Unassociated Document
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the fiscal year ended December 31, 2010
 
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
 
(I.R.S. Employer Identification No.)
incorporation or organization)
   
     
410 Park Avenue, 14th Floor, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (212) 655-0220
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange
on Which Registered
class A common stock,
 
New York Stock Exchange
$0.01 par value (“class A common stock”)
Preferred Stock Purchase Rights
   
 
Securities registered pursuant to Section 12(g) of the Act: None

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

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

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 Website, 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 (not required)
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
 
MARKET VALUE
The aggregate market value of the outstanding class A common stock held by non-affiliates of the registrant was approximately $28,868,388 as of June 28, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) based on the closing sale price on the New York Stock Exchange on that date.
 
OUTSTANDING STOCK
As of March 23, 2011 there were 21,944,273 outstanding shares of class A common stock. The class A common stock is listed on the New York Stock Exchange (trading symbol “CT”).
 
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the registrant’s definitive proxy statement to be filed with the Commission within 120 days after the close of the registrant’s fiscal year.
 


 
 
 

 
 
CAPITAL TRUST, INC.
 
 
1
     
Item 1.
 
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Item 1B.
 
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Item 2.
 
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Item 7A.
 
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Item 8.
 
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Item 9A.
 
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Item 9B.
 
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Item 10.
 
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78
 
F-1
 
 
i

 
PART I
 
Item 1.
Business
 
References herein to “we,” “us” or “our” refer to Capital Trust, Inc., a Maryland corporation, and its subsidiaries unless the context specifically requires otherwise.
 
Overview
 
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 December 31, 2010, we have completed over $11.6 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. We are traded on the New York Stock Exchange under the symbol “CT”, and are headquartered in New York City.
 
Operating Segments
 
Segment revenue and profit information is presented in Note 20 to our consolidated financial statements.
 
Current Market Conditions
 
Despite recent improvement, the U.S economy and many economies around the world continue to be in a state of economic volatility. In addition, the global capital markets, while also improving, continue to be impaired relative to pre-recession levels. The recession and capital markets turmoil have severely impacted the commercial real estate sector resulting in: (i) decreased property level cash flows and (ii) a relative lack of capital, both debt and equity, necessary for markets to function in an orderly manner. In addition, properties financed prior to the credit crisis generally remain overleveraged and create a headwind for the normalization of the commercial real estate property and capital markets. These factors have combined to create significant decreases in property values relative to pre-recession levels, and have and will continue to impact the performance of our existing portfolio of assets. Conversely, these factors create opportunities for well capitalized and experienced commercial real estate investors.
 
March 2011 Restructuring
 
On March 31, 2011, we restructured, amended, or extinguished all of our outstanding recourse debt obligations, which we refer to as our March 2011 restructuring. The March 2011 restructuring involved: (i) the contribution of certain of our legacy assets to a newly formed subsidiary, CT Legacy REIT Mezz Borrower, Inc., or CT Legacy REIT, (ii) the assumption of our legacy repurchase obligations by CT Legacy REIT, and (iii) the extinguishment of our senior credit facility and junior subordinated notes. The restructuring was financed by a new $83.0 million mezzanine loan from an affiliate of Five Mile Capital Partners LLC, or Five Mile, to CT Legacy REIT, and the issuance of equity interests in CT Legacy REIT to our former junior subordinated note holders and former lenders under our senior credit facility, as well as to an affiliate of Five Mile.
 
CT Legacy REIT
 
In connection with the restructuring, we transferred substantially all of our directly held interest earning assets to CT Legacy REIT. The transferred assets include: (i) all of the loans and securities which serve as collateral for the legacy repurchase obligations, except for certain subordinate interests in CT CDO I and II, (ii) our subordinate interests in CT CDO III, and (iii) 100% of our previously unencumbered loans and securities, which we collectively refer to as our Legacy Assets.
 
CT Legacy REIT, which will elect to be taxed as a REIT commencing in 2011, is owned 51.6% by us, 24.2% by an affiliate of Five Mile, and 24.2% by the former lenders under our senior credit facility. In addition, the former holders of our junior subordinated notes received a subordinate class of common equity in CT Legacy REIT, which is described below. Capital Trust, Inc. will manage CT Legacy REIT and the Legacy Assets as a liquidating portfolio.
 
 
1

 
In addition to our interest in the common stock of CT Legacy REIT, we also own 100% of its class A preferred stock. The class A preferred stock initially entitles us to cumulative preferred dividends of $7.5 million per annum, which dividends will reduce in 2013 as the portfolio of Legacy Assets repays or is sold.
 
Repurchase Obligations
 
Our $339.6 million of legacy repurchase obligations with JP Morgan, Morgan Stanley and Citigroup were assumed by wholly-owned subsidiaries of CT Legacy REIT, and the recourse to Capital Trust, Inc. was eliminated. In addition, the facilities were amended with the following terms:
 
 
·
Each of the repurchase lenders received cash pay downs equal to 10% of their outstanding balances, in the aggregate $33.9 million.
 
 
·
Except for certain key man provisions, all restrictive covenants governing the operations of Capital Trust, Inc. were eliminated, including covenants restricting employee compensation, dividend payments, and new balance sheet investments.
 
 
·
Net interest margin sweep and periodic amortization provisions were eliminated.
 
 
·
All forms of margin call or similar requirements under the facilities were eliminated.
 
 
·
Maturity dates were extended to March 31, 2014 in the case of JPMorgan and March 31, 2013 in the cases of Morgan Stanley and Citigroup, subject in all three cases to periodic required repayment thresholds.
 
 
·
Interest rates were increased to LIBOR + 2.50% per annum in the cases of JPMorgan and Morgan Stanley, and LIBOR + 1.50% per annum in the case of Citigroup, subject in all three cases to periodic rate increases over the term of each respective facility.
 
Senior Credit Facility
 
Our $98.1 million senior credit facility was fully satisfied and all collateral for the senior credit facility was released in exchange for (i) a cash payment of $22.9 million, (ii) a 24.2% equity interest in the common stock of CT Legacy REIT, and (iii) $2.8 million of Secured Notes, as defined and discussed below.
 
Junior Subordinated Notes
 
Our $143.8 million of junior subordinated notes were fully satisfied in exchange for (i) a cash payment of $4.6 million, (ii) 100% of the subordinate common stock of CT Legacy REIT, and (iii) $5.0 million of Secured Notes, as defined and discussed below. The subordinate common stock of CT Legacy REIT entitles its holders to receive approximately 25% of the payments otherwise due to us on our equity interest in the common stock of CT Legacy REIT, after aggregate cash distributions of $50.0 million have been paid to all other classes of common stock.
 
Mezzanine Loan
 
CT Legacy REIT entered into an $83.0 million mezzanine loan that carries a 15.0% per annum interest rate, of which 7.0% per annum may be deferred, and that matures on March 31, 2016. The mezzanine loan is not recourse to Capital Trust, Inc. except for certain limited non-recourse, “bad boy” carve outs. Proceeds from the mezzanine loan were used to (i) extinguish the senior credit facility, (ii) extinguish the junior subordinated notes, (iii) provide for the cash pay downs of the repurchase obligations, (iv) pay transaction expenses, and (v) establish liquidity reserves at CT Legacy REIT.
 
The mezzanine loan is collateralized by 100% of the equity interests in a subsidiary of CT Legacy REIT, which in-turn owns all of our Legacy Assets, subject in-part to the repurchase obligations. Five Mile has consent rights with respect to material actions on the Legacy Assets such as material modifications, sales, and/or the pursuit of certain remedies with regard to the Legacy Assets. The mezzanine loan also contains covenants that (i) prohibit CT Legacy REIT from paying common stock cash dividends until the mezzanine loan has been repaid, (ii) prohibit us from selling or otherwise transferring our equity interests in CT Legacy REIT, and (iii) require the continued employment of certain key employees.
 
 
2

 
In addition, an affiliate of Five Mile acquired a 24.2% equity interest in the common stock of CT Legacy REIT in conjunction with the making of the mezzanine loan.
 
Capital Trust, Inc.
 
Following the completion of the March 2011 restructuring, we no longer have any recourse debt obligations, and retained unencumbered ownership of (i) our investment management platform, CT Investment Management Co., LLC, (ii) our co-investment in CT Opportunity Partners I, LP, (iii) our residual ownership interests in CT CDOs I, II, and IV, and (iv) our tax-basis net operating losses. Furthermore, as described above, we retained a 51.6% equity interest in CT Legacy REIT. Our net economic interest in CT Legacy REIT is, however, subject to (i) the Secured Notes, as defined and discussed below, (ii) a management incentive plan, as discussed below, and (iii) the subordinate common stock of CT Legacy REIT owned by our former junior subordinate note holders.
 
