of assets in our balance sheet portfolio, we have purchased all of the outstanding interests in pools of whole residential mortgage loans, which we treat as Qualifying Interests. Investments in such pools of whole residential mortgage loans may not represent an optimum use of our investable capital when compared to the available investments we target pursuant to our investment strategy. These investments present additional risks to us, and these risks are compounded by our inexperience with such investments. We continue to analyze our investments and may acquire other pools of whole loan residential mortgage backed securities when and if required for compliance purposes.

We treat certain of our investments in CMBS, B Notes and mezzanine loans as Qualifying Interests for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C) to the extent such treatment is consistent with guidance provided by the SEC or its staff. In the absence of such guidance that otherwise supports the treatment of these investments as Qualifying Interests, we will treat them, for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C), as real estate related assets or miscellaneous assets, as appropriate.

We understand the SEC staff is currently reconsidering its interpretive policy under Section 3(c)(5)(C) and whether to advance rulemaking to define the basis for the exclusion. We cannot predict the outcome of this reconsideration or potential rulemaking initiative and its impact on our ability to rely on the exclusion.

If our portfolio does not comply with the requirements of the exclusion we rely upon, we could be forced to alter our portfolio by selling or otherwise disposing of a substantial portion of the assets that are not Qualifying Interests or by acquiring a significant position in assets that are Qualifying Interests. Altering our portfolio in this manner may have an adverse effect on our investments if we are forced to dispose of or acquire assets in an unfavorable market and may adversely affect our stock price.

If it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company and limitations on corporate leverage that would have an adverse impact on our investment returns.

Changes in accounting pronouncements have materially changed the presentation and content of our financial statements.

Beginning January 1, 2010 we adopted new accounting guidance which required us to consolidate certain securitization trust entities in which we have subordinate investments. This consolidation resulted in a significant increase to our GAAP-basis assets and liabilities, which may be misleading to readers of our financial statements. In addition, we are required to record losses under GAAP on consolidated assets which may be in excess of our economic interest in the respective consolidated entities. The adoption of this new guidance is likely to result in increased operating costs.

12

We may not have sufficient cash flow to satisfy our tax liability arising from the use of CDO financing.

Due to the redirection provisions of our CDOs, which reallocate principal and interest otherwise distributable to us to repay senior note holders, assets financed through our CDOs may generate current taxable income without a corresponding cash distribution to us. In order to raise the cash necessary to meet our tax and/or distribution requirements, we may be required to borrow funds, sell a portion of our assets at disadvantageous prices or find other alternatives. In any case, there can be no assurances that we will be able to generate sufficient cash from these endeavors to meet our tax and/or distribution requirements.

In the event we experience an “ownership change” for purposes of Section 382 of the Internal Revenue Code, our ability to utilize our net operating losses and net capital losses against future taxable income will be limited, increasing our dividend distribution requirement for which we may not have sufficient cash flow.

We have substantial net operating and net capital loss carry forwards which we use to offset our tax and/or distribution requirements. In the event that we experience an “ownership change” for purposes of Section 382 of the Internal Revenue Code, our ability to use these losses will be effectively eliminated. An “ownership change” is determined based upon the changes in ownership that occur in our common stock for a trailing three year period. Such change provisions may be triggered by regular trading activity in our common stock, and are generally beyond our control.

Risks Relating to Our Class A Common Stock

Sales or other dilution of our equity may adversely affect the market price of our class A common stock.

In connection with restructuring our debt obligations, we issued warrants to purchase 3,479,691 shares of our class A common stock, which represents approximately 15.5% of our outstanding common stock and stock units as of July 23, 2010. The market price of our class A common stock could decline as a result of sales of a large number of shares of class A common stock acquired upon exercise of the warrants in the market. If the warrants are exercised, the issuance of additional shares of class A common stock would dilute the ownership interest of our existing shareholders.

Because a limited number of shareholders, including members of our management team, own a substantial number of our shares, they may make decisions or take actions that may be detrimental to your interests.

