1287701--3/16/2009--GRAMERCY_CAPITAL

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Risks Related to Our Business Liquidity in the capital markets is essential to our businesses and future growth and we rely on external sources to finance a significant portion of our operations. We have limited liquidity and we may be required to pursue certain measures in order to maintain or enhance our liquidity. We utilize a significant amount of debt to finance our portfolios of debt investments and real estate investments, which may subject us to an increased risk of loss, adversely affecting the return on our investments and reducing cash available for distribution. Our outstanding debt contains restrictive covenants relating to our operations. Failure to comply with CDO coverage tests may have a negative impact on our operating results and cash flows. Potential rating agency downgrades may adversely affect our ability to reinvest CDO proceeds. Our credit and repurchase agreements and our mortgage loans contain cross-default provisions. If we are unable to generate sufficient funds or obtain financing for future capital commitments, we may not be able to repay indebtedness or fund our other liquidity needs, which could have a material adverse effect on us. We presently have virtually no additional borrowing capacity under our credit and repurchase facilities. We have incurred substantial impairments of our assets and may incur significant loan loss reserves/impairments in the future. Our reserves for loan losses may prove inadequate, which could have a material adverse effect on us. Higher loan loss reserves are expected if economic conditions do not improve. Loan loss reserves are particularly difficult to estimate in a turbulent economic environment. The current weakness in the financial markets could adversely affect us and one or more of our lenders, which could result in increases in our borrowing costs, reduction in our liquidity and reductions in the value of the investments in our portfolio. We are dependent on SL Green as the special servicer to our CDOs and may not find a suitable replacement if SL Green terminates the special servicing agreement. There can be no assurance that the actions of the U.S. government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets, or market response to those actions, will achieve the intended effect, our business may not benefit from these actions and further government or market developments could adversely impact us. We are required to make a number of judgments in applying accounting policies and different estimates and assumptions in the application of these policies could result in changes to our reporting of financial condition and results of operations. Quarterly results may fluctuate and may not be indicative of future quarterly performance. Maintenance of our Investment Company Act exclusions and exemptions imposes limits on our operations. Rapid changes in the values of our CMBS and other real estate related investments may make it more difficult for us to maintain our qualification as a REIT or exemption from the Investment Company Act. We may incur losses as a result of ineffective risk management processes and strategies. We may experience reductions in portfolio income which would reduce our ability to make distributions over time. If we fail to achieve adequate operating cash flow, our ability to make distributions will be adversely affected. We may experience some volatility in our quarterly earnings due to accounting changes related to the second amended and restated management agreement that we executed in October 2008. The competitive pressures we face as a result of operating in a highly competitive market could have a material adverse effect on our business, financial condition, liquidity and results of operations. Terrorist attacks and other acts of violence or war may affect the market for our common stock, the industry in which we conduct our operations and our profitability. We are highly dependent on information systems and third parties, and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to make distributions to our stockholders. Lack of diversification in number of investments increases our dependence on individual investments. Risk Relating to Our Capital Structure and Access to Liquidity The recent downturn in the credit markets has increased the cost of borrowing and has made financing difficult to obtain, which has negatively impacted our business, and may have a material adverse effect on us. If GKK Manager LLC ceases to be our Manager pursuant to the management agreement, financial institutions providing our repurchase agreements may not provide future financing to us. Certain of our credit agreements and our CDO financing agreements may limit our ability to make investments. We may not be able to issue CDO securities on attractive terms or at all, which may require us to seek more costly financing for our investments or to liquidate assets. Investor demand for commercial real estate CDOs has been substantially curtailed. If we issue senior securities we will be exposed to additional restrictive covenants and limitations on our operating flexibility, which could adversely affect our ability to pay dividends. We may not be able to access financing sources on favorable terms, or at all, which could adversely affect our ability to execute our business plan and our ability to distribute dividends. Interest rate fluctuations could reduce our ability to generate income on our investments. In a period of rising interest rates, our interest expense could increase while the interest we earn on our fixed-rate debt investments would not change, which would adversely affect our profitability. If credit spreads widen before we obtain long-term financing for our assets, the value of our assets may suffer. The repurchase agreements and credit facilities that we use to finance our investments may require us to provide additional collateral. Risks Related to Our Investments Some of our portfolio investments may be recorded at fair value as determined in good faith by our Manager and, as a result, there will be uncertainty as to the value of these investments. We may not realize gains or income from our investments. A prolonged economic slowdown, a lengthy or severe recession, a reduction in liquidity, or declining real estate values could harm our operations. We may be adversely affected by unfavorable economic changes in geographic areas where our properties are concentrated. Joint investments could be adversely affected by our lack of sole decision-making authority and reliance upon a co-venturer's financial condition. Liability relating to environmental matters may impact the value of the properties that we may acquire or underlying our investments. Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs. Prepayments can adversely affect the yields on our investments. Risks Relating Primarily to Gramercy Finance Our borrowers may increasingly be unable to achieve their business plans due to the economic environment and strain on commercial real estate, which may cause stress in our commercial real estate loan portfolio Many of our commercial real estate loans are funded with interest reserves and our borrowers may be unable to replenish those interest reserves once they are depleted. Credit ratings assigned to our CMBS investments are subject to ongoing evaluation and we cannot assure you that the ratings currently assigned to our investments will not be downgraded or that they accurately reflect the risks associated with those investments. The CMBS market has been severely impacted by the current economic turbulence, which has had a negative impact on the CMBS that we own. Recent market conditions and the risk of continued market deterioration have caused and may continue to cause uncertainty in valuing our real estate securities. We may not be able to find suitable replacement investments for CDOs within reinvestment periods. We may be required to repurchase loans that we have sold or to indemnify holders of our CDOs. Our hedging transactions may limit our gains or result in losses. We are subject to the risk that provisions of our loan agreements may be unenforceable. Markets have experienced, and may continue to experience, periods of high volatility accompanied by reduced liquidity. Our mortgage loans, mezzanine loans, participation interests in mortgage and mezzanine loans, real estate securities and preferred equity investments have been and may continue to be adversely affected by widening credit spreads, and if spreads continue to widen, the value of our loan and securities portfolios would decline further. Loan repayments are unlikely in the current market environment. The loans we invest in and the commercial mortgage loans underlying the CMBS we invest in are subject to risks of delinquency, foreclosure, and loss. The subordinate interests in whole loans in which we invest may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us. Investment in non-conforming and non-investment grade loans may involve increased risk of loss. Investments in mezzanine loans involve greater risks of loss than senior loans secured by income producing properties. Bridge loans involve a greater risk of loss than traditional mortgage loans. Preferred equity investments involve a greater risk of loss than traditional debt financing. Our investments in subordinate loans and subordinated CMBS are subject to losses. We may make investments in assets with lower credit quality, which will increase our risk of losses. Our investments in debt securities are subject to specific risks relating to the particular issuer of the securities and to the general risks of investing in subordinated real estate securities. Several of our loans are secured by land parcels in Western United States which have experienced declining value. Absent a recovery of the real estate markets in the near future, the property values may continue to decline and we could be required to record additional loan loss reserves with respect to these loans. Our due diligence may not reveal all of a borrower's liabilities and may not reveal other weaknesses in its business. We currently have certain loans that permit interest to be accrued until the loans' maturity or refinancing. Risks Relating Primarily to Gramercy Realty A significant portion of our properties are leased to financial institutions, making us more economically vulnerable in the event of a downturn in the banking industry. Certain tenants represent a significant portion of the revenue generated by our Gramercy Realty business and failure of these tenants to perform their obligations or renew their leases upon expiration may adversely affect our cash flow and ability to pay distributions to our stockholders. Our cash flow will be impaired when Bank of America, N.A., as tenant under our Dana Portfolio lease, ceases making base rental payments in January 2011 Certain of our leases permit our tenants to terminate their leases, in whole or in part, prior to their stated lease expiration dates, sometimes with little or no termination fee being paid to us Rising operating expenses relating to our properties could reduce our cash flow and funds available for future distributions. With limited exceptions, we acquire properties on an "as is" basis and, therefore, the value of these properties may decline if we discover problems with the properties after we acquire them. The bankruptcy or insolvency of our tenants under their leases or delays by our tenants in making rental payments could seriously harm our operating results and financial condition. We have in the past acquired a substantial number of vacant bank branches, which are specialty-use properties and therefore may be more difficult to lease to non-banks. Certain of our mortgage loans that we assumed in connection with the merger, impose "cash traps" when the financial performance of the property or the portfolio of properties securing such loans fails to meet certain pre-determined financial metrics, which if enforced could adversely affect our financial condition and operating results. The consideration paid for our properties may exceed fair market value, which may harm our financial condition and operating results. We structure many of our real property acquisitions using complex structures often based on forecasted results for the acquisitions, and if the acquired properties underperform forecasted results, our financial condition and operating results may be harmed. If third party managers providing property management services for our office buildings or their personnel are negligent in their performance of, or default on, their management obligations, our tenants may not renew their leases or we may become subject to unforeseen liabilities. If this occurs, our financial condition and operating results, as well as our ability to pay dividends to stockholders at historical levels or at all, could be substantially harmed. Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem. Our properties may contain asbestos which could lead to liability for adverse health effects and costs of remediating asbestos. Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our ability to pay dividends to stockholders at historical levels or at all. An uninsured loss or a loss that exceeds the policies on our properties could subject us to lost capital or revenue on those properties. Our real estate investments are subject to risks particular to real property. Our real estate investments may be illiquid, which could restrict our ability to respond rapidly to changes in economic conditions. CTL and real estate investments may generate losses. We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their obligations under our leases. We may not be able to relet or renew leases at the properties held by us on terms favorable to us. Lease defaults or terminations or landlord-tenant disputes may adversely reduce our income from our leased property portfolio. We may not be able to relet or renew leases at the properties held by us on terms favorable to us. Lease defaults or terminations or landlord-tenant disputes may adversely reduce our income from our leased property portfolio. We may enter into derivative contracts that could expose us to contingent liabilities in the future. Risks Related to Our Management and Our Relationship with SL Green We are dependent on our Manager and its key employees and may not find a suitable replacement if the Manager terminates the management agreement or the key personnel are no longer available to us. The departure of certain members of the senior management of our Manager or the loss of our access to SL Green investment professionals and principals may adversely affect our ability to achieve our investment objectives. There are conflicts of interest in our relationship with our Manager, which could result in decisions that are not in the best interest of holders of our securities. The liability of our Manager is limited under our management agreement, and we have agreed to indemnify our manager against certain liabilities, which may expose us to significant expenses. Our assets that we acquire by foreclosure or by similar conveyance may be subject to purchase rights or rights of first offer in favor of SL Green, which could reduce their marketability or value. Our financial condition and results of operations depend on our ability to manage future growth effectively. Our board of directors has approved very broad investment guidelines for the Manager and does not approve each investment decision made by the Manager. We may change our investment and operational policies without stockholder consent. Our Chief Financial Officer will step down from his post shortly after we file our Annual Report on Form 10-K. Our board of directors is conducting a search for a replacement. However, there is no guarantee we will be able to find a suitable replacement on a timely basis. Risks Related to Our Organization and Structure The concentration of our ownership may adversely affect the ability of investors to influence our policies. Maryland takeover statutes may prevent a change of control of our company, which could depress our stock price. Our authorized but unissued preferred stock may prevent a change in our control which could be in the stockholders' best interests. Our staggered board of directors and other provisions of our charter and bylaws may prevent a change in our control. Changes in market conditions could adversely affect the market price of our common stock. Our common stock may be delisted by the New York Stock Exchange, or the NYSE, which would severely decrease its liquidity. An increase in market interest rates may have an adverse effect on the market price of our common stock. Risks Related to Our Taxation as a REIT Our failure to qualify as a REIT would result in higher taxes and reduced cash available for stockholders. REIT distribution requirements could adversely affect our liquidity. Complying with REIT requirements may limit our ability to hedge effectively. We may in the future choose to pay dividends in our own stock, in which case you may be required to pay income taxes in excess of the cash dividends you receive. The stock ownership limit imposed by the Internal Revenue Code for REITs and our charter may inhibit market activity in our stock and may restrict our business combination opportunities. The "taxable mortgage pool" rules may limit the manner in which we effect future securitizations and may subject us to U.S. federal income tax and increase the tax liability of our stockholders. We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay distributions to our stockholders. Although our use of TRSs may be able to partially mitigate the impact of meeting the requirements necessary to maintain our qualification as a REIT, our ownership of and relationship with our TRSs will be limited and a failure to comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax. While we believe that American Financial qualified as a REIT prior to the merger, there is no guaranty the Internal Revenue Service will not successfully challenge such characterization. In the event American Financial did not qualify as a REIT, we as successor to American Financial's tax liabilities could be subject to significant corporate tax on American Financial's income prior to the merger. If such a tax were imposed, it could have a material adverse effect on our results of operations. Cautionary Note Regarding Forward-Looking Information

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1287701--3/16/2009--GRAMERCY_CAPITAL_CORP