Secured Notes
 
In conjunction with the satisfaction of the senior credit facility and the junior subordinated notes, a wholly-owned subsidiary issued Secured Notes to our former creditors, which Secured Notes are not recourse to us. The Secured Notes have an aggregate initial face balance of $7.8 million and are secured by 93.5% of our equity interests in CT Legacy REIT, which represents 48.3% of the total common stock of CT Legacy REIT. The Secured Notes mature on March 31, 2016 and bear interest at a rate of 8.2% per annum, which interest may be deferred until maturity. All dividends we receive from our equity interests in the common stock of CT Legacy REIT which serve as collateral under the Secured Notes must be used to pay, or prepay, interest and principal due thereunder. Any prepayment, or partial prepayment, of the Secured Notes will incur a prepayment premium.
 
Management Incentive Plan
 
The management incentive plan includes incentive awards issued under our long term incentive plan. The awards provide payments to certain senior level employees equal to 6.75% of the total recovery (subject to certain caps) of our Legacy Assets, net of CT Legacy REIT’s obligations.
 
Developments during Fiscal Year 2010
 
In March 2009, we restructured all of our recourse debt obligations and have since been operating under the terms of the restructuring. Our then restructured debt obligations contained now eliminated covenants that required us to cease our balance sheet investment activities. Therefore, since the 2009 restructuring, our investment activity has been limited to investments for our investment management vehicles. During the year ended December 31, 2010, we originated $409.8 million (on a gross basis) of new investments in 20 separate transactions for our investment management vehicles.
 
On January 1, 2010, we adopted new accounting guidance which changed the criteria for consolidation of variable interest entities, or VIEs. This adoption increased our balance sheet interest earning assets from $1.8 billion to $4.5 billion as we consolidated VIEs that had previously been recorded on a net basis as investments in securities.
 
Since January 1, 2010, our balance sheet interest earning assets were reduced by $616.6 million to $3.9 billion. The primary sources of the decrease were (i) principal repayments of $355.4 million, (ii) provisions and impairments of $226.8 million, and (iii) loan sales and transfers to real estate owned of $37.4 million.
 
The adoption of this new consolidation guidance also required us to consolidate the liabilities of the aforementioned VIEs, increasing our balance sheet interest earning liabilities from $1.7 billion to $4.6 billion. Since January 1, 2010, our liabilities decreased as our recourse liabilities continued to be governed by the terms of our March 2009 restructuring and our non-recourse liabilities were subject to some degree of, if not complete, cash redirection and/or hyper-amortization.
 
 
3

 
As a result of our March 2009 debt restructuring and the redirection of cash flow from our collateralized debt obligations, or CT CDOs, and other securitization vehicles, our liquidity continued to be negatively impacted during 2010. Cash declined by $3.5 million during 2010 due primarily to the redirection of principal and interest payments from our assets to amortize both our recourse and non-recourse debt obligations. This was partially offset by $16.7 million of management and special servicing fees generated by our investment management platform. Having removed certain negative covenants imposed by the 2009 restructuring and eliminated parent-level recourse debt obligations, we believe that we are in an improved position to pursue new financing and capital raising opportunities, but can provide no assurance that any such financing and capital can be obtained.
 
Our active investment management mandates, which were not restricted by our restructured debt obligations, are described below:
 
 
·
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, $176 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 debt sector and does not employ leverage. We earn a base management fee of 0.40% per annum on invested capital.
 
 
·
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 from 28 institutional and individual investors. Currently, $319 million of committed equity remains undrawn. We have a $25 million commitment to invest in the fund ($10 million currently funded, $15 million unfunded) and entities controlled by the chairman of our board of directors 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. During 2010, we earned 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 earned base management fees of 1.3% per annum of invested capital, which fee will continue throughout the life of the fund. 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 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).
 
 
·
CT Mezzanine Partners III, Inc., or Fund III, a $425 million fund we co-sponsored with a joint venture partner, liquidated in the ordinary course in September 2010, resulting in a return to our investors of 11.5%.
 
Platform
 
Our platform consists of 29 full time professionals with extensive real estate credit, capital markets and structured finance expertise and our senior management team has, on average, over 20 years of industry experience. Founded in 1997, our business has been built on long-standing relationships with borrowers, brokers and our origination partners. This extensive network produces a pipeline of investment opportunities from which we select only those transactions that we believe exhibit a compelling risk/return profile. Once a transaction that meets our parameters is identified, we apply a disciplined process founded on four elements:
 
 
·
intense credit underwriting;
 
 
4

 
 
·
creative financial structuring;
 
 
·
efficient capitalization; and
 
 
·
aggressive asset management.
 
The first element, and the foundation of our platform, is our credit underwriting. For each prospective investment, an in-house underwriting team is assigned to perform an intense ground-up analysis of all aspects of credit risk. Our underwriting process is embodied in our proprietary credit policies and procedures that detail the due diligence steps from initial client contact through closing. We have developed the capability to apply this methodology to a high volume of investment opportunities, including CMBS transactions with a large number of underlying loans, through the combination of personnel, procedures and technology. On all levels, we incorporate input received from our finance, capital markets, credit and legal teams, as well as from various third parties, including our credit providers.
 
Creative financial structuring is the second critical element of our platform. In our direct investment programs, we strive to design a customized structure for each investment that provides us with the necessary credit, yield and protective structural features while meeting the varying, and often complex, needs of our clients. We believe our demonstrated ability to structure creative solutions gives us a distinct competitive advantage in the marketplace. In the structured products arena, our broad capital markets expertise enables us to better analyze the risks and opportunities embedded in complex vehicles such as CMBS and synthetic securities.
 
Efficient capitalization is the third integral element of our platform. We utilize multiple debt and equity products to capitalize our balance sheet and investment management businesses. Our goal is to have the lowest cost of capital for our businesses while maintaining appropriate debt and equity levels and structures. As such, we seek to maintain adequate liquidity to defend the balance sheet and investment management vehicles against reasonable capital market and real estate market volatility.
 
The final element of our platform is aggressive asset management. We pride ourselves on our active style of managing our portfolios. From the closing of an investment through its final repayment, our dedicated asset management team is in constant contact with our borrowers and servicers, monitoring performance of our collateral and enforcing our rights as necessary. We are rated/approved as a special servicer by all three rating agencies, allowing us to directly manage workouts on loans that have been securitized.
 
 
5

 
Business Model
 
As depicted below, our business model is designed to produce a unique mix of net interest income from our balance sheet investments and fee income from our investment management and special servicing operations.
 

 
We have historically allocated opportunities between our balance sheet and investment management vehicles based upon our assessment of the availability and relative cost of capital, the risk and return profiles of each investment and applicable regulatory requirements. The restructuring of our secured and unsecured debt obligations in 2009 had consequences for our historical business in that we agreed to covenants that required us to effectively cease our balance sheet investment activities. Subsequent to December 31, 2010, these covenants have been eliminated in connection with our March 2011 restructuring. We can now resume our balance sheet investment activities and we will continue to carry out investment activities for our investment management vehicles, consistent with our previous strategies and the investment mandates for each respective vehicle.
 
We operate our business to qualify as a REIT for federal income tax purposes. We manage our balance sheet investments to produce a portfolio that meets the asset and income tests necessary to maintain our REIT qualification and conduct our investment management business through our wholly-owned subsidiary, CT Investment Management Co., LLC, or CTIMCO, which is subject to federal, state and city income tax.
 
Investment Strategies
 
Since 1997, our investment programs have focused on various strategies designed to take advantage of opportunities that have developed in the commercial real estate finance sector.
 
Depending on our assessment of relative value, our real estate investments may take a variety of forms including, but not limited to:
 
 
·
Mortgage Loans—These are secured property loans evidenced by a first mortgage which is senior to any mezzanine financing and the owner’s equity. These loans may finance stabilized properties, may serve as bridge loans providing required interim financing to property owners or may provide construction and development financing. Our mortgage loans vary in duration and typically require a balloon payment of principal at maturity. These investments may include pari passu participations in mortgage loans. We may also originate and fund first mortgage loans in which we intend to sell the senior tranche, thereby creating what we refer to as a subordinate mortgage interest.
 