Our executive officers and directors, along with vehicles for the benefit of their families, collectively own and control 1,550,283 shares of our common stock representing approximately 6.9% of our outstanding common stock and stock units as of July 23, 2010. W. R. Berkley Corporation, or WRBC, which employs one of our directors, owns 3,843,413 shares of our common stock, which represents approximately 17.1% of our outstanding common stock and stock units as of July 23, 2010. By virtue of their voting power, these shareholders have the power to significantly influence our affairs and are able to influence the outcome of matters required to be submitted to shareholders for approval, including the election of our directors, amendments to our charter, mergers, sales of assets and other acquisitions or sales. The influence exerted by these shareholders over our affairs might not be consistent with the interests of some or all of our other shareholders. In addition, the concentration of ownership in our officers or directors or shareholders associated with them may have the effect of delaying or preventing a change in control of our company, including transactions in which you might otherwise receive a premium for your class A common stock, and might negatively affect the market price of our class A common stock.

Some provisions of our charter and bylaws and Maryland law may deter takeover attempts, which may limit the opportunity of our shareholders to sell their shares at a favorable price.

Some of the provisions of our charter and bylaws and Maryland law discussed below could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders by providing them with the opportunity to sell their shares at a premium to the then current market price.

13

Issuance of Preferred Stock Without Shareholder Approval. Our charter authorizes our board of directors to authorize the issuance of up to 100,000,000 shares of preferred stock and up to 100,000,000 shares of class A common stock. Our charter also authorizes our board of directors, without shareholder approval, to classify or reclassify any unissued shares of our class A common stock and preferred stock into other classes or series of stock and to amend our charter to increase or decrease the aggregate number of shares of stock of any class or series that may be issued. Our board of directors, therefore, can exercise its power to reclassify our stock to increase the number of shares of preferred stock we may issue without shareholder approval. Preferred stock may be issued in one or more series, the terms of which may be determined without further action by shareholders. These terms may include preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption. The issuance of any preferred stock, however, could materially adversely affect the rights of holders of our class A common stock and, therefore, could reduce the value of the class A common stock. In addition, specific rights granted to future holders of our preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The power of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current shareholders’ control.

Advance Notice Bylaw. Our bylaws contain advance notice procedures for the introduction of business and the nomination of directors. These provisions could discourage proxy contests and make it more difficult for you and other shareholders to elect shareholder-nominated directors and to propose and approve shareholder proposals opposed by management.

Maryland Takeover Statutes. We are subject to the Maryland Business Combination Act which could delay or prevent an unsolicited takeover of us. The statute substantially restricts the ability of third parties who acquire, or seek to acquire, control of us to complete mergers and other business combinations without the approval of our board of directors even if such transaction would be beneficial to shareholders. “Business combinations” between such a third party acquirer or its affiliate and us are prohibited for five years after the most recent date on which the acquirer or its affiliate becomes an “interested shareholder.” An “interested shareholder” is defined as any person who beneficially owns 10 percent or more of our shareholder voting power or an affiliate or associate of ours who, at any time within the two-year period prior to the date interested shareholder status is determined, was the beneficial owner of 10 percent or more of our shareholder voting power. If our board of directors approved in advance the transaction that would otherwise give rise to the acquirer or its affiliate attaining such status, such as the issuance of shares of our class A common stock to WRBC, the acquirer or its affiliate would not become an interested shareholder and, as a result, it could enter into a business combination with us. Our board of directors could choose not to negotiate with an acquirer if the board determined in its business judgment that considering such an acquisition was not in our strategic interests. Even after the lapse of the five-year prohibition period, any business combination with an interested shareholder must be recommended by our board of directors and approved by the affirmative vote of at least:

· 80% of the votes entitled to be cast by shareholders; and

· two-thirds of the votes entitled to be cast by shareholders other than the interested shareholder and affiliates and associates thereof.

The super-majority vote requirements do not apply if the transaction complies with a minimum price requirement prescribed by the statute.

The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that an interested shareholder becomes an interested shareholder. Our board of directors has exempted any business combination involving family partnerships controlled separately by John R. Klopp, our former chief executive officer, and Craig M. Hatkoff, our director, and a limited liability company indirectly controlled by a trust for the benefit of Samuel Zell, our chairman of the board, and his family. As a result, these persons and WRBC may enter into business combinations with us without compliance with the super-majority vote requirements and the other provisions of the statute.

14

We are subject to the Maryland Control Share Acquisition Act. With certain exceptions, the Maryland General Corporation Law provides that “control shares” of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiring person or by our officers or by our directors who are our employees, and may be redeemed by us. “Control shares” are voting shares which, if aggregated with all other shares owned or voted by the acquirer, would entitle the acquirer to exercise voting power in electing directors within one of the specified ranges of voting power. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain condit ions, including an undertaking to pay expenses, may compel our board to call a special meeting of shareholders to be held within 50 days of demand to consider the voting rights of the “control shares” in question. If no request for a meeting is made, we may present the question at any shareholders’ meeting.