 
6

 
 
·
Subordinate Mortgage Interests—Sometimes known as B Notes, these are loans evidenced by a junior participation in a first mortgage, with the senior participation known as an A Note. Although sometimes evidenced by its own promissory note, subordinate mortgage interests have the same borrower and benefit from the same underlying obligation and collateral as the A Note lender. The subordinate mortgage interest is subordinated to the A Note by virtue of a contractual arrangement between the A Note lender and the subordinate mortgage interest lender and in most instances is contractually limited in rights and remedies in the case of default. In some cases, there may be multiple senior and/or junior interests in a single mortgage loan.
 
 
·
Mezzanine Loans—These include both property and corporate mezzanine loans. Property mezzanine loans are secured property loans that are subordinate to a first mortgage loan, but senior to the owner’s equity. A mezzanine property loan is evidenced by its own promissory note and is typically made to the owner of the property-owning entity, which is typically the first mortgage borrower. It is not secured by a mortgage on the property, but by a pledge of the borrower’s ownership interest in the property-owning entity. Subject to negotiated contractual restrictions, the mezzanine lender generally has the right, following foreclosure, to become the owner of the property, subject to the lien of the first mortgage. Corporate mezzanine loans, on the other hand, are investments in or loans to real estate related operating companies, including REITs. Such investments may take the form of secured debt, preferred stock and other hybrid instruments such as convertible debt. Corporate mezzanine loans may finance, among other things, operations, mergers and acquisitions, management buy-outs, recapitalizations, start-ups and stock buy-backs generally involving real estate and real estate related entities.
 
 
·
CMBS—These are securities collateralized by pools of individual first mortgage loans. Cash flows from the underlying mortgages are aggregated and allocated to the different classes of securities in accordance with their seniority, typically ranging from the AAA-rated through the unrated, first loss tranche. Administration and servicing of the pool is performed by a trustee and servicers, who act on behalf of all security holders in accordance with contractual agreements. When achievable, we obtain designation as the special servicer for the CMBS trusts in which we have appropriate ownership interests, enabling us to control the resolution of matters which require special servicer approval. We also include select investments in CDOs in this category.
 
Business Plan
 
Our near term business plan is to continue to manage our balance sheet investments, a substantial portion of which are held by CT Legacy REIT, and our existing investment management vehicles through the current volatile market. In addition to these activities, we continue to invest for our investment management vehicles and grow our third-party special servicing business. Finally, with the elimination of our legacy recourse debt and its restrictive covenants, we will look to resume our balance sheet investment activities and raise new capital.
 
Competition
 
We are engaged in a competitive business. In our investment activities, we compete for opportunities with numerous public and private investment vehicles, including financial institutions, specialty finance companies, mortgage banks, pension funds, opportunity funds, hedge funds, REITs and other institutional investors, as well as individuals. Many competitors are significantly larger than us, have well established operating histories and may have greater access to capital, more resources and other advantages over us. These competitors may be willing to accept lower returns on their investments or to compromise underwriting standards and, as a result, our origination volume and profit margins could be adversely affected. In our investment management business, we compete with other investment management companies in attracting third-party capital for our vehicles and many of our competitors are well-established, possessing substantially greater financial, marketing and other resources.
 
 
7

 
Government Regulation
 
Our activities in the United States, including the financing of our operations, are subject to a variety of federal and state regulations. In addition, a majority of states have ceilings on interest rates chargeable to certain customers in financing transactions. Furthermore, our international activities are also subject to local regulations.
 
Employees
 
As of December 31, 2010, we had 29 full-time employees. Our staff is employed under a co-employment agreement with a third-party human resources firm, Ambrose Employer Group, LLC. None of our employees are covered by a collective bargaining agreement and management considers the relationship with our employees to be good. In addition to our staff in New York, we contract for the services of 15 additional dedicated professionals employed by a commercial real estate underwriting services firm in Chennai, India.
 
Website Access to Reports
 
We maintain a website at http://www.capitaltrust.com. We are providing the address to our website solely for the information of investors. We do not intend to incorporate the contents of the website into this report. Through our website, we make available, free of charge, our annual proxy statement, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish them to, the Securities and Exchange Commission, or the SEC. The SEC maintains a website that contains these reports at http://www.sec.gov.
 
 
8

 
Risk Factors
 
FORWARD LOOKING INFORMATION
 
Our Annual Report on Form l0-K for the year ended December 31, 2010, our 2010 Annual Report, any of our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K of the Company, or any other oral or written statements made in press releases or otherwise by or on behalf of Capital Trust, Inc., may contain 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 predict or describe our future operations, business plans, business and investment strategies and portfolio management and the performance of our investments and our investment management business. These forward looking statements are identified by their use of such terms and phrases as “intend,” “goal,” “estimate,” “expect,” “project,” “projections,” “plans,” “seeks,” “anticipates,” “should,” “could,” “may,” “designed to,” “foreseeable future,” “believe,” and “scheduled” and similar expressions. Our actual results or outcomes may differ materially 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.
 
Our actual results may differ significantly from any results expressed or implied by these forward looking statements. Some, but not all, of the factors that might cause such a difference include, but are not limited to:
 
 
·
the effects of the recent turmoil in the financial markets and general economic recession upon our ability to invest and manage our investments;
 
 
·
the general political, economic and competitive conditions in the United States and foreign jurisdictions where we invest;
 
 
·
the level and volatility of prevailing interest rates and credit spreads, magnified by the current turmoil in the credit markets;
 
 
·
adverse changes in the real estate and real estate capital markets;
 
 
·
difficulty in obtaining financing or raising capital, especially in the current constrained financial markets;
 
 
·
the deterioration of performance and thereby credit quality of property securing our investments, borrowers and, in general, the risks associated with the ownership and operation of real estate that may cause cash flow deterioration to us and potentially principal losses on our investments;
 
 
·
a compression of the yield on our investments and the cost of our liabilities, as well as the level of leverage available to us;
 
 
·
adverse developments in the availability of desirable loan and investment opportunities whether they are due to competition, regulation or otherwise;
 
 
·
events, contemplated or otherwise, such as acts of God including hurricanes, earthquakes, and other natural disasters, acts of war and/or terrorism (such as the events of September 11, 2001) and others that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investment;
 
 
·
the cost of operating our platform, including, but not limited to, the cost of operating a real estate investment platform and the cost of operating as a publicly traded company;
 
 
·
authoritative generally accepted accounting principles, or GAAP, or policy changes from such standard-setting bodies as the Financial Accounting Standards Board, the Securities and Exchange Commission, or SEC, Internal Revenue Service, or IRS, the New York Stock Exchange, or NYSE, and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business; and
 
 
·
the risk factors set forth below, including those related to the restructuring of our debt obligations and the implementation of our tax benefits preservation plan.
 
 
9

 
Risks Related to Our Investment Activities
 
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 market turmoil, the risks associated with our business have dramatically increased. Even with our March 2009 and March 2011 debt restructurings, we may not be able to satisfy our obligations to our lenders. 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 may 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.
 
We need to recapitalize our business in order to commence balance sheet investment activity and this may involve a high cost of capital and significant dilution to our shareholders.
 
In order to commence balance sheet investment activity, we will need to obtain substantial additional capital for which we can provide no assurances. The capital markets have not completely recovered from the financial crisis and any new capital raise may be at a high cost and/or involve significant dilution to our shareholders.
 
The U.S. and other financial markets have been in turmoil, and the U.S. and other economies in which we invest are in the midst of an economic recession that 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, sovereign debt default concerns, currency devaluation, and 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 where recoveries have been weak and may not be sustained. As a consequence, owners and operators of commercial real estate that secure or back our investments have experienced distress and commercial 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.
 
 
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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.
 
 
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A prolonged economic slowdown, a lengthy or severe recession characterized by a weak recovery, a continuing 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 exacerbated 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 reduce 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 subordinate investment. Also, in certain cases where we experience appraisal reductions, we may lose our controlling class status or special servicer designation 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 lenders and other interested parties may not be aligned, which can lead to disputes and 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, leading to financial losses for us.
 
We may guarantee many of our debt and contingent obligations.
 
We may 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 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.
 
 
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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 changes 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 management 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 on 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 each investment. In March 2009 and March 2011, we restructured our recourse debt obligations; however, there can be no assurances that our restructuring will enable the successful collection of our assets. 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 our liabilities have set maturity dates.
 
 
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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 liquidity 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 circumstances, be liable for the actions of our third party partners or co-venturers.
 
Recent developments with our CDO financings have negatively impacted 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 CT 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 returned to compliance. We have breached these tests and cash flow has been redirected for three of our four CT CDOs and there can be no assurances that this will not occur with the remaining CT CDO. 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.
 
 
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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 our CT 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 from 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, as has occurred throughout the recent economic recession and weak recovery. 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.
 
 
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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 2011 debt 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.
 
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 invest 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 purposes of the REIT asset and income tests.
 
 
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Risks Related to Our Investment Management Business and Management of CDOs
 
Our current 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 the March 2009 and March 2011 debt restructuring may have a negative impact on our reputation. 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.
 
 
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CTIMCO’s role as collateral manager for our CT 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 CT 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 CT CDOs or in making investments. In particular, the discretion that we exercise in managing the collateral for our CT 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 result 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 CT CDO and investment advisory investors, our financial condition could be materially adversely effected.
 
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 relationships 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 either a portion, or all of incentive fees previously received.
 
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, our chief financial officer, Geoffrey G. Jervis, and our chief credit officer, Thomas C. Ruffing, are currently not employed pursuant to employment agreements. There can be no assurance that Messrs. Plavin, Jervis, and Ruffing will enter into new employment agreements pursuant to which they agree to long-term employment with us. In addition, the departure of any two of Messrs. Plavin, Jervis, and Ruffing from their employment with us constitutes an event of default under our restructured debt obligations unless we hire suitable replacements acceptable to the lenders.
 
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 and services among us and our investment management vehicles.
 
 
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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, as amended. 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 staff 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.
 
 
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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, of 1986, as amended, 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 of 1986, as amended, or 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 class A 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. Our efforts, including a recently adopted Rights Agreement, to preserve these tax benefits may significantly constrain our ability to raise additional capital through offerings of common stock.
 
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 March 23, 2011. These warrants become exercisable on March 16, 2012. 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 March 23, 2011. 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 March 23, 2011. 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.
 
 
20

 
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.
 
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.
 
 
21

 
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.
 
We are also 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 conditions, 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 two of our former executive officers and directors, 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
 
 
22

 
 
·
the general economic environment and the commercial real estate property and capital markets.
 
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.
 
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 class 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.
 
 
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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, and we may use our substantial net operating losses carried forward to offset future taxable income, and therefore reduce our dividend requirements. 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 also 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 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.
 
 
24

 
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.
 
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.
  
Certain of our legacy assets are subject to separate REIT qualifications and restrictions as a result of our March 2011 debt restructuring.
 
In conjunction with our March 2011 debt restructuring, we transferred certain of our legacy assets to CT Legacy REIT, a special purpose entity which will elect to be taxed as a REIT for purposes of federal income taxes. As a REIT, CT Legacy REIT is generally subject to the same risks described above with respect to distribution requirements, limitations on the types and quantities of permissible assets and income, and penalties for non-compliance with REIT regulations. As a result of restrictions under our mezzanine loan at CT Legacy REIT, cash distributions cannot be made to the shareholders of CT Legacy REIT until such debt has been fully repaid. Should a dividend be required to comply with REIT regulations, CT Legacy REIT may declare a “consent dividend” which will pass a pro-rata share of its taxable income to us without a corresponding cash payment.
 
In addition, CT Legacy REIT is generally precluded from making new investments, and a portion of the legacy assets which are held by CT Legacy REIT may not qualify as REIT real estate assets. Accordingly, there is a risk that as the portfolio liquidates in the ordinary course, the asset mix at CT Legacy REIT, or income thereon, may violate REIT regulations and force CT Legacy REIT to either sell assets, potentially at disadvantageous prices, and/or terminate REIT status, which could result in material taxes and penalties, and which would constitute a default under the mezzanine loan.
 
 
25

 
Unresolved Staff Comments
 
None.
 
Properties
 
Our principal executive and administrative offices are located in approximately 12,000 square feet of office space leased at 410 Park Avenue, New York, New York 10022. Our telephone number is (212) 655-0220 and our website address is http://www.capitaltrust.com. Our lease for office space expires in October 2018.
 
Legal Proceedings
 
We are not party to any material litigation or legal proceedings, or, to the best of our knowledge, any threatened litigation or legal proceedings, which, in our opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial condition.
 
(Removed and Reserved)
  
 
26

 
PART II
 
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our class A common stock is listed for trading on the NYSE under the symbol “CT.” The table below sets forth, for the calendar quarters indicated, the reported high and low sale prices for our class A common stock as reported on the NYSE composite transaction tape and the per share cash dividends declared on our class A common stock.
 
   
High
   
Low
   
Dividend
 
2010
                 
Fourth quarter
    $1.80       $1.15       $0.00  
Third quarter
    1.90       1.52       0.00  
Second quarter
    2.81       1.52       0.00  
First quarter
    1.89       1.27       0.00  
                         
2009
                       
Fourth quarter
    $3.00       $1.10       $0.00  
Third quarter
    3.47       1.15       0.00  
Second quarter
    2.88       1.09       0.00  
First quarter
    4.25       0.87       0.00  
                         
2008
                       
Fourth quarter
    $13.17       $3.42       $0.00  
Third quarter
    19.76       9.78       0.60  
Second quarter
    29.98       18.71       0.80  
First quarter
    30.38       24.30       0.80  

The last reported sale price of the class A common stock on March 23, 2011 as reported on the NYSE composite transaction tape was $2.42. As of March 23, 2011, there were 516 holders of record of the class A common stock. By including persons holding shares in broker accounts under street names, however, we estimate our shareholder base to be approximately 7,568 holders.
 
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 so as to comply with the REIT provisions of 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 legacy debt obligations, our cash dividend distributions have been restricted to the minimum amount necessary to maintain our status as a REIT. Moreover, such covenants, taking into consideration the recent IRS 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, required us to make any distribution in stock to the extent permitted. Subsequent to December 31, 2010, these covenants have been eliminated as a result of our March 2011 restructuring. See Note 22 to our consolidated financial statements for additional discussion.
 
In addition to the foregoing restrictions, our dividend 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 that our board of directors deems relevant. In accordance with Internal Revenue Service guidance, we are required to report the amount of excess inclusion income earned by us. In 2010, we calculated excess inclusion income to be de minimis.
 
 
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Issuer Purchases of Equity Securities
 
The following table provides information regarding purchases of shares of our class A common stock made by or on our behalf during the three months ended December 31, 2010.
 
Period
 
(a) Total
Number
of Shares
Purchased(1)
   
(b) Average Price
Paid per Share
   
(c) Total
Number
of Shares
Purchased as
Part
of Publicly
Announced
Plans
or Programs
   
(d) Maximum
Number (or
Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
 
October 1-31, 2010
          $—              
November 1-30, 2010
                       
December 1-31, 2010
    3,411       1.55              
Total
    3,411       $1.55              
                                 
     
(1)
All purchases were made 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.
 
Equity Compensation Plan Information
 
The following table summarizes information, as of December 31, 2010, relating to our equity compensation plans pursuant to which shares of our common stock or other equity securities may be granted from time to time.
 
Plan category
     
(a)
Number of securities to be
issued upon exercise of
outstanding options
 
(b)
Weighted average
exercise price of
outstanding options
 
(c)
Number of securities remaining available
for future issuance under equity
compensation plans (excluding securities
reflected in column (a))
 
Equity compensation plans approved by security holders(1)
   
12,224
     
$14.73
     
356,518
   
Equity compensation plans not approved by security holders(2)
   
     
     
   
Total
   
12,224
     
$14.73
     
356,518
   
     
(1)
The number of securities remaining for future issuance consists of 356,518 shares issuable under our second amended and restated 2007 long-term incentive stock plan which was approved by our shareholders. Awards under the plan may include restricted stock, unrestricted stock, stock options, stock units, stock appreciation rights, performance shares, performance units, deferred share units or other equity-based awards, as the board of directors may determine.
(2) 
All of our equity compensation plans have been approved by security holders.
  
 
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Selected Financial Data
 
The following table sets forth selected consolidated financial data, which was derived from our historical consolidated financial statements included in our Annual Reports on Form 10-K, for the years ended December 31, 2006 through 2010.
 
You should read the following information together with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included in “Item 8. Financial Statements and Supplementary Data.”
 