If voting rights are not approved at the shareholders’ meeting or if the acquiring person does not deliver the statement required by Maryland law, then, subject to certain conditions and limitations, we may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. If voting rights for control shares are approved at a shareholders’ meeting and the acquirer may then vote a majority of the shares entitled to vote, then all other shareholders may exercise appraisal rights. The fair value of the shares for purposes of these appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if we are not a party to the transaction, nor does it apply to acquisitions approved or exempted by our charter or bylaws. Our bylaws contain a provision exempting certain holders identified in our bylaws from this statute, including WRBC, family partnerships controlled separately by John R. Klopp and Craig M. Hatkoff, and a limited liability company indirectly controlled by a trust for the benefit of Samuel Zell and his family.

We are also subject to the Maryland Unsolicited Takeovers Act which permits our board of directors, among other things and notwithstanding any provision in our charter or bylaws, to elect on our behalf to stagger the terms of directors and to increase the shareholder vote required to remove a director. Such an election would significantly restrict the ability of third parties to wage a proxy fight for control of our board of directors as a means of advancing a takeover offer. If an acquirer was discouraged from offering to acquire us, or prevented from successfully completing a hostile acquisition, you could lose the opportunity to sell your shares at a favorable price.

The price of our class A common stock may be impacted by many factors.

As with any public company, a number of factors may impact the trading price of our class A common stock, many of which are beyond our control. These factors include, in addition to other risk factors mentioned in this section:

· the level of institutional interest in us;

· the perception of REITs generally and REITs with portfolios similar to ours, in particular, by market professionals;

· the attractiveness of securities of REITs in comparison to other companies;

· the market’s perception of our ability to successfully manage our portfolio and our March 2009 restructuring; and;

· the general economic environment and the commercial real estate property and capital markets.

Our restructured debt obligations restrict us from paying cash dividends, which may reduce the attractiveness of an investment in our class A common stock.

The restrictions on our inability to pay cash dividends, except in a limited manner, will reduce the current dividend yield on our class A common stock and this can negatively impact the price of our class A common stock as investors seeking current income pursue alternative investments.

Your ability to sell a substantial number of shares of our class A common stock may be restricted by the low trading volume historically experienced by our class A common stock.

Although our class A common stock is listed on the New York Stock Exchange, the daily trading volume of our shares of class A common stock has historically been lower than the trading volume for certain other companies. As a result, the ability of a holder to sell a substantial number of shares of our class A common stock in a timely manner without causing a substantial decline in the market value of the shares, especially by means of a large block trade, may be restricted by the limited trading volume of the shares of our class A common stock.

15

Our shares of class A common stock may be delisted from the NYSE if the price per share trades below $1.00 for an extended period of time, which could negatively affect our business, our financial condition, our results of operations and our ability to service our debt obligations.

Our class A common stock at times has traded below $1.00. In the event the average closing price of our class A common stock for a 30-day period is below $1.00, our stock could be delisted from the NYSE. The threat of delisting and/or a delisting of our class A common stock could have adverse effects by, among other things:

· reducing the trading liquidity and market price of our class A common stock;

· reducing the number of investors willing to hold or acquire our class A common stock, thereby further restricting our ability to obtain equity financing; and

· reducing our ability to retain, attract and motivate directors, officers and employees.

Risks Related to our REIT Status and Certain Other Tax Items

Our charter does not permit any individual to own more than 9.9% of our class A common stock, and attempts to acquire our class A common stock in excess of the 9.9% limit would be void without the prior approval of our board of directors.

For the purpose of preserving our qualification as a REIT for federal income tax purposes, our charter prohibits direct or constructive ownership by any individual of more than a certain percentage, currently 9.9%, of the lesser of the total number or value of the outstanding shares of our class A common stock as a means of preventing ownership of more than 50% of our class A common stock by five or fewer individuals. The charter’s constructive ownership rules are complex and may cause the outstanding class A common stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual. As a result, the acquisition of less than 9.9% of our outstanding class A common stock by an individual or entity could cause an individual to own constructively in excess of 9.9% of our outstanding cla ss A common stock, and thus be subject to the charter’s ownership limit. There can be no assurance that our board of directors, as permitted in the charter, will increase, or will not decrease, this ownership limit in the future. Any attempt to own or transfer shares of our class A common stock in excess of the ownership limit without the consent of our board of directors will be void, and will result in the shares being transferred by operation of the charter to a charitable trust, and the person who acquired such excess shares will not be entitled to any distributions thereon or to vote such excess shares.