   
Years ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(in thousands, except for per share data)
 
STATEMENT OF OPERATIONS DATA:
                             
REVENUES:
                             
Interest and related income
    $158,733       $121,818       $196,215       $254,505       $176,758  
Management fees and other revenues
    15,006       13,575       13,308       10,330       4,407  
Total revenues
    173,739       135,393       209,523       264,835       181,165  
OPERATING EXPENSES:
                                       
Interest expense
    123,963       79,794       129,665       162,377       104,607  
General and administrative expenses
    18,779       22,102       24,957       29,956       23,075  
Depreciation and amortization
    20       71       179       1,810       3,049  
Impairments
    72,366       114,106       2,917              
Provision for loan losses
    146,478       482,352       63,577              
Valuation allowance on loans held-for-sale
    2,119             48,259              
Total operating expenses
    363,725       698,425       269,554       194,143       130,731  
                                         
(Loss) gain on sale of investments
          (10,363 )     374       15,077        
Gain on extinguishment of debt
    3,134             6,000              
Income (loss) from equity investments
    3,608       (3,736 )     (1,988 )     (2,109 )     898  
(Loss) income before income taxes
    (183,244 )     (577,131 )     (55,645 )     83,660       51,332  
Income tax provision (benefit)
    2,100       (694 )     1,893       (706 )     (2,735 )
NET (LOSS) INCOME ALLOCABLE TO COMMON STOCK:
    $(185,344 )     $(576,437 )     $(57,538 )     $84,366       $54,067  
PER SHARE INFORMATION:
                                       
Net (loss) income per share of common stock:
                                       
Basic
    $(8.28 )     $(25.76 )     $(2.73 )     $4.80       $3.43  
Diluted
    $(8.28 )     $(25.76 )     $(2.73 )     $4.77       $3.40  
Dividends declared per share of common stock
    $—       $—       $2.20       $5.10       $3.45  
Weighted average shares of common stock outstanding:
                                       
Basic
    22,371       22,379       21,099       17,570       15,755  
Diluted
    22,371       22,379       21,099       17,690       15,923  

 
   
Years ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(in thousands)
 
BALANCE SHEET DATA:
                             
Total assets
    $4,120,690       $1,936,635       $2,837,529       $3,211,482       $2,648,564  
Total liabilities
    4,531,877       2,105,802       2,436,085       2,803,245       2,222,292  
Shareholders’ (deficit) equity
    (411,187 )     (169,167 )     401,444       408,237       426,272  

 
 
29

 
Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
References herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.
 
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, and are prepared in accordance with accounting principles generally accepted in the United States, or 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 December 31, 2010, our consolidated balance sheet includes an aggregate $3.5 billion of assets and $3.7 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 $29.1 million. See Note 11 to our consolidated financial statements for additional 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 vehicles. In managing our operations, we focus on originating investments, managing our portfolios and capitalizing our businesses.
 
March 2011 Restructuring
 
On March 31, 2011, we restructured, amended, or extinguished all of our outstanding recourse debt obligations, which we refer to as our March 2011 restructuring. The March 2011 restructuring involved: (i) the contribution of certain of our legacy assets to a newly formed subsidiary, CT Legacy REIT Mezz Borrower, Inc., or CT Legacy REIT, (ii) the assumption of our legacy repurchase obligations by CT Legacy REIT, and (iii) the extinguishment of our senior credit facility and junior subordinated notes. The restructuring was financed by a new $83.0 million mezzanine loan from an affiliate of Five Mile Capital Partners LLC, or Five Mile, to CT Legacy REIT, and the issuance of equity interests in CT Legacy REIT to our former junior subordinated note holders and former lenders under our senior credit facility, as well as to an affiliate of Five Mile.
 
CT Legacy REIT
 
In connection with the restructuring, we transferred substantially all of our directly held interest earning assets to CT Legacy REIT. The transferred assets include: (i) all of the loans and securities which serve as collateral for the legacy repurchase obligations, except for certain subordinate interests in CT CDO I and II, (ii) our subordinate interests in CT CDO III, and (iii) 100% of our previously unencumbered loans and securities, which we collectively refer to as our Legacy Assets.
 
 
30

 
CT Legacy REIT, which will elect to be taxed as a REIT commencing in 2011, is owned 51.6% by us, 24.2% by an affiliate of Five Mile, and 24.2% by the former lenders under our senior credit facility. In addition, the former holders of our junior subordinated notes received a subordinate class of common equity in CT Legacy REIT, which is described below. Capital Trust, Inc. will manage CT Legacy REIT and the Legacy Assets as a liquidating portfolio.
 
In addition to our interest in the common stock of CT Legacy REIT, we also own 100% of its class A preferred stock. The class A preferred stock initially entitles us to cumulative preferred dividends of $7.5 million per annum, which dividends will reduce in 2013 as the portfolio of Legacy Assets repays or is sold.
 
Repurchase Obligations
 
Our $339.6 million of legacy repurchase obligations with JP Morgan, Morgan Stanley and Citigroup were assumed by wholly-owned subsidiaries of CT Legacy REIT, and the recourse to Capital Trust, Inc. was eliminated. In addition, the facilities were amended with the following terms:
 
 
·
Each of the repurchase lenders received cash pay downs equal to 10% of their outstanding balances, in the aggregate $33.9 million.
 
 
·
Except for certain key man provisions, all restrictive covenants governing the operations of Capital Trust, Inc. were eliminated, including covenants restricting employee compensation, dividend payments, and new balance sheet investments.
 
 
·
Net interest margin sweep and periodic amortization provisions were eliminated.
 
 
·
All forms of margin call or similar requirements under the facilities were eliminated.
 
 
·
Maturity dates were extended to March 31, 2014 in the case of JPMorgan and March 31, 2013 in the cases of Morgan Stanley and Citigroup, subject in all three cases to periodic required repayment thresholds.
 
 
·
Interest rates were increased to LIBOR + 2.50% per annum in the cases of JPMorgan and Morgan Stanley, and LIBOR + 1.50% per annum in the case of Citigroup, subject in all three cases to periodic rate increases over the term of each respective facility.
 
Senior Credit Facility
 
Our $98.1 million senior credit facility was fully satisfied and all collateral for the senior credit facility was released in exchange for (i) a cash payment of $22.9 million, (ii) a 24.2% equity interest in the common stock of CT Legacy REIT, and (iii) $2.8 million of Secured Notes, as defined and discussed below.
 
Junior Subordinated Notes
 
Our $143.8 million of junior subordinated notes were fully satisfied in exchange for (i) a cash payment of $4.6 million, (ii) 100% of the subordinate common stock of CT Legacy REIT, and (iii) $5.0 million of Secured Notes, as defined and discussed below. The subordinate common stock of CT Legacy REIT entitles its holders to receive approximately 25% of the payments otherwise due to us on our equity interest in the common stock of CT Legacy REIT, after aggregate cash distributions of $50.0 million have been paid to all other classes of common stock.
 
 
31

 
Mezzanine Loan
 
CT Legacy REIT entered into an $83.0 million mezzanine loan that carries a 15.0% per annum interest rate, of which 7.0% per annum may be deferred, and that matures on March 31, 2016. The mezzanine loan is not recourse to Capital Trust, Inc. except for certain limited non-recourse, “bad boy” carve outs. Proceeds from the mezzanine loan were used to (i) extinguish the senior credit facility, (ii) extinguish the junior subordinated notes, (iii) provide for the cash pay downs of the repurchase obligations, (iv) pay transaction expenses, and (v) establish liquidity reserves at CT Legacy REIT.
 
The mezzanine loan is collateralized by 100% of the equity interests in a subsidiary of CT Legacy REIT, which in-turn owns all of our Legacy Assets, subject in-part to the repurchase obligations. Five Mile has consent rights with respect to material actions on the Legacy Assets such as material modifications, sales, and/or the pursuit of certain remedies with regard to the Legacy Assets. The mezzanine loan also contains covenants that (i) prohibit CT Legacy REIT from paying common stock cash dividends until the mezzanine loan has been repaid, (ii) prohibit us from selling or otherwise transferring our equity interests in CT Legacy REIT, and (iii) require the continued employment of certain key employees.
 
In addition, an affiliate of Five Mile acquired a 24.2% equity interest in the common stock of CT Legacy REIT in conjunction with the making of the mezzanine loan.
 
Capital Trust, Inc.
 
Following the completion of the March 2011 restructuring, we no longer have any recourse debt obligations, and retained unencumbered ownership of (i) our investment management platform, CT Investment Management Co., LLC, (ii) our co-investment in CT Opportunity Partners I, LP, (iii) our residual ownership interests in CT CDOs I, II, and IV, and (iv) our tax-basis net operating losses. Furthermore, as described above, we retained a 51.6% equity interest in CT Legacy REIT. Our net economic interest in CT Legacy REIT is, however, subject to (i) the Secured Notes, as defined and discussed below, (ii) a management incentive plan, as discussed below, and (iii) the subordinate common stock of CT Legacy REIT owned by our former junior subordinate note holders.
 
Secured Notes
 
In conjunction with the satisfaction of the senior credit facility and the junior subordinated notes, a wholly-owned subsidiary issued Secured Notes to our former creditors, which Secured Notes are not recourse to us. The Secured Notes have an aggregate initial face balance of $7.8 million and are secured by 93.5% of our equity interests in CT Legacy REIT, which represents 48.3% of the total common stock of CT Legacy REIT. The Secured Notes mature on March 31, 2016 and bear interest at a rate of 8.2% per annum, which interest may be deferred until maturity. All dividends we receive from our equity interests in the common stock of CT Legacy REIT which serve as collateral under the Secured Notes must be used to pay, or prepay, interest and principal due thereunder. Any prepayment, or partial prepayment, of the Secured Notes will incur a prepayment premium.
 
Management Incentive Plan
 
The management incentive plan includes incentive awards issued under our long term incentive plan. The awards provide payments to certain senior level employees equal to 6.75% of the total recovery (subject to certain caps) of our Legacy Assets, net of CT Legacy REIT’s obligations.
 
Current Market Conditions
 
Despite recent improvement, the U.S. economy and many economies around the world continue to be in a state of economic volatility. In addition, the global capital markets, while also improving, continue to be impaired relative to pre-recession levels. The recession and capital markets turmoil have severely impacted the commercial real estate sector resulting in: (i) decreased property level cash flows and (ii) a relative lack of capital, both debt and equity, necessary for markets to function in an orderly manner. In addition, properties financed prior to the credit crisis generally remain overleveraged and create a headwind for the normalization of the commercial real estate property and capital markets. These factors have combined to create significant decreases in property values relative to pre-recession levels, and have and will continue to impact the performance of our existing portfolio of assets. Conversely, these factors create opportunities for well capitalized and experienced commercial real estate investors.
 
 
32

 
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 in 2009, as discussed in Note 8 to our consolidated financial statements, included covenants that required us to effectively cease our balance sheet investment activities. With the consummation of our March 2011 restructuring, these negative covenants have been eliminated. We will continue to carry out investment activities for our investment management vehicles, consistent with our previous strategies and investment mandates for each respective vehicle.
 
The table below summarizes our total originations and the allocation of opportunities between our balance sheet and investment management business for the years ended December 31, 2010 and 2009.
 
Originations(1)
           
(in millions)
 
Year ended
December 31, 2010
   
Year ended
December 31, 2009
 
Balance sheet
    $―       $―  
Investment management
    306       138  
 Total originations
    $306       $138  
     
(1)
Includes total commitments, both funded and unfunded, net of any related purchase discounts.
 
 
Balance Sheet Investments
 
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 December 31, 2010 and 2009.
 
Interest Earning Assets
                       
(in millions)
 
December 31, 2010
 
December 31, 2009
 
   
Book Value
   
Yield(1)
 
Book Value
   
Yield(1)
Securities held-to-maturity
    $3       10.54 %     $17       7.89 %
Loans receivable, net (2)
    519       4.09       650       3.73  
Loans held-for-sale, net (2)
    6                    
Subtotal / Weighted Average
    $528       4.08 %     $667       3.84 %
                                 
Consolidated VIE Assets
                               
Securities held-to-maturity
    $504       6.97 %     $698       6.58 %
Loans receivable, net
    2,891       2.27       391       3.58  
Loans held-for-sale, net
                18        
Subtotal / Weighted Average
    $3,395       2.97 %     $1,107       5.41 %
                                 
Total / Weighted Average
    $3,923       3.12 %     $1,774       4.82 %
     
(1)
Yield on floating rate assets assumes LIBOR of 0.26% and 0.23% at December 31, 2010 and 2009, respectively.
(2) 
Excludes loan participations sold with a net book value of $86.8 million and $116.7 million as of December 31, 2010 and 2009, respectively. These participations are net of $172.5 million of provisions for loan losses as of both December 31, 2010 and 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 December 31, 2010, our only Unfunded Loan Commitment was $300,000, 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.
 
 
33

 
In addition to our investments in Interest Earning Assets, we also hold equity investments in unconsolidated subsidiaries, which represent our co-investments in private equity funds that we manage. As of December 31, 2010, this balance primarily relates to one such fund, CT Opportunity Partners I, LP, or CTOPI.
 
During the third quarter of 2010, we completed the liquidation of one of our investment management vehicles, CT Mezzanine Partners III, Inc., or Fund III, in which we had a 4.7% investment. We recorded $733,000 of incentive management fees in conjunction with the liquidation of Fund III.
 
The table below details the carrying value of our equity investments in unconsolidated subsidiaries, as of December 31, 2010 and 2009.
 
Equity Investments
           
(in thousands)
 
December 31, 2010
 
December 31, 2009
             
CTOPI
    $8,931       $2,175  
Fund III
          158  
Capitalized costs/other
    1       18  
Total
    $8,932       $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 of those investments.
 
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.
 
As of December 31, 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.
 
 
34

 
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 Assets, which are currently performing but pose a higher risk of non-performance and/or loss. We actively monitor and manage Watch List Assets to mitigate these risks in our portfolio.
 
Portfolio Performance - Non-VIE Assets(1)
           
(in millions, except for number of investments)
 
December 31, 2010
 
December 31, 2009
             
Interest earning assets, excluding VIEs ($ / #)
    $528 / 38       $667 / 44  
                 
Impaired Loans (2)
               
Performing loans ($ / #)
    $59 / 7       $53 / 6  
Non-performing loans ($ / #)
    $21 / 3       $5 / 3  
Total ($ / #)
    $80 / 10       $58 / 9  
Percentage of interest earning assets
    15.2 %     8.7 %
                 
Impaired Securities (2) ($ / #)
    $2 / 6       $3 / 6  
Percentage of interest earning assets
    0.4 %     0.4 %
                 
Watch List Assets (3)
               
Watch list loans ($ / #)
    $158 / 9       $259 / 8  
Watch list securities ($ / #)
    $1 / 1       $15 / 3  
Total ($ / #)
    $159 / 10       $274 / 11  
Percentage of interest earning assets
    30.1 %     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, valuation allowances on loans-held-for-sale and other-than-temporary impairments of securities.
(3) 
Watch List Assets exclude Loans against which we have recorded a provision for loan losses or valuation allowance, and Securities which have been other-than-temporarily impaired.
 
Excluding Loans in our consolidated VIEs, four Loans with an outstanding balance of $91.7 million as of December 31, 2010, which did not qualify for extension pursuant to the corresponding loan agreements, were extended during the year ended December 31, 2010.
 
 
35

 
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 Assets, which are currently performing but pose a higher risk of non-performance and/or loss. We actively monitor and manage Watch List Assets to mitigate these risks in our portfolio.
 
Portfolio Performance - Consolidated VIE Assets(1)
       
(in millions, except for number of investments)
 
December 31, 2010
 
December 31, 2009
             
Interest earning assets of consolidated VIEs ($ / #)
    $3,395 / 151       $1,107 / 91  
                 
Real estate owned ($ / #)
    $8 / 1       $― / ―  
Percentage of interest earning assets
    0.2 %     %
                 
Impaired Loans (2)
               
Performing loans ($ / #)
    $168 / 7       $43 / 6  
Non-performing loans ($ / #)
    $69 / 7       $30 / 5  
Total ($ / #)
    $237 / 14       $73 / 11  
Percentage of interest earning assets
    7.0 %     6.6 %
                 
Impaired Securities (2) ($ / #)
    $14 / 11       $25 / 5  
Percentage of interest earning assets
    0.4 %     2.3 %
                 
Watch List Assets (3)
               
Watch list loans ($ / #)
    $514 / 12       $53 / 2  
Watch list securities ($ / #)
    $65 / 9       $150 / 16  
Total ($ / #)
    $579 / 21       $203 / 18  
Percentage of interest earning assets
    17.1 %     18.3 %
     
(1)
Portfolio statistics include Loans classified as held-for-sale.
(2) 
Amounts represent net book value after provisions for loan losses, valuation allowances on loans-held-for-sale and other-than-temporary impairments of securities.
(3) 
Watch List Assets exclude Loans against which we have recorded a provision for loan losses or valuation allowances, and Securities which have been other-than-temporarily impaired.
 
The ratings performance of our Securities portfolio, including securities held by consolidated VIEs, over the years ended December 31, 2010 and 2009 is detailed below:
 
Rating Activity(1)
 
Year ended
December 31, 2010
 
Year ended
December 31, 2009
Securities Upgraded
2
 
1
Securities Downgraded
28
 
21
     
(1)
Represents activity from any of Fitch Ratings, Standard & Poor’s or Moody’s Investors Service.
 