The 9.9% ownership limit may have the effect of precluding a change in control of us by a third party without the consent of our board of directors, even if such change in control would be in the interest of our shareholders or would result in a premium to the price of our class A common stock (and even if such change in control would not reasonably jeopardize our REIT status). The ownership limit exemptions and the reset limits granted to date would limit our board of directors’ ability to reset limits in the future and at the same time maintain compliance with the REIT qualification requirement prohibiting ownership of more than 50% of our class A common stock by five or fewer individuals.

16

There are no assurances that we will be able to pay dividends in the future.

We expect in the future when we generate taxable income to pay quarterly dividends and to make distributions to our shareholders in amounts so that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with our compliance with other requirements, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no assurances that we will be able to pay dividends in the future. In addition, some of our distributions may include a return of capital, which would reduce the amount of capital available to operate our business. There have been recent changes to the Internal Revenue Code that would allow us to pay required dividends in the form of additional shares of common stock equal in value up to 90% of the required dividend. We expect that as we undertake efforts to conserve cash and enhance our liquidity and comply with our restructured debt obligations covenants, future required dividends on our class A common stock will be paid in the form of class A common stock to the fullest extent permitted. There can be no assurance as to when we will no longer be subject to debt obligation covenants or will cease our efforts to conserve cash and enhance liquidity to an extent we believe positions us to resume the payment of dividends completely or substantially in cash.

We will be dependent on external sources of capital to finance our growth.

As with other REITs, but unlike corporations generally, our ability to finance our growth must largely be funded by external sources of capital because we generally will have to distribute to our shareholders 90% of our taxable income in order to qualify as a REIT, including taxable income where we do not receive corresponding cash. Our access to external capital will depend upon a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings, cash distributions and the market price of our class A common stock.

If we do not maintain our qualification as a REIT, we will be subject to tax as a regular corporation and face a substantial tax liability. Our taxable REIT subsidiaries will be subject to income tax.

We expect to continue to operate so as to qualify as a REIT under the Internal Revenue Code. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial or administrative interpretations exist. Notwithstanding the availability of cure provisions in the tax code, various compliance requirements could be failed and could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

· we would be taxed as a regular domestic corporation, which under current laws, among other things, means being unable to deduct distributions to shareholders in computing taxable income and being subject to federal income tax on our taxable income at regular corporate rates;

· any resulting tax liability could be substantial, could have a material adverse effect on our book value and would reduce the amount of cash available for distribution to shareholders;

· unless we were entitled to relief under applicable statutory provisions, we would be required to pay taxes, and thus, our cash available for distribution to shareholders would be reduced for each of the years during which we did not qualify as a REIT; and

· we generally would not be eligible to requalify as a REIT for four full taxable years.

Fee income from our investment management business is expected to be realized by one of our taxable REIT subsidiaries, and, accordingly, will be subject to income tax.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities and limit our expansion opportunities.

In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature of our investments in commercial real estate and related assets, the amounts we distribute to our shareholders and the ownership of our stock. We may also be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

17

Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments.

In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investments in securities cannot include more than 10% of the outstanding voting securities of any one issuer or 10% of the total value of the outstanding securities of any one issuer unless we and such issuer jointly elect for such issuer to be treated as a “taxable REIT subsidiary” under the Internal Revenue Code. The total value of all of our investments in taxable REIT subsidiaries cannot exceed 20% of the value of our total assets. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer. If we fail to comply with these requirements , we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences.

Complying with REIT requirements may force us to borrow to make distributions to shareholders.

From time to time, our taxable income may be greater than our cash flow available for distribution to shareholders. If we do not have other funds available in these situations, we may be unable to distribute substantially all of our taxable income as required by the REIT provisions of the Internal Revenue Code. Thus, we could be required to borrow funds, sell a portion of our assets at disadvantageous prices or find another alternative. These options could increase our costs or reduce our equity. Our restructured debt obligations may cause us to recognize taxable income without any corresponding cash income and we may be required to distribute additional dividends in cash and/or class A common stock.

18