Capitalization
 
We capitalize our business with a combination of debt and equity. As of December 31, 2010, our debt sources, which we collectively refer to as Interest Bearing Liabilities, 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.
 
 
36

 
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 our March 2009 debt restructuring improved the stability of our capital structure. Subsequent to December 31, 2010, in connection with our March 2011 restructuring, our legacy debt obligations were substantially restructured, reduced or discharged in part with financing obtained from a new mezzanine loan. See Note 22 to our consolidated financial statements for further discussion of our debt obligations subsequent to the March 2011 restructuring.
 
The table below describes our Interest Bearing Liabilities as of December 31, 2010 and December 31, 2009:
 
Interest Bearing Liabilities(1)
           
(Principal balance, in millions)
 
December 31, 2010
 
December 31, 2009
             
Recourse debt obligations
           
Secured credit facilities
           
Repurchase obligations
    $373       $451  
Senior credit facility
    98       99  
Subtotal
    471       550  
                 
Unsecured credit facilities
               
Junior subordinated notes
    144       144  
Total recourse debt obligations
    $615       $694  
                 
% Subject to valuation tests
    60.7 %     65.0 %
Weighted average effective cost of recourse debt (2) (3)
    3.25 %     3.11 %
                 
Non-recourse securitized debt obligations
               
CT Collateralized debt obligations
    $982       $1,097  
                 
Other consolidated VIE's
    2,639       N/A  
Total non-recourse securitized debt obligations
    $3,621       $1,097  
                 
Weighted average effective cost of non-recourse debt (2) (4)
    1.34 %     1.93 %
                 
Total interest bearing liabilities
    $4,236       $1,791  
                 
Shareholders' deficit
    ($411 )     ($169 )
     
(1)
Excludes participations sold.
(2) 
Floating rate debt obligations assume LIBOR of 0.26% and 0.23% at December 31, 2010 and 2009, respectively.
(3) 
Including the impact of interest rate hedges with an aggregate notional balance of $64.1 million as of December 31, 2010 and $64.4 million as of December 31, 2009, the effective all-in cost of our recourse debt obligations would be 3.77% and 3.58% per annum, respectively.
(4) 
Including the impact of interest rate hedges with an aggregate notional balance of $339.7 million as of December 31, 2010 and $352.8 million as of December 31, 2009, the effective all-in cost of our non-recourse debt obligations would be 1.78% and 3.44% per annum, respectively.
 
Recourse Debt Obligations
 
The table below summarizes our repurchase obligations as of December 31, 2010 and 2009:
 
Repurchase Obligations
           
($ in millions)
 
December 31, 2010
 
December 31, 2009
             
Counterparties
    3       3  
Outstanding repurchase obligations
    $373       $451  
All-in cost
    L+ 1.59 %     L+ 1.66 %
 
 
37

 
See Note 8 to our consolidated financial statements for additional discussion on the terms of our repurchase obligations as of December 31, 2010.
 
Our senior credit facility 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 December 31, 2010, we had $143.8 million of junior subordinated notes outstanding with a book value of $132.2 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.
 
Non-Recourse Debt Obligations
 
Non-recourse securitized debt obligations of consolidated VIEs include our four CT CDOs as well as securities issued by other consolidated VIEs, which are securitization vehicles not sponsored by us.
 
These consolidated non-recourse securitized debt obligations are described below:
 
Non-Recourse Securitized Debt Obligations
 
(in millions)
 
December 31, 2010
   
December 31, 2009
 
   
Book Value
   
All-in Cost(1)
   
Book Value
   
All-in Cost(1)
 
                         
CT collateralized debt obligations
                   
CT CDO I
    $200       0.96%       $233       0.88%  
CT CDO II
    262       1.06       284       0.99  
CT CDO III
    240       5.16       254       5.15  
CT CDO IV
    281       1.04       327       0.97  
Total CT CDOs
    $983       2.03%       $1,098       1.92%  
                                 
Other consolidated VIEs
                               
GMACC 1997-C1
    $97       7.12%       N/A       N/A  
GSMS 2006-FL8A
    126       0.81       N/A       N/A  
JPMCC 2005-FL1A
    96       0.82       N/A       N/A  
MSC 2007-XLFA
    751       0.49       N/A       N/A  
MSC 2007-XLCA
    522       1.52       N/A       N/A  
CSFB 2006-HC1
    1,046       0.77       N/A       N/A  
Total other consolidated VIEs
    $2,638       1.08%       N/A       N/A  
                                 
Total non-recourse debt obligations
    $3,621       1.34%       $1,098       1.92%  
     
(1)
Includes amortization of premiums and issuance costs of CT CDOs. Floating rate debt obligations assume LIBOR of 0.26% and 0.23% at December 31, 2010 and 2009, respectively.
 
Shareholders’ Equity
 
We did not issue any new shares of class A common stock during the year. Changes in the number of outstanding shares during the year ended December 31, 2010 resulted from restricted common stock grants, forfeitures and vesting, as well as stock unit grants.
 
 
38

 
The following table calculates our book value per share as of December 31, 2010 and 2009:
 
Shareholders' Equity
 
   
December 31, 2010
 
December 31, 2009
             
Book value (in millions)
    ($411 )     ($169 )
Shares:
               
     Class A common stock
    21,916,716       21,796,259  
     Restricted common stock
    32,785       79,023  
     Stock units
    485,399       464,046  
     Warrants & Options(1)
           
        Total
    22,434,900       22,339,328  
Book value per share
    ($18.33 )     ($7.57 )
     
(1)
Excludes shares issuable upon the exercise of outstanding warrants and options. These shares would be anti-dilutive as of both December 31, 2010 and 2009 because an increase in shares would decrease the book deficit per share.
 
As of December 31, 2010, there were 21,949,501 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 or to third parties. We present these participations sold as both assets and non-recourse liabilities because 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 December 31, 2010, we had four such participations sold with a total gross carrying value of $259.3 million.
 
The income earned on these loans is recorded as interest income and an identical amount is recorded as interest expense on our consolidated statements of operations. Generally, participations sold are recorded as assets and liabilities in equal amounts on our consolidated balance sheet. We have recorded an aggregate $172.5 million of provisions for loan losses against certain of our participations sold assets, resulting in a net book value of $86.8 million as of December 31, 2010. The associated liabilities have not been adjusted as of December 31, 2010, and will not be eliminated until the loans are contractually extinguished, at which time we will record a gain of $172.5 million.
 
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 variability 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.
 
 
39

 
The table below details our interest rate exposure as of December 31, 2010 and 2009:
 
Interest Rate Exposure
 
(in millions)
 
December 31, 2010
 
December 31, 2009
Value exposure to interest rates(1)
           
Fixed rate assets
    $898       $833  
Fixed rate debt
    (493 )     (410 )
Interest rate swaps
    (404 )     (417 )
Net fixed rate exposure
    $1       $6  
Weighted average coupon (fixed rate assets)
    7.18 %     6.91 %
                 
Cash flow exposure to interest rates(1)
               
Floating rate assets
    $3,616       $1,678  
Floating rate debt less cash
    (3,717 )     (1,642 )
Interest rate swaps
    404       417  
Net floating rate exposure
    $303       $453  
Weighted average coupon (floating rate assets) (2)
    2.13 %     3.29 %
                 
Net income impact from 100 bps change in LIBOR
    $3.0       $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 0.26% and 0.23% at December 31, 2010 and 2009, respectively.
 
 
 
40


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 years ended December, 2010, 2009 and 2008:
 
Investment Management Revenues
 
(in thousands)
 
December 31, 2010
 
December 31, 2009
 
December 31, 2008
                   
Fees generated as:
                 
Public company manager (1)
    $—       $1,769       $7,104  
Private equity manager
    8,541       11,743       12,941  
CDO collateral manager
    937       240        
Special servicer
    7,252       1,679       367  
Total fees
    $16,730       $15,431       $20,412  
                         
Eliminations (2)
    (1,785 )     (2,009 )     (7,104 )
                         
Total fees, net
    $14,945       $13,422       $13,308  
     
(1)
Beginning in the fourth quarter of 2009, public company management fees were offset by special servicing and CDO collateral management fees generated by our balance sheet portfolio. Gross public company management fees were $3.5 million for the year ended December 31, 2010, offset by $3.5 million of special servicing and CDO collateral management fees. Gross public company management fees were $4.8 million for the year ended December 31, 2009, offset by $3.0 of special servicing and CDO collateral management fees. Gross public company management fees were $7.1 million for the year ended December 31, 2008.
(2) 
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 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, $176 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 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 from 28 institutional and individual investors. Currently, $319 million of committed equity remains undrawn. We have a $25 million commitment to invest in the fund ($10 million currently funded, $15 million unfunded) and entities controlled by the chairman of our board of directors 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. During 2010, we earned 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 earned base management fees of 1.3% per annum of invested capital, which fee will continue throughout the life of the fund. In addition, we earn net incentive management fees of 17.7% of profits after a 9% preferred return and a 100% return of capital.
 
 
41

 
 
·
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 institutional 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 capital.
 
 
·
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 institutional investors. We earn management fees of 0.75% per annum of fund assets (capped at 1.5% on invested equity).
 
The table below provides additional information regarding the three private equity funds and one separate account we managed as of December 31, 2010.
 
Investment Management Mandates, as of December 31, 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
 
$490
 
$667
 
 —
   
 0.40% (Assets)
 
 N/A
 
 N/A
CTOPI
 
Fund
 
289
 
540
 
4.63%
(2)
 
(Assets/Equity)(3)
 
100%(4)
 
—%(5)
                               
Liquidating:
                             
CT High Grade
 
Sep. Acc.
 
326
 
350
 
 —
   
0.25% (Assets)
 
 N/A
 
 N/A
CT Large Loan
 
Fund
 
174
 
325
 
 —
(6)
 
0.75% (Assets)(7)
 
 N/A
 
 N/A
     
(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 earned 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 earned 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) 
We have not allocated any of the CTOPI incentive management fee to employees as of December 31, 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.
 
During the third quarter of 2010, we ceased investment management activity related to two vehicles, CT Mezzanine Partners III, Inc., or Fund III, and CTX CDO I, Ltd., or the CTX CDO. Fund III was a vehicle we co-sponsored with a joint venture partner, which completed its liquidation in the ordinary course with the satisfaction of its final investment in August 2010. We recorded $733,000 of incentive management fees in conjunction with the liquidation of Fund III. The CTX CDO was a CDO sponsored, but not issued, by us from which we earned a collateral management fee. In July 2010, we were replaced as collateral manager of the CTX CDO.
 
Taxes
 
We account for our operations using accounting principles generally accepted in the United States, or GAAP. Below, we reconcile the differences between our GAAP-basis reporting and the equivalent amounts prepared on an income tax basis.
 
 
42

 
Our operations are conducted in two separate taxable entities, Capital Trust, Inc. (a real estate investment trust, or REIT) and CTIMCO (a wholly owned taxable REIT subsidiary, or TRS, of the REIT). These entities are presented on a consolidated basis under GAAP, however are separate tax payers. The table below shows our consolidated GAAP net loss, as well as the contributions from each of the REIT and the TRS on a GAAP basis:
 
GAAP Net Loss Detail
 
(in thousands)
 
Year Ended
December 31, 2010
 
REIT GAAP net loss
    ($187,163 )
TRS GAAP net income
    1,819  
Consolidated GAAP net loss
    ($185,344 )
 
REIT (Capital Trust, Inc.)
 
We have made a tax election to be treated as a REIT. The primary benefit from this election is that we are able to deduct from the calculation of taxable income (shown as REIT taxable income in the chart below), dividends paid to our shareholders, effectively eliminating corporate taxes on the operations of the REIT. In order to qualify as a REIT, our activities must focus on real estate investments and we must meet certain asset, income, ownership and distribution requirements. If we fail to maintain qualification as a REIT, we may be subject to material penalties and potentially subject to past and future taxes.
 
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.
 
The table below reconciles the differences between GAAP net loss and estimated taxable income for the REIT:
 
REIT GAAP to Tax Reconciliation
 
(in thousands)
 
Year Ended
December 31, 2010
 
REIT GAAP net loss
    ($187,163 )
         
GAAP to tax differences:
       
Losses, allowances and provisions on investments(1)
   
129,029
 
Net loss from seven consolidated trusts for GAAP
   
70,531
 
Equity investments(2)
   
(3,002
)
Other (3)
   
2,636
 
Subtotal
   
199,194
 
         
REIT estimated taxable income (4)
   
$12,031
 
     
(1)
Comprised of 2010 GAAP losses that will potentially be recognized in future tax periods. This is offset by tax losses recognized in 2010 that were recorded as GAAP losses in prior periods.
(2) 
GAAP to tax differences relating to our co-investments in CTOPI.
(3) 
Primarily differences associated with deferred income and compensation of our directors.
(4) 
We will utilize our net operating losses carried forward from prior periods to offset taxable income.
 
For tax year 2010, we expect to utilize net operating losses, or NOLs, carried forward from prior periods to offset taxable income. We will likely be subject to minimum federal and state level taxation.
 
As of December 31, 2010, we have approximately $302.0 million of NOLs, and $128.0 million of net capital losses, or NCLs, available to be carried forward and utilized in future periods. If we are unable to utilize our NOLs, $3.0 million will expire in 2016 and $299.0 million will expire in 2029. If we are unable to utilize our NCLs, $10.2 million will expire in 2013, $87.4 million will expire in 2014, and $30.4 million will expire in 2015.
 
 
43

 
TRS (CTIMCO)
 
CTIMCO is a wholly owned subsidiary that operates our investment management business (including the management of Capital Trust, Inc.) and holds some of our assets. As a TRS, CTIMCO is subject to corporate taxation.
 
The table below reconciles GAAP net income to estimated taxable income for the TRS:
 
TRS GAAP to Tax Reconciliation
 
(in thousands)
 
Year Ended
December 31, 2010
 
TRS GAAP net income
    $1,819  
TRS income tax provision
    2,086  
TRS GAAP net income (pre GAAP tax provsion)
    3,905  
         
GAAP to tax differences:
       
General and administrative (1)
    (513 )
Other
    (463 )
Subtotal
    (976 )
         
TRS estimated taxable income (pre-NOL) (2)
    $2,929  
     
(1)
Primarily differences associated with stock-based and other compensation to our employees.
(2) 
We will utilize our NOLs carried forward from prior tax periods to offset taxable income at the TRS to the extent possible.
 
For tax year 2010, we paid approximately $735,000 in taxes at the TRS, as the utilization of NOLs carried forward from prior tax periods did not fully offset taxable income.
 
GAAP Tax Provision (Consolidated)
 
During 2010, in our GAAP-basis consolidated financial statements, we recorded an income tax provision of $2.1 million, which was primarily due to $735,000 in current year taxes paid and $1.4 million in non-cash tax expense due primarily to our utilization of net operating losses to partially offset taxable income.
 
Dividends
 
In 2010, we did not pay any dividends to holders of our class A common stock.
 
See Part II - Item 5 to this 2010 Annual Report for information on prior dividends paid.
 
 
44

 
Results of Operations
 
Comparison of Results of Operations: Year Ended December 31, 2010 vs. December 31, 2009
 
(in thousands, except per share data)
                       
   
2010
   
2009
   
$ Change
   
% Change
 
Income from loans and other investments:
                       
Interest and related income
    $158,733       $121,818       $36,915       30.3 %
Less: Interest and related expenses
    123,963       79,794       44,169       55.4 %
Income from loans and other investments, net
    34,770       42,024       (7,254 )     (17.3 %)
                                 
Other revenues:
                               
Management fees from affiliates
    7,808       11,743       (3,935 )     (33.5 %)
Incentive management fees from affiliates
    733             733       N/A  
Servicing fees
    6,404       1,679       4,725       281.4 %
Other interest income
    61       153       (92 )     (60.1 %)
Total other revenues
    15,006       13,575       1,431       10.5 %
                                 
Other expenses:
                               
General and administrative
    18,779       22,102       (3,323 )     (15.0 %)
Depreciation and amortization
    20       71       (51 )     (71.8 %)
Total other expenses
    18,799       22,173       (3,374 )     (15.2 %)
                                 
Total other-than-temporary impairments of securities
    (77,960 )     (123,894 )     45,934       (37.1 %)
Portion of other-than-temporary impairments of securities recognized in other comprehensive income
    9,594       14,256       (4,662 )     (32.7 %)
Impairment of goodwill
          (2,235 )     2,235       N/A  
Impairment of real estate held-for-sale
    (4,000 )     (2,233 )     (1,767 )     79.1 %
Net impairments recognized in earnings
    (72,366 )     (114,106 )     41,740       (36.6 %)
                                 
Provision for loan losses
    (146,478 )     (482,352 )     335,874      
(69.6
%)
Valuation allowance on loans held-for-sale